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

Proton 185Although Proton was financially healthy with RM900 million in cash, arelatively low debt–equity ratio of 1:5 (as at March 1998), and a 9.1 per centincrease in turnover to RM6.8 billion, net profit fell by 40.6 per cent for the1998 financial year (The Edge, 6 July 1998). By July 1998, Proton reduced itsproduction from 4,500 to 2,000 cars a week and was faced with an inventory of25,000 cars and vendor problems (The Edge, 13 July 1998, 10 August 1998).Higher component costs (as a result of the ringgit’s depreciation) and a fall incar sales forced Proton to further reduce production from 20,000 to 5,000 carsa month, resulting in a RM82 million pre-tax loss for the six months ending30 September 1998 (Business Times, 4 December 1998, 10 August 1998).Following Proton’s privatization, DRB-HICOM aimed to become ‘amajor industrial group which is global and highly diversified’ where ‘manufacturing,financial services and construction would continue to remain [its]core business’ (Business Times, 19 August 1996). Despite this, about 75 percent of its total sales (RM829 million in 1997) came from Proton cars, withfew of its other subsidiaries able to generate cash flow let alone profit (seeNew Straits Times, 19 March 1998; The Edge 12, April 1999, 7 February2000; Malaysian Business, 1 April 2000). HICOM’s operating profit wasinsignificant after stripping out earnings from EON and Proton, and by 1999,only its automotive segment was making money (Malaysian Business, 1 April2000; The Edge, 7 February 2000). The timing of the decision to sell Protonback to the government suggests that the owner may have preferred rentsfrom a highly protected domestic market rather than invest in technologyacquisition and production capacity needed to compete internationally.DRB-HICOM continued to distribute Proton and EON’s substantial profitsthrough its national dealership of Proton further suggests that this may havebeen a more important source of profit than manufacturing. This wasreflected in DRB-HICOM’s subsequent organizational restructuring andfocus post privatization, shifting towards other non-competitive sectors ofthe economy.After the sale of Proton (along with Proton Edar and Gadek Capital),the company amalgamated four listed companies to form the DRB-HICOMGroup, focusing on three core divisions – automotive, property and construction– which generated 50, 17 and 33 per cent of the group’s revenuerespectively (New Straits Times, 2 May 2002). The focus on property andconstruction was consistent with the pattern of Malaysia’s privatization andthe preferences of (Malay) capital for non-tradable sectors. EON contributedtwo thirds of automotive earnings, but this was expected to decline as bothit and Proton lost market share. DRB-HICOM subsequently secured thefranchise for Honda and Chevrolet cars. Although it started out as an industrialconglomerate, the company shifted its focus to securing governmentcontracts including the supply and maintenance of military vehicles for theMinistry of Defence, and construction, with RM2 billion worth of contracts,mainly in the construction of Phase 1 of the electrified double-trackingrailway project between Ipoh and Rawang (New Straits Times, 2 May 2002).