JULY 31 — Dear Tun, with regard to Malaysia’s place in the automotive manufacturing ecosphere.

You have wasted little time in getting down to business, and among your visions that you expressly shared with us recently is the Malaysian automotive industry, and how you intend to jump start it.

Here are my thoughts on the matter.

1. Making cars for sale at a profit is a business. It is a different matter from the individual’s passion for cars — the beauty of, the speed of, the luxury of, etc. It must be profitable, it should generate investment and jobs and, above all, profit.

2. The making of cars for sale is a mature industry, it has been around for over a century, and is credited with being a pioneer of mass production. It is a big volume business. The biggest companies (or groups of companies) make and sell about 10 million units a year, and the smaller of the established, healthy brands sell about 1.5 million.

3. High volume lowers unit cost. A company like Toyota sells 10 million units a year, which means it buys 10 million sets of tyres a year. Which means it has very strong bargaining power with the tyre makers it buys from, compared to a company that buys 1 million sets. That’s simply business. That also applies to the shock absorbers, and wiper motors, and switches, and radiators, etc, that it buys in bulk from its vendors. I hope that explains why Toyota can produce a 1.3-litre, 4-cylinder, 4-door sedan, cheaper than other makers of 1.3-litre, 4-cylinder, 4-door sedans. Because it buys the components at a lower price.

4. Every billion dollar Toyota invests in research and development each year is divided by the 10 million units it sells each year. That’s 100 dollars per unit for amortisation, the big word experts used. Whereas every billion spent by a company that sells, say 2 million units, will be divided by 2 million, which is 5,000 dollars per unit. So, to match the 100 per unit cost, the smaller player simply must spend much less on R&D, or about 200 million to compete with Toyota’s billion. With me so far?

5. The big companies sell worldwide. That means about 180 countries. Thousands of cities, with dozens of dealerships in each. And each dealership competes with dozens of rivals representing different brands.

6. Not all brands are equal. The “premium” brands like Mercedes, BMW, Audi, Lexus, command a bigger margin, which means each car sold earns a higher profit, as a percentage of selling price. The lowest margins are at the low end of the market, the affordable, econo-cars. To make money here, since you earn less per car sold, you simply have to sell many more units.

7. Malaysian brands like Proton and Perodua are in the economy segment. Every car maker in the world offers a cheap-ish 4-door, 4-cylinder compact salon car. It is the most difficult segment to compete in. It is more difficult to engineer a car to be cheap and economical to make, operate and maintain than to make a luxury car. You have to watch the cost of every single component, and you need to hit volume targets, and you have to compete. With a Rolls Royce, you just build the best, total up the cost and add your desired margin on top.

8. Consumers in other countries do not hate Malaysian cars. We are not big enough to be noticed, much less to be hated. They are just spoilt for choice. (Historically, Protons and Peroduas were the butt of jokes in some foreign markets but so were Hyundais and Skodas, and look where these brands are now. Chinese brands in general are looked down upon too but no one looks down at their sales figures, and how they are buying up big, old brands like Volvo. And Proton too.)

9. No country actually puts up barriers against Malaysian cars. We are too small for them to bother to do that. They just set the same standards for all cars sold in their markets. It DOES complicate matters that many countries have differing standards. But ALL car makers that sell in a particular market meets the local standards. The reason they can do that is volume. If you sell 100,000 units per year in a single market, it is worthwhile fine-tuning your product to meet local rules. If you sell only 400 economy cars, then maybe not. But if you sell 400 Bugattis, then that is a huge market.

10. Proton’s past export efforts were dismal failures. It’s not hard to understand why. Send a few hundred cars with great fanfare to Egypt, or Turkey, or Iran, or Germany. And then what? Apart from the happy fellas who got to become expats, did anyone really know what was happening there? How many dealerships did they set up? Who would invest money in a dealership, offering only one or two very ordinary products, when competing dealers next door offered several well known and familiar brands’ full range of products, from tiny to compact to executive to luxury to commercial vehicles? Will future export attempts be more successful? How so? What will change?

11. Profitable car-making is a matter for companies but we cannot ignore the countries where these companies started up and continue to operate from. They are industrialised countries, they make steel, and they make machine tools, i.e., the tools with which to make other machines. The 30,000 tonne hydraulic presses, the smart robots, etc. Malaysia does not. We still have to import all these essential items.

12. Our neighbours also did not make these heavy items. All they did was create an environment for such industries to thrive, and at lower costs. Now, these countries have factories that produce all the components to put a car together, and even some of the tools to do that.

13. It is not only cars that are sold. The shares, and even venerable brands of the car makers are also bought and sold. The list of who owns which company is long, and the cross holdings are more complex than a spider’s web. There really is no such thing as a national car company any more.

14. In the era of WTO and global trade, any action to restrict others’ trade activities will be met with retaliation. If we put up hurdles to cars from countries that make and sell many cars, they won’t hit us back in our cars, because we export so few anyway. They will hit back in ways that will hurt us, in the very exports that we are competent in. Ask POTUS Donald Trump how his trade war is going. And his is a big country, while ours is quite small.

15. Through dangerously long long terms of up to 10 years, Malaysians do express their love for cars by buying over 560,000 units a year, placing us 22nd on the list of the world's biggest car markets. Countries that pioneered the autombile, like the UK (sixth, 2.9 million) and Sweden (28th 430,000) no longer own the brands that made them famous, like Rolls Royce and Jaguar and Volvo, which have been bought and are now owned not by other countries but by other companies.

16. So, you now talk about further restricting imports instead of boosting exports. You seem to have lost that feeling for Proton because Geely has bought into it, and have nothing to say about Perodua. You want to start a new brand, to be bought only by Malaysians, who will be persuaded by making other cars less affordable? I won’t buy into that.

17. Note that I have not complained or criticised Proton products thus far, although I am aware many of my fellow countrymen cannot mention the name without foaming at the mouth. No, it is not about whether Proton makes good or bad cars, or whether Malaysians can make good cars. We can. What we cannot do is make it better and cheaper on our own than the next guy, for all the reasons listed above.

18. And, the times they are a-changing. Some of the top car-making nations in the world — Germany and France, are seriously considering prohibiting internal combustion engined-cars within the next couple of decades.

19. So, we go electric lah, kan? So, wouldn’t it make sense to push in that direction? We don’t have many natural advantages but, at least, we would also be starting not too far behind the rest.

20. For some interesting further reading, click here. 

Top 20 motor vehicle producing countries (2017)

Country Motor vehicle production (units)

China

29,015,434

United States

11,189,985

Japan

9,693,746

Germany

5,645,581

India

4,782,896

South Korea

4,114,913

Mexico

4,068,415

Spain

2,848,335

Brazil

2,699,672

France

2,227,000

Canada

2,199,789

Thailand

1,988,823

United Kingdom

1,749,385

Turkey

1,695,731

Russia

1,551,293

Iran

1,515,396

Czech Republic

1,419,993

Indonesia

1,216,615

Italy

1,142,210

Slovakia

1,001,520

* Paul Si is a Malay Mail reader.

** This is the personal opinion of the writer or publication and does not necessarily represent the views of Malay Mail.