By Michael Shari
Since the early 1990s, the world's largest carmakers have spent billions building up a massive manufacturing base in Thailand and Indonesia. Their goal is to dominate in Southeast Asia, where 1 million autos are sold annually. The starting bell rang on January 1, 2003, when member states of the Association of Southeast Asian Nations dropped tariffs on car imports that have 40% ASEAN local content.
The multinationals still face one obstacle that they just can't seem to steer around: Malaysia, whose sales of nearly 500,000 cars a year make up half the region's market. For the benefit of its two national carmakers, Proton and Perodua, the government has postponed dropping tariffs on cars, which now range from 42% to 300%, until January 1, 2005. At the same time, Malaysia is backtracking on just how far it will lower tariffs, cutting only as far as 20% instead of 5% in the other ASEAN countries. And then, the International Trade & Industry Ministry says it will raise excise taxes on cars assembled in Malaysia to recoup the lost tariff revenue and create a level playing field.
DIGNIFIED WAY OUT?
However, the world's big carmakers have an easier, faster, and possibly even cheaper way to challenge Malaysian protectionism: An old-fashioned corporate takeover. This would save big carmakers the tens of millions of dollars and the 5- to 10-year lead time required for a new entrant to build up a sales and service network widespread enough to compete with Proton, which has 60% of the market, and Perodua, which has 20%. "They have the incumbent advantage of a massive presence with an established [nationwide] dealer network," says Graeme Maxton, managing director of Autopolis, an auto-industry consultancy in Singapore.
From the Malaysian government's point of view, divestment could be a dignified way out. When the region's floodgates open, Toyota Corollas, Ford Lynxes, and Honda Streams assembled in Thailand will slowly but surely take market share away from Malaysia's national carmakers. That would be painful for the country to watch. But it would be much easier for the powers that be to stomach the idea of offering the two multinationals that already own equity stakes in Proton and Perodua -- DaimlerChrysler (DCX ) and Toyota, respectively -- an opportunity to take over the national carmakers.
Saving face will be important. Malaysia's carmakers are the pet projects of Prime Minister Mahathir Mohamad, who after nearly 22 years in office is Asia's longest serving leader. Mahathir has said he'll step down in October, and senior aides in his office say his handpicked successor, Home Affairs Minister Abdullah Badawi, has not hinted at any radical departure from Mahathir's signature economic policies. Still, says Aishah Ahmad, president of the Malaysian Automotive Industry Assn., "Mahathir's anointed successor may not have as much passion for the auto industry."
Malaysia could be warming to the idea of selling its crown jewels. In January, 2001, the government allowed Daihatsu Motor to raise its minority stake in Perodua, which stands for Perusahaan Otomobil Kedua, to 51%. The authorities kept management control in exchange for allowing Daihatsu to start exporting Malaysian-made Perodua parts under the Daihatsu brand name to its new Daihatsu assembly plant in Indonesia.
That was seen as a first step toward relinquishing control over Perodua to Daihatsu and ultimately selling Proton. "The Prime Minister's thinking was: Let's try it with Perodua first before we do anything with Proton," says a Malaysian auto-industry executive.
Later that year, Toyota acquired Daihatsu, and Mitsbushi was taken over by DaimlerChrysler. Given that Mitsubishi sold Proton its manufacturing technology in the 1980s and Daihatsu sold its technology to Perodua in the 1990s, auto-industry analysts in Southeast Asia see those acquisitions as a harbinger of change on the Malaysian automotive landscape. Spokespersons for Mitsubishi and Daihatsu, reached in Tokyo, deny that their outfits are planning takeovers of Proton or Perodua. DaimlerChrysler and Toyota officials, reached in Frankfurt and Tokyo, respectively, declined to comment.
Proton CEO Tengku Mahaleel acknowledges that rumors are circulating in Kuala Lumpur that potential foreign investors are talking to his state-controlled concern, but he refers questions to Mahathir himself. "That's a shareholder issue," says the former Formula One race-car driver.
If these multinationals had stepped up to the plate sooner, they might have gotten a better deal. Proton would cost a lot more to acquire today than at the height of the Asian financial crisis in 1998, when Malaysian consumers went into hiding. Since then, the total value of Proton's stock has quadrupled to $1.2 billion, while profits have increased 10-fold, to $250 million. Perodua is not publicly listed, making it hard to estimate its value. Combined, the two companies sell nearly 400,000 cars a year and export less than 5% of their production.
Auto-industry analysts in Southeast Asia generally agree that it's only a matter of time before the government lets go. They see the Malaysian car market as irresistible to foreign investors. It's not only the largest in ASEAN but the most lucrative as well. While Thais love pickup trucks and Indonesians prefer minivans, Malaysians lean toward four-door sedans.
And geographically, Malaysia sits right in the middle of ASEAN, making it a convenient export platform. "I don't think it's a question of 'if' anymore but 'when,'" says Michael J. Dunn, head of Automotive Resources Asia Ltd., a Bangkok consultancy. Takeovers would give the multinationals -- and perhaps not only the ones that already own stakes in the Malaysian carmakers -- a far more attractive option than pining over this market from outside the gates.
Shari, who covers Southeast Asia for BusinessWeek from Singapore, wrote this column from Kuala Lumpur
Edited by Douglas Harbrecht