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Malaysian Automotive demand and pricing strategy
When the first Proton introduced in Malaysian automotive market in 1985, Proton
Saga appeared to be the cheapest priced car among its competitor in the same
market segment. Proton was priced at least 20% cheaper than non-national
makes in the same 1.3 to 1.5 litre class. With both the low price and a dash of
national pride working for it, the Proton got a rapid hold on the market. By 1988
the Proton, with a model lineup of one, had overtaken all other makes and
models and grabbed 73% of the Malaysian passenger car market.
In 1983, when the 'national car' was planned, Malaysia had an annual new car
market of about 90,000 units, and the market was growing annually by 20%. The
Proton plant was designed to produce 80,000 units a year and could be geared
up to 120,000 units. But in Proton's first full year of production (1986), total car
sales took a severe dip to 47,000 and next year, due to a worsening economic
situation, just 35,000. Only in 1988 did the market begin a recovery to 54,000
units, by now most of them Protons. Since then, the market has grown steadily to
a 2005 peak of 417,000 cars.
Government policy has kept the Proton cheaper than other makes by the simple
strategy of taxing the competition, while giving Proton exemptions or rebates
from these same taxes. Duties on packages of parts for assembly into complete
cars in Malaysia is said to average about 30%. Proton is exempted from most of
these.
On 1 January 2008, the postponed-several-times full implementation of an
ASEAN Free Trade Agreement, which Malaysia originally signed on to in January
1992, was to finally have come into effect. The agreement would effectively bar
practices that discriminate against goods (including vehicles) that are considered
Made in ASEAN by the use of Tariff and/or Non-Tariff Barriers. This would
practically eliminate most of the price advantage, achieved by way of the 50%
rebate Proton (and other Malaysian-made cars) enjoy on a hefty (75 to 105%)
engine-capacity-related Excise Duty applied to new cars sold in Malaysia.
As 2008 progressed, this initiative seemed not materialise in order to protect
local automotive manufacturer. This derailed these manufacturers' previous plans
to use Thailand (principally) as their ASEAN manufacturing hub, and forced them
to reintroduce Malaysian-assembly of some models from CKD. This move
allowed these foreign Marques to benefit from better tariff structures applied to
such vehicles, in an effort to remain competitive (in the non-National car
segment), and to narrow the price difference between their models and
equivalent (Excise Duty rebated) Malaysian-made cars.
The lack of direct competition at Proton models' price points (in Malaysia) has
also allowed Proton, for many years, to continue selling very outdated designs,
generally with scant regards to providing basic safety equipment such as airbags
and anti-lock braking in domestic models. This scenario kept Proton left behind in
term of quality and innovation in its products and not very successful in foreign
market, and lack of economy of scale.
In 2006, Proton's sales dropped 30.4% from 166,118 in 2005 to 115,538 for the
Malaysian market, indicated a 55% fall of sales to 962.3 million ringgit, its lowest
in at least seven years. This allowed Perodua to overtake Proton as the country's
largest passenger carmaker for the first time, with a 41.6% market share, while
Proton's market share fell from 40% in 2005 to 32% in 2006. As at June 2010,
proton has only 26.6% of market share, whereas Perodua has led the market at
31.5%.
Under oligopoly market structure, which the number of firms is small enough that
action from any individual firms in the industry on price, output, product quality,
introduction of new models, and terms of sale have a perceptible impact on the
sales of other firms in the industry. They are interdependence, and any new
move is likely to evoke a countermove by its rival.
Automotive industry in Malaysia seems in line with what Augustin Cournot said in
his model called The Cournot Model, asserts that each firm, in determining
profit-maximising output level, assumes that the other firms output will not
change and continue producing the same amount of output in the next period.
This is what happening in automotive industry in Malaysia. Proton tried to
produce more output by penetrating more market in overseas and produce lest
cost per unit. But it has not been very successful yet as its product lacks of
technologies and the quality of products produced not as good as its competitors.
Even some of its local market share has been taken over by world automotive
company such as Toyota, where their market share has been increased to 14.8%
for the first half of this year compared to 11.9% for the same period in previous
year.
Cartels and other forms of collusion have been practised by some of firms in
automotive industry in Malaysia, but not really obvious in term of price
standardisation. It is more toward to non-price collusion. This can be seen in one
of Perodua initiatives. Perodua had teamed together with Daihatsu and Toyota to
come out with new model. 80 engineers were sent to Japan to work on the new
model and to provide their inputs right from the very start of the project which
was in early 2002. What this meant was that the model which is now to be known
as the Daihatsu Boon/Toyota Passo/ Perodua Myvi. Besides the R&D
personnel, there were also Malaysian engineers from the manufacturing side
who were sent to Japan to work simultaneously on the production issues related
to the new model. Such collaboration is necessary nowadays because the cost of
developing an all-new model is incredibly expensive and being able to share the
cost makes it possible to price the product more competitively. In the case of the
Myvi, Perodua says that it spent around RM210 million, a fifth of what it would
have cost if it had tried to develop the model alone.
This is part of the international firms strategies in avoiding price wars, reduces
their production cost and produced a better output, where they are for sure
cannot reduce the price alone in competing Proton cars as it is protected by
government policies. Perodua now has dominated Malaysian market and their
move could affect the decision by other firms in this industry and could be a price
leader and set them as a benchmark for product pricing in Malaysia market.
References:
1. www.peroduapromosi.com
2. Malaysian Automotive Association, Market Review for 1st half 2010.
3. Dr. Mohd Rosli, The Automobile Industry and Performance of Malaysian Auto Production, Journal of Economic Corporation 2006.
4. John Petroff, www.poei.org