The Delta Model and Proton
Proton is one of Malaysian national carmakers that started its manufacturing in 1983 using technology and parts from Mitsubishi Motors of Japan. Its first assembled car Proton Saga came off the assembly line in 1985. The cars the company was manufacturing were entirely from Mitsubishi parts, but that changed gradually as the company gained technological knowledge and started to manufacture some of the parts. The first car that the company entirely designed and built was the Proton Waja launched in 2001.
By the year 2002 the company had 60% market share in Malaysia, although it did not stay there long as it came down to 30% by around 2005 and the situation is expected to get worse in 2008 when the mandates of AFTA would force the reduction of import tariff. Based on these findings and the highly competitive nature of the car industry in Malaysia and around the globe the company is facing a tough competition from another local manufacturer Peduoa that is the second compact carmaker in the country. Recently Peduoa had passed Proton by stealing its market share that it had been chipping at for a long time.
What the competition and the coming into the picture of the Asian Free Trade Agreement (AFTA) is doing to the company and what it should do to turn around its situation will be discussed in this paper. The Malaysian Car Market There are two major local car manufacturers that are dominating the car market in Malaysia that amounts to 90%, while other 25 manufactures compete for the remaining 10%. The dominating carmaker owned by the state Proton was overtaken by Peruoda the second carmaker while Proton is struggling to keep its market share, as well as trying to gain more market share both at home and abroad.
The Malaysian government has a lot of influence on the car manufacturing sector since the nation has developed the particular sector to help it stabilize the volatile effect of its mainstay that used to be rubber and palm oil. There are at least nine car-assembling companies that turn out 18 models and another 14 commercial vehicles, although Peruoda and Proton are the major national car manufacturers. The relation the company has with Mitsubishis had been mentioned earlier and in October 1996 Proton acquired Lotus, a British brand with a plan to integrate some of its models in the nation’s car program (Herald Tribune, 1999).
Following that in 1999, the government had sold the company to a private interest, however, because of the financial problem the company started to face, a nationally owned oil company has bought back a controlling interest in the company to give the troubled company a financial infusion. In all this, the national carmakers such as Proton and Perdoua are exempt from import duties and enjoy a 50% reduction in excise taxes in a form of rebate, while foreign manufacturers are expected to pay the full tariff, resulting in the two companies selling cars for half the import price.
In addition, they also enjoy reduction on import duty where the national companies are only paying 13% compared to 40% for foreign manufacturers that have plants in the country. There is also van manufacturing that takes place in the nation undertaken by a number of entities that the two major manufacturers are not part of and it enjoys similar tax and tariff brakes. Other car manufacturer such as Ford and DaimlerChrysler had agreement with the locals to manufacturer cars and had an arrangement with Associated Motor Industries that assembles passenger and commercial vehicles designed by Ford and have its nameplate.
DailmerChrysler had an arrangement with a financial company called MBF to assemble both Jeep Cherokee and Wrangler so that the venture will enable the companies to tap into the growing utility vehicle market. In spite of this, the industry is suffering from lack of quality and high prices resulting from the industry’s heavy dependence on imports that are at 70%. The reason for that is the lack of skilled workers and technicians, in addition to the lack of technological advance.
The lack of skilled workers was because of lack of government support and incentive, as what the government is doing currently is not sufficient. There could also be weak individual interest and employers are passive when compared to the advanced regions. This is the environment the two national carmakers that are competing neck and neck are operating producing most of the cars for the local market, as well as for export where they are looking new niche markets such as the Middle East (Asia Sentinel, 2007). Proton’s Background
The company started assembling Proton Saga using parts from Mitsubishi Motors and slowly it started using locally made parts as the car industry slowly started to acquire technological knowledge and skills. It had two models; Proton Wira and Proton Perdana based entirely on Mitsubishi models before the company came up with Proton Waja that it designed without copying from others. By the year 2005 the company had lost its 60% market share and only had 30% share that was expected to even fall further in 2008 when the AFTA mandate is applied, since it will reduce tariff to 5% only.
The national car manufacturers have not shown a good result even if they were highly protected from foreign competition, especially in their export sector. The company had acquired Lotus technologies that enabled it to have under its roof engineering and automotive expertise that would enable it to manufacture more models. The outcome of this effort was Proton Gen-2 followed by Proton Sawy. What followed in 2007 was the introduction of Persona and Proton saga in January 2008.
The company is in the process of coming up with a hybrid that it believed is important to combat the rising cost that is threatening its success, as well as to meet the environmental requirement. In all this the company had been able to produce more than three million cars where some of them had been exported to countries such as the UK, Australia, and South Africa, and it wants to gain more market share in other locations such as the Middle East (Next Auto, 2008).
It is also having talks with companies such as Peugeot Citroen that could materialize resulting in opening more markets for the company (Auto News). There are more countries that the company is exporting to an insignificant number of cars, as the major recipients of its cars are the three mentioned countries. It is also negotiating with China’s Youngman Automobile Group with an arrangement the company will import up to 30,000 Gen-2 CBU to sell in the Chinese market (B-net, 2006).
Other markets such as the Irish and New Zealand were where proton cars had stirred interest among low budget-oriented buyers, although Proton had left both markets. Efforts to export to the US had not materialized since cars manufactured in Malaysia are not meeting the strict safety standards and legislative requirements. How Proton Is Faring Currently Even if the number two carmaker recently had eclipsed the company, it still has the potential to make a come back, although the problems that are besieging it could persist.
To see how the company is doing it is helpful to make a PEST analyses. Political It is possible to say that Proton being a national carmaker started by government initiative has the good intent of the government on its side. For some reason, the government had decided to sell the company into the private sector, but because of the financial crisis it encountered another branch of the government that deals with the nation’s oil had taken majority stake in the company in order to infuse cash into the cash strapped company.
The advantage the company gets from the government goes as far as enjoying special tariff on all its imports when compared to the other foreign car manufacturers that have plants in the nation. It is not only that it enjoys almost a 50% tariff protection from cars imported in the country making it at an enviable position. The only political problem it is going to face is when it is time to implement the AFTA where the requirement is, all member countries should not pay more than 5% tariff.
When that is applied the industry would be exposed to competition that would steal its market share because imported cars are going to be more attractive, since they would end up being cheaper than the locally manufactured cars that might also lack competitive edge with the imports. To show the advantage the company is enjoying currently, to make it easier for the company to control the market and compete effectively with imports, the government is paying out of its own pocket the tariff relief other members’ imports are getting.
Economic When it comes to economic trends the car manufacturing industry is not immune from recession, where for example, when consumer spending is down by any given percent that is the exact percentage the company loses from it sales margin. Therefore, since there is no visible recession in the country in recent years, what determines how the company fares economically is the kind of new car models that it can come up with.
An executive in the company had said if there is a problem the company is facing currently it is falling behind in coming up with new models that takes up to two years to develop and an additional two years to attract more buyers. Overall, the nation might suffer from high skilled labor shortage that would affect it directly when it emulates to come up with its own parts that could save it money, since one of the reasons that makes the cars it is coming up with expensive is the parts where more than 70% has to be imported.
Even with the tariff advantage it has, the cost of parts would make it difficult to bring down the price of cars unless it gets special concession from the government such as tariff protection. Furthermore, it is not still winning global market share as the cars it is coming up with are not of high quality that will compete with the big number of cars that are competing for market share. It only exports to a handful of countries that amounts to lower than 100,000 a year. Social The cars the company is coming up with are emulating to avail value to the home market that has varied tastes and expectations that requires meeting.
Even if that is not the case, the high tariff that the government is requiring from carmakers will make what the company sells cheaper in spite of the fact 70% of the parts are imported and the amount of excise it is paying is deliberately made lower than other competitors that have foreign assembly plant in the country, in order to enable it to charge lower price that is not easily attainable. Since the cars it manufactures are made much cheaper it still had 60% of the market, although it is losing it not to foreign competition, but to a local competitor that is coming up with more appealing models.
Technology The fact that the company does not have its own technology yet that will enable it to manufacture its own engine or the fact that the overall car industry lacks the technology to manufacture all the parts the car manufacturers need would continue to affect their bottom line, where they will be assembling other sources technology that are making them pay a high price. This shows that from the beginning up to now they are disadvantaged technologically, although they are investing on the future and they have gained some ground.
There are important areas what they do is contributing to such as job creating and creating opportunity for the country’s part manufacturers that have become responsible for 30% of the parts. They have made it where they are in just two decades and they could accomplish more if they exert more effort. The overall effort is also important to orient a backward third world country into modern technology even if the profit making aspect of what they are doing is lukewarm as it is witnessed, but over time it could show better result.
Nevertheless, as long they generate interest in big manufacturers such as GM of the US their chance of acquiring the technology they need is there (Auto News, 2007). SWOT Analysis It is also possible to make SWOT analysis based on the company value and what is bringing into the market. Strength • The company still can afford to sell low quality cars at a premium price in Malaysia since it used to control 60% of the market, by getting direct help from the government. • Since the government owns the company it does not have to fear going under, as the government will always keep it afloat.
• The TG, Malim manufacturing facility will avail it an opportunity to consolidate all its models production and this could help its value chain. • It has the fastest delivery time for its captive markets such as the armed force, the police, some portion of the civil service, and for taxi use. • Still it has support from countries such as India and Brazil that could import the company’s cars in bigger number. Weakness • Consumers know how the company is run and how it works.
Unless it meets their expectations, they will buy other cars that have added values and similar price, the reason why the company only has 30% market share control down from 60%. • The possibility that it will win markets such as the US and other European countries is slim as it had taken the Japanese 50 years and the Korean 20 years to penetrate, for example, the American market. • The quality issue would continue to haunt the company and could chip on any gain it makes on the other value chain such as marketing and distribution facility, although its plant utilization is still low since plants are not using their full capacity.
• The artificial pricing system introduced by the government because of the loss of the tariff protection would change the form of the company unless it becomes highly competitive. • There is a quality issue that needs addressing that could affect the profitability of the company. • As a government owned company, there is political interference that could hinder its success in the private sector. • The rate of plant utilization is low. • Its ability to retain or cultivate talent had been low • It is failing behind in introducing new models that it claims takes at least two years.
• Cannibalizing of models is noticeable because of a mixed up model lineups • There is no economy of scale in the company when looking at its value chain • The number of dissatisfied customers had resulted in making it lose 30% market share and was surpassed by the second national carmaker • There is lack of urgency in what it is doing • It is possible that its captive market would also want to pay the exorbitant sum and buy better-built cars or other competitors’ cars such as the second carmaker. • Technical difficulties such as rattling power windows had attracted a lot of attention.
Opportunities • It can garner enough market share if it ups its drive of manufacturing motorcycles. • The company is still in a better position to find more buyers for its cars if it uses the right marketing scheme, as well as if it improves the quality of the cars. • The company has up to 60% unutilized workforce that it can harness in the future with minimal cost, as it is available waiting to put to use. It could also use that available work force to work on improving the quality of the cars it is manufacturing and to do more screening.
• There might be still a chance for some private sector source to buy a majority interest in the company. • As a government owned company, the company’s cars are the mainstay of government workers, which is a large market unless they desert it Threats • Since it is not paying equal attention to the motorcycle market, it could lose that front. • There are similar cars such as Avanza, Myvi, and Kia that could make life difficult for the company unless it beats them quality-wise and steal some of their markets. Especially Malaysians who are somewhat forced to buy Proton’s car could get tired of the outdated models and would want to switch.
• Even if it has jumped on the hybrid bandwagon, it still has to show result and the possibility it could fail is there. • The company has ceased to use the tariff advantage it used to have because of the need to meet the AFTA requirement and that will make things difficult for it since it would lose market share for outside carmakers. • Its cost reduction and innovation effort on its value chain is not effective when compared with its competitors, because the company is not operating as a private company since it has access to government fund, although it is shrinking.
• The company might not be in a good position for receiving foreign direct investment because of its losing luster, especially when compared with the other AFTA signatories. • There is lack of economy of scale seen from its value chain perspective. • The company might not be viable as a carmaker simply because it was heavily dependant on the tariff advantage it was getting and could cease its current existence in the near future. • If it want FTA with Japan or the US in the future it has to dismantle its current way of doing business that has made it heavily dependent on unfair trade barriers.Sample Essay of EduBirdie.com