PROTON (automobile)

Founded by the former Prime Minister of Malaysia, YAB Tun Dr. Mahathir bin Mohamad, PROTON was established in the year 1983. PROTON in short for  Perusahaan Otomobil Nasional Sendirian Berhad, is a Malaysian automobile manufacturer. Initially, the idea of a national car came about from Dr. Mahathir as a length to achieve a developed nation by 2020. (Sam, 2013) This led to The National Car Project which was approved by the Cabinet in 1982, where PROTON was officially founded in the following year. PROTON has a headquarters in Shah Alam, Selangor as well as an additional manufacturing plant in Tanjung Malim, Perak. PROTON being in the automotive industry was the only national carmaker in Malaysia until the establishment of its competitor, Perodua in 1993. With over 42% of it’s shares owned by Khazanah Nasional Berhad, PROTON was owned by them making it government-linked, as Khazanah Nasional was a government-owned investment company. However, the ownership of PROTON was taken over later on by DRB-HICOM, a leading corporation in automotive manufacturing in 2012. (Lim, 2013) In the year 1985, PROTON manufactured it’s first car the ‘Proton Saga’ as a result from collaborating with Mitsubishi Motors. The production of the Proton Saga was said to be the start of the Malaysian automotive industry and has caused massive structural changes in the industry. The entry of PROTON into the industry has seen a shift of the domestic car market from one which depended on imported cars to one which depended on locally made cars. Ever since the manufacture of the Proton Saga, PROTON has now manufactured different models of vehicles, which are now selling in the market. PROTON does not only sell in Malaysia alone, but also runs in other countries, mainly in Asia. (Chin, 2013)

PROTON was doing very well in terms of sales in the year 1983 when it was first established, as it was the country’s number 1 choice in purchasing automobile vehicles. Besides that, at that particular time PROTON faced no competitors in the automobile industry, as it was the only local vehicle manufacturer in Malaysia. Sales for PROTON continued increasing steadily right up till the late 1980’s as a result of a shortage of technical expertise in the field as well as a worldwide economic recession.

Based on PROTON’s sales graph above, it is clearly shown that sales have not been stagnant over the years. There is a decline in sales in the year 2003 due to reduction of import tariff by AFTA (ASEAN Free Trade Area). As prices of foreign cars go down due to the reduction of import tariff, the demand for foreign cars increases. In 2006, the other decline in sales by PROTON is due to the release of Perodua’s highly sought after car Myvi in 2005, which eventually became the best selling car in 2006. From the year 2006 up till 2011, sales of PROTON automobiles have been steadily increasing due to the National Automotive Policy (NAP) being introduced. One of the main objectives of the NAP is to help local automobile companies like PROTON and Perodua survive in an ever-competitive global environment. (MITI, 2009)

First Malaysian car; PROTON Saga

Demand

One of the main factors for quantity demanded of a car is the price. As the National Automotive policy plans to protect the local automotive industry by extracting tax on exports and imposing tax on imports, consumers are able to purchase PROTON cars at a lower price.

As shown above, when the price of cars decreases from p1 to p2 and when other determinants remains the same (ceteris paribus), there is an increase in quantity demanded from q1 to q2, which causes a movement along the demand curve.

The other main determinant for demand of cars is the price of complementary goods. Petrol is a complementary good to cars and recently the Malaysian government has imposed an increase in petrol prices. The price of RON95 and diesel went up 20cents per litre while the price of RON97 went up by 15cents. (Lee, 2013). With the rise in price of complementary goods like petrol, people tend to use less petrol, which results in the decrease in demand for cars.

Based on the graph above, it is shown that when petrol prices increases, demand for cars decreases from Q to Q1, shifting the demand curve to the left.

Supply

The law of supply states that ‘producers are willing to supply a good only if they can at least cover their marginal cost of production’. Hence, after the reduction in import tariff by AFTA, there was an increase in supply of foreign cars, which ultimately decreased the supply in local PROTON cars. This was because foreign cars became more affordable after the reduction in import tariff. Because of the decrease in supply for local cars, PROTON reduces production of it’s vehicles as to avoid profit loss. The decrease in supply of PROTON cars sees a shift in the supply curve to the left from S0 to S1.

 Elasticity

One of the factors that affect the elasticity of demand is income. Consumers are able to spend thousands and even millions of Ringgit Malaysia buying cars, which makes up a rather big proportion of their income. The greater the proportion of income consumers spends on a good, the larger is the elasticity of demand for that good. Therefore, the price elasticity of demand for PROTON cars is elastic. Besides that, closeness of substitute goods also affects the elasticity of demand. Being a country that imports cars from all over the world, there are many substitutes to PROTON cars such as Perodua, Toyota, Honda and many more. Consumers tend to switch to alternative cars from carmakers such as Perodua when price of PROTON car increases as they sell cars which are up to standard at a much lower price.

Market Failure

Underproduction occurs when production is restricted and quantity is inefficient. In 2013, PROTON was reported to have over 4,000 orders made for the Saga SV however the amount exceeded the amount PROTON was manufacturing per month, which is 2,000 units. Underproduction occurs as marginal social benefit exceeds marginal social cost where consumers are willing to pay for the car but supply is inefficient. This also causes deadweight loss to arise.

In order to encourage citizens to buy more locally made cars, the government is increasing the tax on foreign cars, causing an increase in price. When tax is imposed, the marginal social benefit exceeds the marginal social cost once again causing inefficiency. This eventually causes deadweight loss to arise.

Besides taxes, subsidies have been imposed on PROTON cars as well. That way, PROTON is able to sell cars at a low price to a wide range of income holders. When subsidy is imposed, the supply curve shifts to the right, where marginal social cost exceeds marginal social benefit.

Market Structure

PROTON belongs to the oligopolistic competition as there are a few other competitors besides itself in the automotive industry such as local automotive company, Perodua as well as international competitors Toyota, BMW, Mazda and so on.

Based on the table above, it is observed that PROTON is ranked number 2 from 2010 to 2012 in terms of market share in Malaysia, right behind Perodua. As companies in oligopoly are price settlers instead of price takers, PROTON is able to set their price at a lower level to attract more local consumers to buy their vehicles. PROTON is advised to take such measures in lowering prices as to keep up with the competition with local and international competitors. Besides that, the changes in price and quantity produced by other competitors can greatly affect PROTON’s profits therefore PROTON should achieve the 2 types of interdependency which is to cooperate with one another (collusion) or to compete with one another (non-collusion). An example of collusion is PROTON’s collaboration with Mitsubishi Motors to produce the first Malaysian car, Citroen, Youngman and Honda.

Conclusion

With the help of import tariffs and subsidies imposed by the government, PROTON is currently leading in Malaysia’s automotive industry. With PROTON’s new CamPro engine, PROTON is capable in producing engines with good power output, which meets new emission standards. Therefore, it is inevitable that PROTON has indeed accelerate Malaysia’s industrialization capabilities to match those of developed nations. (PROTON, 2013)



Reference List

Chin Hua Yik (2013) Copy about Proton.  Available from:

http://prezi.com/dtuzwcdq7yom/copy-of-about-proton/ [Assessed 7 January 2013]

Lee Yen Mun (2013) RON95 petrol, diesel up 20 sen from midnight (Update).

Available from: http://www.thestar.com.my/News/Nation/2013/09/02/ron95-up-20-sen.aspx/  [Assessed 7 January 2013]

Lim Sue Goan (2013) Proton’s Story.  Available from:

http://www.themalaysianinsider.com/sideviews/article/protons-story-lim-sue-goan [Assessed 7 January 2013]

PROTON (2013)  History. Available from: http://corporate.proton.com/en/About/Brand/History.aspx 

[Assessed 7 January 2013]

Miti (2009) Review of National Automotive Policy. Available from:

http://www.miti.gov.my/cms/content.jsp?id=com.tms.cms.article.Article_9971dce0-c0a81573-3edb3edb-686eb8ad  [Assessed 7 January 2013]

Tamar Gabilaia (2001) Malaysian Proton and AFTA: threat or advantage?

Available from: http://www1.american.edu/ted/proton.htm  [Assessed 7 January 2013]

Sam Chee Kong (2013) A Tale of Two Cars. Available from:

http://www.malaysia-chronicle.com/index.php?option=com_k2&view=item&id=105482:a-tale-of-two-cars-proton-and-hyundai&Itemid=2#axzz2pEoMY2yP [Assessed 7 January 2013]