40 years ago China can’t even CKD a car, how did they overtake Proton and Perodua?
Hans · Jul 26, 2021 02:07 PM
When Proton was established in 1983, China didn’t even have a single modern car plant. By 1983, when Malaysia had become the first country outside of Germany to assemble a W126 Mercedes-Benz S-Class, China was still clobbering together ‘60s era Soviet sedans.
We were once a rising Asian Tiger. At its peak in FY2010, Proton exported 22,000 cars (including CKD kits), not the highest but it was pretty decent for 100 percent Malaysia-developed products. Our technical competency was ahead of Thailand and Indonesia.
Today, Proton exports less than 2,000 cars annually.
Meanwhile, China is now the world’s most important car market, selling over 25 million cars annually, and is the world’s capital of EVs.
China's success was not supposed to happened, neither was Malaysia's decline
Critics will say that comparison with China is unfair because of its huge domestic market, which grants it huge economies of scale.
But that’s an overly simplistic view because India (1.38 billion population) is just as big but is still not yet an automotive powerhouse.
Indonesia is the world's fourth most populous country, with over 270 million people but yet its Timor national car project failed.
Remember that 10 million population Sweden is home to Volvo (Trucks), Scania, Volvo Cars, Koenigsegg, and SKF.
Austria has a population of just 9 million but it is home to Magna Steyr, the world's most famous automotive contract manufacturer. Thanks to its many automotive engineering consultancies and specialist suppliers, it's hard to find a European car that doesn't have input from Austria.
So while economies of scale is important, the world is too big and too complex for a binary yes/no, right/wrong view.
To say that China had it easy because of its huge domestic market also glosses over the fact that Chinese companies had to overcome hardships unimaginable by comfortable middle-class Malaysians.
Remember that China endured what's known in history as the 'Century of Humiliation', facing one war after another, from being bullied by Western powers to legalize opium and cede control of its territories, to dealing with its many civil wars, it’s a miracle that China is still intact today.
When Volkswagen first set up business in China in the 1983, the same year Proton was established, VW found China to have no industrial base to support a modern automotive industry.
VW executive board member Martin Posth, who was tasked to setup the first modern car factory in China, said in his memoir 1,000 Days in Shanghai, “The building had nothing in common with my understanding of a production facility.”
Posth was recounting his first visit to the state-owned Shanghai Automobile Tractor Corporation’s (precursor to today’s SAIC) plant in Anting, the site selected for VW to launch its entry into China.
It was the ‘80s but the plant was still producing a Shanghai SH760A, a lightly modified ‘60s era Soviet sedan, using very rudimentary means.
“I couldn’t for the life of me imagine the dilapidated factory producing even a single car that would come near being acceptable, based on our standards,” he added, questioning his bosses at Wolfsburg's rationale on working with the Chinese!
Malaysia, once the rising Asian Tiger
Meanwhile, Malaysia has been making modern cars since 1967 – the Volvo 144S, the first country outside of Sweden to build Volvos.
We know how to run car plants and make basic car parts – tyres, air filters, seats, instrument clusters, rubber parts, 12V batteries, windshields and windows, headlights, interior plastics etc.
Our generally English-speaking work force makes it easy for foreign manufacturers to work with us and our economy was booming.
Every major car producing nation had a vehicle assembly operation in Malaysia.
From the British to the Americans, to the Japanese, Swedes, French, Italians, and German, everyone had local assembly operations here. If you were to go further back, the Australians (Holden) would be represented too.
Only the Koreans were not on the list but that's because they haven't started exporting.
Even Dr. Carl Hahn, then Chairman of the Volkswagen Group and one of the most powerful figures in the automotive industry, saw it necessary to pay a visit to Malaysia.
We were not just good in manufacturing, Malaysians were running the entire end-to-end cycle of the car business, from financing to after-sales to marketing, and we were known to be among the best in Asia outside of Japan.
The Germans at Daimler were so impressed with Cycle & Carriage that they gave the city of Ipoh, which had one of the highest concentration of Mercedes-Benzes for any city in the world (buoyed by the tin mining boom in the ‘50s), a giant logo to be put on top of the limestone hill at the city’s entrance.
Later, they returned to Malaysia to inspect the now defunct AMIM plant in Shah Alam, liked what they saw and moved heavens and mountains to allow Malaysia to become the first country outside of Germany to assemble an S-Class.
The Italians noted City Motors’ marketing prowess. Buoyed by the tin mining boom, the Guilia and the Alfetta were the BMW 3 Series of the '60s and '70s. Malaysia was then one of Alfa Romeo's most important markets in Asia and the first country outside of Italy to use Alfa Romeo as police cars.
In its heydays, Nissan saw Tan Chong as its most influential overseas distributor in Asia.
Meanwhile in China, Posth said that the Chinese weren’t just starting from zero, but below zero.
The only Chinese with a driver’s license were military personnel and nobody outside the military knew how to fix cars, never mind finding a local Chinese who knew anything about running a car company.
“No matter what you touch, you lay your hands on a dozen of problems,” said Posth. From these extremely difficult beginnings, Posth would lay the foundation to make Volkswagen the No.1 brand in the world’s most important car market.
Today, Chinese brands are on their way to catchup with foreign rivals. They are not quite there yet, but are damn close.
What was missing in Malaysia?
Studying the development of China’s automotive industry against Malaysia’s, the biggest difference is not economies of scale (not relevant in ‘80s China), but the lack of meritocracy on our part.
The early days of Proton and Perodua were left under the care of government-appointed bureaucrats who weren’t very good at looking after the interest of Malaysia.
Proton entered a deal with Mitsubishi Motors, paying high royalties but could not export the Proton Saga without the approval of Mitsubishi, so much for being a national car.
Hyundai too relied on Mitsubishi engines for their early models but faced no such export restrictions because this was the first and most important requirement for the Koreans. Hyundai made sure no such nonsense would happen.
As for the first Perodua Kancil, it was based on an older generation Daihatsu Mira that was no longer produced in Japan. Japan had switched to fuel injection engines but Malaysia accepted a deal that involved closing off a portion of the market so Daihatsu could offload its old carburetor engines to Malaysia.
One of the pre-conditions for the Volkswagen deal in China was that the car must be of current technology. The Santana (Passat B2) that VW gave China had just been launched in Germany one year earlier.
The other pre-condition was that the joint venture must be funded with foreign currency, since China was too poor to afford more currency outflow.
The game plan for the Chinese was quite simple – invite the foreigners, keep the partnership under tight Chinese control, keep the money within China. The last part was most crucial.
China was then too poor to be in any position of bargaining power but they pulled it off anyway. Explaining how they did it requires another post, but the short story is that while Shanghai officials were baiting Volkswagen, their peers in the neighbouring province of Jilin were baiting Toyota (via FAW).
To get a better deal, Shanghai later opened talks with GM, which in 1997, offered SAIC the then-new Buick Century to China, while VW was still flogging its 14-year old Santana.
Beijing was pitting VW against Toyota and GM to get a better deal for China.
In contrast, Malaysia decided that it was a fair deal to block out foreign competition for Mitsubishi (and now Geely) and Daihatsu to profit from Malaysia uncontested.
Whatever few cards the Chinese government had, they played it very well. Which brings us to another point about Chinese government officials.
It’s not about market size or technology, it’s about humans
The Chinese civil service model is quite different from the West. Instead, the Chinese civil works like a private company (ironic given it’s a communist background), where civil servants are graded based on their performance on economic growth of their region, job creation, and more recently, air quality – before they can be promoted (and sometimes, demoted).
One cannot be appointed into a ministerial position until one has proven himself / herself at say, a mayor level.
Over in Malaysia, the position of a minister and chairman of GLCs are awarded based political patronage, not their qualifications. Remember Prasarana's gaffe?
Consider the architect of China’s latest national automotive policy, Wan Gang, who until 2018, served as China’s Minister of Science and Technology. He is often credited as the person who made China the world’s capital for EV technology.
Prior to working for the government, Wan was Tongji University’s professor of automotive engineering. He holds a doctorate from Germany’s Technical University of Clausthal, and before that, he was an engineer for Audi AG, serving as program manager for the B5-generation Audi A4.
No permanent protection for China’s ‘national’ brands
Another element of meritocracy in China is its treatment of local car manufacturers.
Chinese manufacturers are protected from foreign competition by a 1994 rule that requires all foreigners looking to set up business in China to form joint ventures (JVs) with local manufacturers, with equity of the foreign company capped at 50 percent – it’s a way to protect local manufacturers, allowing them to quickly learn Western technology.
In 2014, China's Ministry of Industry and Information Technology warned Chinese manufacturers that after 20 years, it is time to remove all protection.
By 2018, Beijing removed the equity cap for JVs for electrified vehicle. Soon, Tesla started plans to build a plant in Shanghai - the first 100% foreign-owned car plant. Chinese EV models will now have to compete directly with Tesla.
By 2022, the equity cap will be abolished for all vehicle types.
Not only that, import taxes on CBU cars have been slashed from 25 percent to 15 percent. This is inevitable as China needs to ease trade war tensions with USA and Europe.
Turning the attention back to Malaysia, is Proton and Perodua stronger than when it started?
From a domestic sales stand point, yes they are but when judged on merit, they made little progress in exports.
Since two of our biggest brands don’t export much, our local parts suppliers are also not very competitive. According to the last manufacturing census done in 2015, only 167 out of 525 Malaysian parts manufacturers were engaged in exports.
Malaysia has since lost 40% of foreign brands doing CKD
Meanwhile, more foreign brands are pulling out from manufacturing in Malaysia. In the early ’80s, before Proton, Malaysia had 21 foreign brands with CKD operations here. Today, we only have 12, down by nearly half.
Of course, the value of investments from the remaining manufacturers have also increased multiple folds but so have our neighbours Thailand and Indonesia. A child who lives off his parent’s money doesn’t get credit for growing taller right?
Actually, the outcome of Malaysia’s national car and the eventual rise of China was evident from the moment the Proton-Mitsubishi Motors and Shanghai-VW partnership were established.
Despite enjoying generous government protection, Proton was losing money, mostly due to rapid increase in Yen value following the signing of the Plaza Accord by France, Germany, USA, UK, and Japan (but the Yen appreciation problem affects everyone equally).
By 1988, 3 years after the Saga’s launch, Dr. Mahathir lost his patience and to keep the program going, he replaced the local management of Proton with Mitsubishi Motor’s Kenji Iwabuchi, and later Mitsuo Hattori - thus defeating the purpose of a national car.
The then Finance Minister Daim Zainuddin reportedly expressed his disappointment with the local managers, saying “If that happens to a Japanese (losing money despite no competition), he commits hara-kiri.” (actually, the correct term is Seppuku).
Meanwhile over in China, Posth’s German colleagues at Wolfsburg would often laugh at his Chinese project by asking him “How are your Chinese Micky Mice getting on?”
But Posth knew the inevitable outcome, that China will eventually surpass everyone else.
Every German engineer who arrived in China to teach the locals were amazed at their eagerness to learn and catch up with the West.
“The Chinese understood anything that had to do with manual labour in next to no time. In the shortest time imaginable, they were assembling cars better and more quickly than anywhere else in the world – and this has not changed right up to the present day,” he noted in his book, but added to the journey ahead will be long and arduous.
China wasn't the only automotive force that started way behind Malaysia. Korea too had a very difficult start. It emerged from the Korean War as one of the poorest countries in the world. This next post is a story of how Korea’s car industry overtook Malaysia's.