AFTA Compliance Problems
When Proton started selling cars, its cars were 20% cheaper than cars imported in the country that enabled the company to grab at least 73% of the market share by 1988. The company started out by selling around 90,000 cars a year in a market that was growing annually by 20%. It does not mean there were not up and downs but the 2005 figure, at a peak of 417,000 cars a year shows how the company grew steadily. This was because government policy has deliberately kept the price of the cars low and that was possible by heavily taxing the competition, especially the foreign ones.
Other manufacturers could pay up to 150% excise tax while importing parts and Proton was exempt from this. On January 2008, the agreement ASEAN countries signed in 1992 needs implementing and Malaysia is one of the signatories. This agreement prohibits practices of any preferential treatment such as tariff or non-tariff barriers on goods produced in other member countries and this include cars. What this will lead to is the 50% rebate Proton and other Malaysian made cars enjoy cannot be applied anymore that costs cars made by non-Malaysia ASEAN member countries between 30 and 60 % more.
When the new rule became effective in January 2008, what is allowed is only a 5% import duty and what this means is Toyota cars made in Thailand would only cost 10% more than Protons or other Malaysian made cars creating a big threat for the national carmakers. To solve this problem the government has allowed the national companies to continue receive the rebate and it will pick the tab for them knowing that in the near future it will be penalized for doing so, since it is going to be a disregard to the agreement.
The speculation is the government could ignore the level playing field recommended in the agreement, at least temporarily. The government also has tried to introduce grants and subsidies to make up for the removed excise duty rebate that would also be a non-compliant the government will have to answer for. The outcome is the company that had been taking advantage of what the government availed to it in a form tariff reduction and was selling outdated cars that lack basic safety standards such as air bags and brake locks had faced an insurmountable problem.
The only thing that will save it in the future and make it competitive is changing its forms and might have to find buyers form the private sector or under its present forms it should come up with better cars that could beat the competition (Paultan, 2006). Car Industry Analysis It is possible to analyze the car industry by using Porter’s five factors. Looking at the first factor that deals with entry of competitors tells that it is not easy unless the products can meet certain standard that is made very high when it comes to cars.
This is attested by how many years it took Japan to penetrate the US market that was 50, while it took Koreans 20 years and cars made by companies such as Proton might not qualify for many years to come because they do not meet the safety standers. This is applicable in many advanced countries, although there are exceptions as it was witnessed from what Proton managed to accomplish, as it sell its cars in countries such as the UK, Australia, Brazil, India, South Africa and there are more countries that are willing to buy the cars as long as they avail some advantage.
These advantages could be safety, lower price, values, or even the model of the car if it is sporty or spacious. Therefore, when looking at the world car market that has its own cyclical ups and downs, the entry of new players is not easy, because cars are highly technologically incentive commodities where only those that have attained the high level technology that can penetrate the market.
Carmakers such Proton might have a long way to go to achieve that level. When looking at substitutes, since there are many brands and models in the global car industry depending on the kind of agreement that is in place, it is always possible to lock out substitutes by others by introducing import barrier, such as high tariff or it is possible to close out substitutes by simply saying they do not meet the standard if that is the case.
But cars that have high quality such as most Japanese cars are threats even for advanced countries such as the US whose car industry is threatened by Toyota for example that is overtaking the local carmakers by the number of cars it sells in the country and globally, where Toyota is very close to outdo GM the largest car seller in the world. They did that because of the high quality their cars have and the lower price they can manage to charge for their cars.
Looking at Malaysia it can lock out manufacturers other than ASEAN member countries by continuing with the tariff barrier. However, when it comes to AEEAN member countries it is already breaking the rules in order to keep the national carmaker going and to keep its local market share. When looking at the barraging power of buyers if a given product is expensive, made deliberately so by high tariff, it could thwart the buyers’ barraging power because they have no choice other than buying what they can afford.
This is applicable globally where Toyota was able to steal market share because it can afford to sell its cars cheaper since the cost it is incurring is lower when compared to the other manufacturers that have to pay a very high wage for their workers that will make their cars expensive. To make things worse, some of the Japanese cars could be better made than the Americans mass produced cars that will create another reason that will make buyers to buy Japanese cars where they will get double advantage; low price and good quality car.
What the determining factor is as it is witnessed in Proton’s case if the Malaysian car buyers are going to afford to buy Japanese cars with a price of 10% difference only, it is possible that they would rather pay the difference and buy a high quality car. This shows that it is possible to manipulate the bargaining power of buyers by making imports very expensive.
The problem is when that is not possible it will be difficult to avoid losing market share for foreign cars. When looking at the barraging power of the suppliers in the global car market, unless they are protected somehow, national suppliers could be easily threatened by imported parts if they are cheap or if they have good quality and affordable at the same time. There is enough proof by what Japanese carmakers have done to the US market.
On the other hand, local car seller can monopolize the local market by introducing high tariff that will make the imported cars very expensive similar to what happened in Malaysia where it is still possible to make cars manufactured by none ASEAN countries expensive, although how Malaysia would deal with the threat that is coming from member countries remain to be seen. When looking at rivalry among the existing players in the car industry, most of them had been there for many years as entering the industry is not easy because of technological and capital barriers.
Those who had been around compete with each other and those that can up with appealing models, lower prices and other amenities that will attract buyers will forge ahead by making profit. Any failure in that area would mean losing market share as it happened to Proton, as the second carmaker had almost taken over it for reasons such as Proton is falling behind in coming up with newer models and some technical problems also are besieging it making buyers to buy more of the second national carmakers cars that are enjoying the same tariff protection form outside manufacturers.
Recommendation While making recommendation, it is possible to apply Delta Model Strategic Triangle and make an analysis on the case of Proton. When looking at first factor of the triangle and apply it to Proton it is possible to look at how effectively the company competes in the market place that is threatened to lose its position, especially because of AFTA that will allow other ASEAN member to compete with it with almost equal footing in its own domestic market. The key here is how to win the customers to its side without using the tariff protection it was enjoying.
This is where best product can come in and if Proton can come up with products that beat the competition by the appeal and value they avail for the customers, such products will winners. It is difficult to say whether that is possible or not by looking at some of the difficulties other than losing the tariff protection the company is facing, such as lack of technology, lack of skilled work force, lack of coming up with new models, and heavy dependence on imparted parts that will continue to make its cars expensive or less attractive.
These are the factors that require attention if it wants to come up with the best car that is fuel efficient, it has all the safety built-in mechanism, it has appealing look, and is not very expensive. The other factor which is total customer solution would require to study the customers closely so that it will be possible to build some kind of bondage. Based on that it might possible to address the direct need of the customers.
That might not be difficult for Proton as a national car manufacturer that has more role to play than making profit and its customers could ally to it come good or bad times, in order to help it beat the competition if it tries its best and try to add most of the value these customers want in what it is doing. Otherwise, if not for foreign competitors, it could loss for local competitors similar to what happened when it lost its first place market share for the number two player.
The other factor in the triangle is system lock-in that deals with all the extended company that includes the customers, suppliers, and other entities that play roles in selling the cars Proton is manufacturing, such as sales people, distributor, wholesaler, and retailers. This means Proton will have to focus on all the system that is enabling it to manufacture and sell cars since each one of them has a special role to play that is worth paying attention to.
One good example to mention might be the government that is playing an essential role in keeping the company afloat because it has a majority stake in the company. This relation is threatened badly lately to the point where Proton might be better off if it finds a private sector investor such as Volkswagen that will take it private, but this investor has to be able to bring in all the lacking components, not only the capital the government can furnish easily (Inside Line, 2006).
Lacking components such as technology, skills, vision, marketing, and the like are badly needed so that the company can come up with cars that would beat the competition. Without these factors it will find it difficult to float, as the time the government will be cornered is not far Conclusion Proton is a third world car manufacturer that is struggling to supply its own domestic market primarily that had covered a considerable distance by starting out assembling Mitsubishi’s cars and eventually has come up with its own design.
It is also trying to come up with its own engine (Herald Tribune, 2005). One of its problem is technology and lack of skilled workers among others that will hold it back from beating its competitors that include the Japanese carmakers that have become a threat for advanced economies such as the US. To make things worse it had already lost its tariff protection because of AFTA and it is kept artificially afloat that is resulting in the government overriding the agreement it has signed with the members.
It is difficult to visualize how the government would overcome this problem, but one likely possibility is to find an investor that has the capital, the technology, and can also introduce skilled workers, as well as the other needed know-how that will make a struggling carmaker such as proton successful (VOA News, 2007). REFERENCES Asia Sentinel, “Ailing Proton Looks to Mecca”, Available Online, December 30, 2008, www. asiasentinel. com/index. php? option=com_content&task=view&id=891&Itemid=229 Auto News, 2007, “GM ‘interested’ in Malaysia’s Proton, CFO Henderson says”, Available Online, December 30, 2008, www.
autonews. com/apps/pbcs. dll/article? AID=/20070117/REUTERS/70116022/1118, gm interested AutoNews, “Peugeot Citroen and Malaysia’s Proton consider link”, Available Online, December 30, 2008, www. autonews24h. com/Auto-Industry/Peugeot-Citroen/1199. html Edmunds, “Volkswagen Abandons Alliance With Malaysian Automaker Proton”, Available Online, December 30, 2008, www. edmunds. com/insideline/do/News/articleId=108940 Find Articles, 2006, “Of Petronas, Proton and China” Available Online, December 30, 2008, findarticles. com/p/articles/mi_qn6207/iSample Essay of EduBirdie.com