The Future of Proton

The Future of Proton.

Much has been written about Proton in Letter to Editor lately. It seems that the car industry as a whole is at a crossroad. Falling sales, thin margin and increased competition from Korean carmakers are the problem of the year for Proton. A few big car companies are posting huge losses (DaimlerChrysler, General Motors, Ford and Mitsubishi) and some has closed its business in the past few years. The emergence of Korean carmaker as global leaders in price and profitability is anything but surprising.

The key to their success goes back to the time of economic slowdown in 1997, as well as the natural endowment the Korean people have; educated, high savings rate and good industrial facilities. During the economic slowdown in 1997, the Korean let their currency slide and bankrupt companies closed its doors. In economic jargon this is called cleaning the slate. Companies posted huge losses, but they moved on, with the benefit of huge tax losses carried forward. Financial restructuring, debt equity swap and discounted bond sales were common during those times. The remaining companies that survived the economic crisis have the benefit of more opportunities, acquired assets at fire-sale prices and with the enhanced benefit of Korea’s high savings rate, could borrow capital at low interest rate and invest in advanced production line. The result is lowest production cost overall - efficient production. Do remember that back in 1997, a lot of investment funds buy stocks in Korea with a view of higher than average returns. Even GM bought a stake in Daewoo.

Now back to Proton, The key to Proton’s future success is in its ability to adapt to changing business environment. With the oil price at its highest level in decades, sooner or later public opinion of car as a mean of transportation would change. Most car companies have already change their marketing strategies in the face of competition from Korea by giving deep discount, attractive financing and forming alliances and merging with another.
GM offered employee discount price to all its customers in North America. Some European and Korean carmakers offered interest free financing in some countries. While Daimler, BMW, Audi and Volkswagen found merger partners to increase market share and expand production facilities. All these efforts are just to retain or increase market share. Why is this so? Simple, consumer prefers global brand when buying products/goods that need technical back up, and they demand reliability. Automobile market is moving towards oligopoly. Take CPU market for example, would you buy any other brand beside Intel and AMD? What other brand you might ask.
I like the idea for Proton-Volkswagen tie-up. Basically Volkswagen found a new market in ASEAN with a sizeable market share in exchange for continuing profitability for Proton. Proton would gain access to Volkswagen marketing network worldwide. This would ensure Proton’s survival in the near future. The other choice is to continue with high tariff for foreign cars to protect Proton and other local carmakers. Anyone who visited India in the 80’s and early 90’s would tell you that Indian cars were from the 50’s.
But if that is not palatable to Proton board and shareholders; after all, any tie-up like that would have to be approved by majority of shareholders in an EGM, I can offer a marketing idea that might work for Proton.
If we visit Dell website, we could buy computer online and tailor it to our own specification; bigger monitor, smaller hard drive, more memory and add a few accessories. What if we can buy a car that way?
Proton could offer 3-4 models based on one platform, then offer these cars for sale online and let buyers choose their specifications; paint colour, sedan or station wagon, manual or power windows etc. Then buyers can add up the prices or they can buy the recommended bundle and choose to pay cash or arrange financing that suit them. Don’t forget to tell the buyers their expected delivery date, to be delivered to wherever the buyers want to, by Poslaju. (I think Proton could appoint logistics companies to do delivery)
Without doubt, the entire Proton supply chain management has to be managed online. Savings from low inventory and cutting out middlemen could be passed on to buyers in the form of lower prices.
Cars is fast becoming commodity like, one car is not much different than another. These days when people buy car, they expect to use it for a set number of years and then get rid of it.
How I wish I could buy my Mitsubishi brake light lenses just like I bought my computer component, off the internet.

Malaysia's Competitive Edge

Malaysia’s Competitive Edge: How to Get There.

Global business landscape is changing rapidly. Adam Smith predicted 200 years ago that businesses, in search of efficiency would relocate to wherever the lowest cost and most efficient location are. In this information age, location does not matter anymore, as long as there are the necessary infrastructures for Internet, no limits, no boundaries. American and European companies already relocate their back room operations to India; accounting, call centres, customer service/technical back ups etc and contracting their manufacturing to China.
What we as a nation should do to remain competitive – in the face of new competition from China and India?
Put our house in order first:
High quality education system – educated workforce are easily trainable. We must build the necessary infrastructure that produce educated workforce – not only educated but also creative. We do not want just yes-man – but people who are of critical mind and creative. Learn from Ireland – that country move from the poor man of Europe to one of the richest in just 3 decades. Chinese proverb says:
“ If you want to be prosperous for one year, grow grains.
If you want to be prosperous for 10 years, grow trees.
If you want to be prosperous for 100 years, grow people.”
From The Economist.
Remove barriers that were designed to protect and pamper local businesses and industries. Trade barriers only encourage monopoly pricing of goods with the consequence economic loss. Pampered businesses become uncompetitive in the global market – they would continue asking for protection until doomsday if we let them. The common people would suffer from high prices and loss of economic benefit.
Simplify our tax system. A low tax rate for businesses, e.g. 20% like in Ireland or Hong Kong encourage business investment. Higher investment rate would have positive flow on effect to the economy. In most Western countries, its citizens carry the burden of taxes, because their citizens enjoy the benefit of their taxes, in the form of government, defence and education. A high corporate tax is meaningless when multinationals (as most large companies are, even those domiciled in Malaysia) can evade taxes by inflating intercompany invoices. Ever wonders why multinational companies report most of their profits in the country of lowest tax rate?
Encourage R & D spending – I do not know the rule for R & D in Malaysia, but if companies were allowed to expense off its R & D spending in the year it occurred, instead of capitalising it and expense it over the life of the project, that would make a difference to their ability to compete in the marketplace.
Remove barrier to capital movement into and out of the country. Multinational companies that invest in a country would like to know that they can take their investment elsewhere if they need to. The existence of capital barriers is just like a big sign saying “Don’t Invest Here”. Therefore free floating the ringgit is desirable.
Transparency in governance and the way we run the government. For goodness sake, set the rules – but stick to it – no favouritism and bending the rules. In this regard we must treat everyone the same manner and equally.
Transparency and equality in our justice system. Make the law available to everybody with swift and fair justice system. Reduce backlog in civil and criminal cases. If swift and fair justice system easily available from village level up to the High Court, businesses and investors would be assured. We had a good background following the English legal system. But please get rid of repressive laws that were enacted to silence the communists. Laws that deny a group/person fair trial and justice do not give good image to the country. Look at Zimbabwe, is that a good example?

Once we have put our house in order, then we can move on, improve our competitiveness.

Increase our savings rate to optimum level. High savings rate would provide capital for business expansion.
Economist, Robert Solow calculates that optimal savings rate is about 50% of income. We may not be able to achieve that soon, but moving towards this target is desirable, given our current inflationary pressures.

Manage our resources carefully: water, air, land and forests. When pricing resources, due consideration must be given to the needs of future generations, other species (flora and fauna) and without detrimental effect or changes to the environment we live in. resources reflect our wealth, now and in the future. Our recent experience with drought and haze bring home the point that even the air we breathe and water for drinking are scarce resources.
Subsidizing and underpricing these resources only encourage wastage. A more effective way would be pricing these goods at market value, but subsidize those who cannot afford by giving them money to buy these goods. The same system could be used for petrol and diesel. Sell petrol and diesel at world market price, and give income top up directly to the poor – into their account.
When giving out licences to extract resources, be it water, fishery, land or minerals, we must not deplete our environment in the process.

Increase our talent pool.
As they say, however rich we are, if we do not know the value of our wealth, we would soon lose them. This is where a good education system that encourages creativity plays its part.
Western countries have realised lately that human capital – in the form of talented and hard working individuals is a form of wealth. That’s why USA, Canada, Australia and New Zealand are encouraging immigration of people from around the world. These countries set up point system, whereby the most desirable and demanded skills are allowed in.
The immigrants that these Western countries seeking are different than the foreign workers we have in Malaysia. We also need to attract talented migrants into the country – and revamp our ‘state of siege, keep them out’ immigration policies. We should encourage diversity, because diversity brings different viewpoint and ideas.
These are where our future competitive edge lie.