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

Proton 181to go about it’ and Proton’s management initially did not understand thebusiness thoroughly (Malaysian Business, 1 July 1994: 14). As a result, progresswas slow and Proton essentially remained a (Malay) assembler, relyingon Mitsubishi technology and essentially rebadging old Mitsubishi models.In-house engine assembly only began in 1990, six years after commencementof operations, and the high cost of using Mitsubishi’s engines and ongoingroyalty payments affected Proton’s competitiveness. 26Proton’s original and subsequent production targets (after privatization)were substantially below industry estimates for economies of scale, with thegovernment underestimating the capital and technological requirements, andtime needed to develop a Malaysian car. While it sought to emulate SouthKorea’s car industry, the government did not account for global conditions(including overcapacity) and industry forecasts made in the 1970s, as well asongoing trends towards industry rationalization. Capacity expansion wasfurther constrained by domestic market size and the lack of internationalcompetitiveness, particularly in the context of global overcapacity.Proton’s original and subsequent production targets (5,000 units in 1985,120,000 by the 1990s, and 500,000 by 2000) were well below industry levelsfor economies of scale. Its planned capacity of 80,000 in 1985 was alsouneconomical, while actual capacity in 1985 was even lower at 40,000. Thesefigures were significantly below Hyundai’s first production planned for 1976(55,000) and 1978–1979 (120,000). By 1987, Hyundai was producing 670,000cars (Bloomfield 1991). Proton’s planned capacity expansion was ambitiousand depended on substantial sales growth which only a large export marketcould provide. Hyundai’s breakthrough as a major exporter came when itentered the North American market, selling 169,000 cars in 1986 and 263,000in 1987, allowing it to increase production capacity from 150,000 (in 1984) to700,000 (1988) (Gwynne 1991).In comparison, the Malaysian government did not even have export plansfor Proton to be able to duplicate these economies of scale, and the originalagreement in fact incorporated a de facto restriction on exports of the Saga(Doner 1991; Tharu 1994). Furthermore, Proton’s Japanese management wasapparently not interested in competing with Mitsubishi, and targeted marketsthat Mitsubishi had no interest in and which only required minor modificationsto the car. 27 As a result, early attempts to enter the US market failedpartly due to the need for expensive modifications. Instead, as late as 1995,Proton continued to rely on ‘a very strong, very big, domestic base’ for a‘competitive production volume’ of 250,000–300,000 a year in 1995 28 whentotal passenger car sales for the entire country that year was only 285,792(Malaysian Motor Traders Association, cited in Business Times, 31 January1997).On top of this, privatization did not change Proton’s relationship withits local suppliers, and the company continued to find it difficult to reducecomponent costs due to government policies on Malay vendors. Proton hadto support local industries, meet NEP objectives by promoting Malay