Perodua pushes Proton to the brink

By Sherilyn Goh

Despite decades of protection, Proton has not been able to catch up in terms of domestic automotive market share. Once controlling 74% of market share at its peak, Proton has since lost out to Perodua and other foreign marques, and controlling a mere 14% today. Has Perodua pushed Proton to the brink? Or was protectionism Proton’s biggest undoing?

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National carmaker Perusahaan Otomobil Nasional, or better known as Proton, was established in 1983, as part of then-prime minister Dr Mahathir Mohamad’s vision of seeing Malaysia becoming an advanced, industrialised nation. Carmaking was one of the measures introduced.

Some have equated the national car project to putting the cart before the horse, as Malaysia at that time did not possess the technological capabilities to do so. This was substantiated by the findings of the Industrial Master Plan formulated with international assistance, which recommended that the country focus on resource-based industries.

Despite objections, Mahathir obstinately pushed on with his vision. The first Proton rolled off the production line in 1985, two years after its inception.

The first Proton to enter the market was a rebadged second-generation Mitsubishi Lancer Fiore with its body parts stamped in Malaysia – embellished with a dark blue shield which encompassed a yellow crescent, positioned below a yellow 14-pointed star – to which Malaysians could proudly call their national car: Proton Saga.

That was unfortunate timing as Malaysia back then was in the throes of a recession, which saw Proton being immediately put into the red.

But Proton, initially owned by the government-owned Heavy Industries Corp of Malaysia, rose from the ashes and by the late ’80s, it was selling close to four out of five new vehicles sold. In 1994, it was still controlling 74% of the market.

Impressive as it may seem, the leadership position, however, came by denying the public its choice. In those days, as some may recall, if you chose not to buy a Proton, the next make of a comparable locally assembled car would be at least 50% more expensive, due to high tariff barriers set by the Malaysian government to protect the national carmaker – still in its infancy – against external  competition.

In Proton’s defence, Mahathir had argued that the national carmaker would eventually acquire the economies of scale through exports, and the right technology through R&D. That, 32 years on, sadly has yet to materialise.

Having recently marked its 30-year anniversary since the first Proton Saga rolled off its production line in Shah Alam, the national carmaker’s market share has, over the years, slipped off its peak from that of some 14 years back with the second national car project Perusahaan Otomobil Kedua, or better known as Perodua, long overtaking Proton in terms of total industry volume (TIV) since 2006.

The setting up of the second national car project in 1992, which saw its first Perodua Kancil launched in August 1994, was originally intended to cater to a different market segment.

As compared to Proton’s Saga, Wira and Waja models which are sedans meant for middle-income, mid-sized families, Perodua’s Kancil and Kelisa are more compact in size, designated for singles as well as relatively low-income and smaller-sized families.

When Perodua Myvi – a rebadged Daihatsu Boon, also branded as Daihatsu Sirion, Toyota Passo and Subaru Justy elsewhere – was first introduced in 2005, Perodua’s market share grew exponentially the following year to exceed Proton’s for the first time.

The Myvi model, a product of Perodua’s collaboration with both Daihatsu and Toyota, outsold its rival’s best-selling model at the time, Proton Wira, which sold only 28,886 units in Malaysia in that year. Perodua sold 80,327 Myvi units during the same year.

Proton Savvy, a similarly classed supermini hatchback model introduced to the market shortly after Myvi’s debut, was also a far cry from the latter. Perodua Myvi went on to become the best-selling car from 2006 to 2013, propelling sales for the second national carmaker to achieve the status of market leader in the local automotive industry.

The current automotive market dynamics

While the Perodua models introduced in the early days were probably not meant to compete with – but rather to complement – Proton, the former has, in fact, long overtaken the latter in terms of market share since coming head-to-head for the first time through the introduction of its Perodua Myvi model in 2005. By 2007, Proton’s market share had already plunged to 24%, while Perodua’s had hit a record 33% after surpassing its big brother for the first time the year before.

For the first time since the advent of the national car project in 1983, Malaysians have been afforded a comparable alternative to Proton vehicles. This is substantiated by a study published in the Malaysian Economic Journal in 2014, which found that when the price of Proton Saga 1,300cc rises, Perodua gets a sales boost for its Myvi and Viva models.

The significant overlap with Proton’s target market, through the introduction of the Perodua Myvi models since 2005, put a dent onto Proton’s sales, costing the national carmaker its market share.

Subsequent models to the Myvi have also sustained Perodua’s market position at the expense of Proton, with the second national carmaker providing Malaysian consumers with more choices such as Perodua Viva and Axia.

As Mahathir, currently chairman of Proton, lamented earlier this year: “Perodua was supposed to stay in the 660cc market. Now they have moved into the territory held by Proton. At the time, it was okay… But now, despite having two national carmakers, our market share has gone from 80% to 48%.”

While competing with Perodua on the lower-priced end, Proton also sees the top end of its territory encroached by non-national carmakers such as Toyota, Honda and Nissan, which have been aggressive in recent years through the introduction of its new entry-level, B-segment models at increasingly competitive prices.

Such examples include Nissan’s Almera in 2012, Toyota’s Vios in 2013 and Honda’s 2014 City and Jazz which rival the Proton Preve in terms of pricing.

As a result, the year 2014 saw the combined market share of non-national cars (53%) exceeding that of national cars (47%) for the first time, which saw Perodua (29.4%) continuing to lead the market, whereas Proton maintained its second position albeit with a reduced market share of 17.4%, down 3.8 percentage points from the previous year.

Honda, meanwhile, emerged as the biggest gainer with an increase in market share of 3.7% to 11.6%, coming in behind Toyota’s 15.3%.

As seen from the 2014 TIV figures, the rules in which the automotive sector game is played have been rewritten. Just back in 2001, Proton controlled over half of the domestic market with its market share coming in at 53%. Its current market share of 17% is less than one quarter of what it used to enjoy at its peak, where nearly four in five cars sold were Proton cars.

As compared to Proton’s market share which has been plummeting in recent years, Perodua’s performance in the past decade has been more consistent, maintaining close to 30% of the automotive market share.

But the reality is such that both national carmakers, Proton and Perodua, are protected in the local automotive scene against external competition via the imposition of excise duties on imported cars of foreign make, which can range anywhere between 65% and 105% depending on the amount of local content used in the manufacturing of the vehicles.

Under the various mechanisms in place in exchange for car localisation, however, the average excise duty being paid per car is understood to be about 50%.

On top of that, there is also the 30% import duty imposed on cars originating from non-Asean countries and a 10% sales tax on all car purchases prior to the implementation of the goods and services tax (GST) this year.

Collectively, these taxes make cars sold in Malaysia one of the most expensive in the world, second only to Singapore, according to automotive portal Jalopnik in 2013.

To put things into perspective, in 2013, the government collected RM7.31 billion from excise duties, constituting close to 75% of total tax revenue derived from the automotive industry. This is a significant amount of money and while the government is talking about subsidy rationalisation, it is not likely that anything will be done in terms of reducing taxes on cars.

While the government had promised to gradually reduce car prices by 30% in five years’ time through various initiatives in the run-up to the 13th general election in 2013, the revision of excise duty is not one of them to be included in the subsequently introduced National Automotive Policy 2014.

“At this present moment, it is not possible for the government to consider any reduction in excise duties. Going forward, the government will be monitoring the fiscal situation, and in the event the fiscal situation is conducive, the government is open to the possibility of gradually reviewing excise duties,” International Trade and Industry Minister Mustapa Mohamed was quoted as saying in January 2014.

For years now, the national carmakers have relied on the excise duty differential to stay competitive in the Malaysian market against their foreign counterparts by rendering the latter less affordable to the Malaysian public, while government coffers have also continued to benefit from the revenue derived from excise duties imposed on the automotive industry.

For close to a decade now, Proton – despite protected by government policies – is like an encumbered tiger (Proton’s emblem has been changed to the iconic tiger since 2000), which has been playing catch-up with the mouse deer, while finding its share dwindling – on the other hand – due to fierce competition from foreign marques.

Going forward, Proton is under a pincer attack from Perodua on the national carmaker side and the non-national cars on the other. Unless it changes the way it operates, it is unlikely to survive, as the market share figures clearly indicate.

Tomorrow: Where Proton went wrong