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PROTON’s dilemma – tough love

POSTED BY Amirul Hazmi ON 06 April 2016

Proton-21Protection, and working towards removing dependency

By: Shamsidar Hassan

PROTON – Malaysia’s national brand — has enjoyed the benefits of protection since its establishment 32 years go. However, despite numerous capital injections and tax incentives, Proton has not gained the competitive edge and achieved the economies of scale required for them to be profitable.

Protectionism is necessary for the stimulation of infant industries, in particular the automotive industry. However, policies and business models of such industries must be reviewed as they are a cost on the consumer and the public.

General Motors’ bailout – an act of tough love

In 2009, General Motors or GM, filed for bankruptcy after the financial crunch of the Lehman/US financial crisis exposed several years of GM’s poor financial performance.

After months of negotiation, the Obama administration granted a bailout package to GM, worth USD 50 billion, to counter the devastating effects that would ensue should the 1.2 million employees within the GM ecosystem, be out of work. Described as “Too big to fail”, GM’s dependencies included component suppliers, distributors, service centers, and communities.

The bailout was to be granted upon very painful conditions – GM had to declare bankruptcy, the management had to be restructured and GM had to make some tough decisions, including the consolidation of its 12 brands and production assets. The bailout also made the US government a controlling 60 per cent stakeholder.

The bailout showed immediate results. Within 3 months, GM reduced its debt from USD93 billion to USD 17 billion. Between 2010 and 2013, GM posted a cumulative profit of USD22 billion.  By 2014, the restructuring plan ended with GM buying back all its shares from the US government.

Today, GM is doing well, ranked third globally with total global sales of 8.31 million units in 2015 and a profit of USD 9.7 billion.

Similarities with Proton

Numerous case studies cited that prior to the crisis, there existed a lack of willingness for the leadership at GM to change and adapt to global trends. GM’s business model continually focused making gas guzzling SUVs while global competitors such as Toyota and Honda were developing more fuel efficient engines and introducing hybrid models into the US market.

GM also ignored competition and had a culture of being very risk-averse, slow to change and highly bureaucratic. The fuel inefficiency of its models was partly due to the over confidence of its management that GM’s market share in the domestic market would never be challenged.

Internally, GM’s production costs were uncompetitive due to high overheads. Its 47 plants needed to run at 80% capacity to turn a profit, which was an unsurmountable task due to the slowing demand for its models.

Five years later, it rebranded itself by introducing models that the market wanted, reduced production costs and its brand regained the confidence of its buyers.

Similarly, Proton’s years of protection was deemed necessary when it was first introduced in the 1980s. National pride was high as Malaysians were driving a car of their own. Thirty two years later, the perception of Malaysians regarding Proton has changed.

Despite moves towards liberalization, the management of Proton remained adamant that protection should continue and denied that its lack of competitiveness had anything to do with its slumping market share.

Moving forward

If the government were to help Proton in any way, is there a guarantee that it will bite the bullet and make some radical changes, like GM did?

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