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A case of ‘industrial nationalism’ or ‘industrial globalization’?

Published on The Edge Weekly

Do we really need a third national car?

The Father of Modern Management Peter Drucker once called the automotive industry “the industry of industries”. It was considered so because of the scale of the industry and also its potential to create linkages and spill-over effects on other manufacturing industries.

Malaysia’s government-led heavy industrialization programme was unveiled in the early 1980s by the then Prime Minister Dr. Mahathir Mohamad, thereby paving the way towards building a nationally owned and controlled automotive industry. From an industrial development point of view, the first national car project with the roll-out of Proton in 1985 was the government’s earnest attempt to increase local content, achieve economies of scale and upgrade the assembly facility to a globally competitive manufacturing industry.

Dr. Mahathir’s ‘industrial nationalism’ in the automotive industry was also a manifestation of his “Look East Policy”, inspired by the remarkable success in economic and social development by Japan and South Korea. However, the highly interventionist and protectionist nature of this industrialization model, often conducted in the name of supporting infant industries, was heavily criticised and is still thought of as the primary reason behind the underachievement of Malaysia’s national car project.

Today, more than 30 years later, Dr. Mahathir has once again mooted a new national car project. Yet, public opinion is divided as reported in a YouGov poll where almost four in ten Malaysians (or 38%) supported the project, one in four (or 25%) opposed it and the remaining 37% were unsure. Previous bailouts of Proton Holdings amounting to billions in taxpayer money continue to dominate discussions over the feasibility, transparency and governance of the third national car project.

On 9 August 2019, MITI had finally announced the cooperation between Japan’s Daihatsu Motor and the little-known local R&D firm DreamEdge to spearhead the endeavour with the first model prototype expected to be out in March 2020 and the first car launch in the subsequent year. Crucially, however, the cooperation is not expected to entail significant equity partnership or cash injection from the government, although concerns over DreamEdge’s financial health has been highlighted.

But questions remain as to why DreamEdge was chosen as the anchor firm given the lack of track record in mass production of cars. Also, what is the economic rationale for Daihatsu to provide advanced technological support for DreamEdge since it has no equity stake in the third national car project? Furthermore, how will Daihatsu’s tie-up with DreamEdge affect its participation in the country’s second national car, Perodua, where it has an equity control of 35%?

From a policy perspective, it is more important to seek clarity on the overall industrial development strategy through this third national car project.

First, if we compare the experiences of Malaysia and South Korea, both countries’ national car projects began as joint ventures with foreign partners in order to facilitate technology transfer. Then, the vendor development programme was set up to nurture development of indigenous auto-parts and components supplier ecosystem to increase local content in production. Ultimately, strong export performance would become the barometer of success for pursuing ‘industrial nationalism’ together with the wide-ranging support by the state.

While the Korean national automakers have since managed to undertake significant upgrading and emerged as globally competitive companies, the Malaysian automotive industry remains highly dependent on Japanese regional vendor system as well as a domestic car market that is artificially preserved by the government for national brands. A vast body of research has attributed the success story of Korean automotive industry to the role of government who had held state-backed manufacturers highly accountable by allowing them to fail irrespective of firm size due to poor export performance. This disciplinary mechanism has incentivised companies to continuously up their game and the result was the survival of dominant players such as Hyundai Motor who would later create spill-over effects across the Korean economy.

Second, the global production network has been reconfigured extensively since we first experimented with national car in the 1980s. Discrete, highly internalised national automotive industries have given way to a more integrated global operations where lead multinational firms organise their production facilities around regions and countries where specialization can take place, and higher productivity is gained along the value chain. In other words, it is high time that we move on from ‘industrial nationalism’ to ‘industrial globalization’.

Take the example of the automotive industry in the Philippines. The country’s strength is in the production of electrical and electronic automotive components, especially wire harnesses which direct the flow of current and electronic signals throughout the vehicle. Official trade policy briefs reported that six out of the country’s largest ten exporters are wire harness companies, and this trend will grow in importance given the increasing use of electronic components in vehicles. Furthermore, with increasing specialization, the Philippines automotive industry is ripe for upgrading to produce batteries for electric cars. Also, the spill-over effects are already being demonstrated with companies leveraging their capabilities in automotive wire harnesses to enter into the electrical systems of the aerospace industry. Therefore, in the age of industrial globalization, economies may be better off carving out niche production areas while seeking to undertake industrial upgrading over time.

So, what does this recent development mean to the country’s National Automotive Policy?

It is expected that MITI will incorporate future business trend and market demand in its upcoming revision to the policy document. But more crucially, does the third national car project hint at a reversal to the 2014’s policy revision to promote greater liberalisation of the domestic market? Also, given past experience, will policymakers consider returning to protectionist measures to support the third national car?

There is opportunity cost to state intervention in the economy. To ensure a sustainable automotive industry, the policymakers should focus on parts of the value chain where Malaysian manufacturers can specialise and be regionally competitive, at least. Tax and investment incentives should also be given with proper monitoring to promote accountability, as guided by the Korean lesson. Over the years, much has been invested to encourage the use of public transportation, and that should still remain as the policy priority moving forward.

2019-08-26T10:14:08+00:00 26th August 2019|Opinion|Comments Off on A case of ‘industrial nationalism’ or ‘industrial globalization’?