PRIVATIZATION Privatization in Malaysia, Regulation, rent-seeking and policy failure

Proton 161(when Proton’s domestic market share was declining, and with industryliberalization approaching), and the owner’s subsequent diversification intoother non-competitive sectors, suggests that the owner was unwilling toundertake the necessary capital investment and may have been attracted toProton because of the rents from car sales in a protected domestic market.This preference was consistent with the general preference of Malaysiancapital for captive rents in non-competitive sectors, as discussed in Chapter 3,and underlies the difficulties the government faced in attempting to create adynamic capitalist class. While Proton subsequently developed its own bodydesign and engine, and rationalized its local content programme and distribution,this occurred only after it was renationalized. Crucially, productdesign remained poor and uncompetitive as Proton was unable to developthe necessary technology. This again illustrates the inherent technologicalchallenges in the industry, and the viability problems of the project, not tomention privatization. More critically, it underlines the importance of thestate’s disciplinary capacity in the management of necessary subsidies (inthis case, learning rents) as the most important condition for successfulprivatization.This chapter is structured as follows. The next section will discuss thechallenges faced by the auto industry and Proton specifically. This is followedby the background to Proton’s creation, privatization and renationalization.We then evaluate the performance of Proton before and after privatization,looking at its financial performance, production capacity, export and protectionlevels, technology acquisition, local content, and marketing and distribution.The following section identifies the main problems and causes offailure, and prioritizes the main conditions necessary for successful privatization.The final section summarizes the main findings and concludes.ChallengesCompetitiveness in the auto industry is largely a function of economies ofscale and productivity. The capacity to sell vehicles also depends on finalproduct quality and marketing and distribution. The level of technology willdetermine the quality of product design and the efficiency of the productionprocess. Marketing and distribution are also important as achievingeconomies of scale requires selling cars. Here, Proton faced industry-relatedchallenges as well as challenges specific to late industrializers, along withconstrains posed by wider government objectives.Industry characteristics and trendsThe auto industry is characterized by requirements for substantial scaleeconomies and capital investment, as well as increasing concentration,overcapacity and low margins. Industry data, particularly in the 1970s (whenfeasibility studies for Malaysia’s national car project were being conducted)