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This article first appeared in Forum, The Edge Malaysia Weekly on August 26, 2019 - September 1, 2019

Do we really need a third national car?

The Father of Modern Management Peter Drucker once called the automotive industry “the industry of industries”. It was considered so because of the scale of the industry and its potential to create linkages and spillover effects on other manufacturing industries.

Malaysia’s government-led heavy industrialisation programme was unveiled in the early 1980s by Tun Dr Mahathir Mohamad during his first stint as prime minister, paving the way towards building a nationally owned and controlled automotive industry. From an industrial development point of view, the first national car project with the rollout of Proton in 1985 was the government’s earnest attempt to increase local content, achieve economies of scale, upgrade the assembly facility to a globally competitive manufacturing industry and expand the country’s technological and engineering base.

Mahathir’s “industrial nationalism” in the automotive industry was also a manifestation of his “Look East Policy”, inspired by the remarkable success in economic and social development by Japan and South Korea. However, the highly interventionist and protectionist nature of this industrialisation model, often conducted in the name of supporting infant industries, was heavily criticised and is still thought of as the primary reason behind the underachievement of Malaysia’s national car project.

Today, more than 30 years later, Mahathir has once again mooted a new national car project. Yet, public opinion is divided, as reported in a YouGov poll where almost 4 in 10 Malaysians (38%) supported the project, one in four (25%) opposed it and the remaining 37% were unsure. Previous bailouts of Proton Holdings amounting to billions in taxpayer money continue to dominate discussions on the feasibility, transparency and governance of the third national car project.

On Aug 9, the Ministry of International Trade and Industry (Miti) finally announced the cooperation between Japan’s Daihatsu Motor and little-known local R&D firm DreamEDGE to spearhead the endeavour with the first model prototype expected to be out in March 2020 and the first car launch in the subsequent year. Crucially, however, the cooperation is not expected to entail significant equity partnership or cash injection from the government, although concerns over DreamEDGE’s financial health have been highlighted.

But questions remain as to why DreamEDGE was chosen as the anchor firm given its lack of track record in mass production of cars. Also, what is the economic rationale for Daihatsu to provide advanced technological support for DreamEDGE since it has no equity stake in the third national car project? Furthermore, how will Daihatsu’s tie-up with DreamEDGE affect its participation in the country’s second national car, Perodua, where it has a stake of 35%?

From a policy perspective, it is more important to seek clarity on the overall industrial development strategy through this third national car project.

First, if we compare the experiences of Malaysia and South Korea, both countries’ national car projects began as joint ventures with foreign partners in order to facilitate technology transfer. Then, a vendor development programme was set up to nurture development of indigenous auto parts and components supplier ecosystem to increase local content in production. Ultimately, strong export performance would become the barometer of success for pursuing “industrial nationalism” together with wide-ranging support by the state.

While the South Korean national automakers have since managed to undertake significant upgrading and emerge as globally competitive companies, the Malaysian automotive industry remains highly dependent on the Japanese regional vendor system as well as a domestic car market that is artificially preserved by the government for national brands.

A vast body of research has attributed the success story of Korean automotive industry to the role of government, which held state-backed manufacturers highly accountable by allowing them to fail — irrespective of their size — due to poor export performance. This disciplinary mechanism incentivised companies to continuously up their game and the result was the survival of dominant players such as Hyundai Motor, which would later create spillover effects across the Korean economy.

Second, the global production network has been reconfigured extensively since we first experimented with the national car in the 1980s. Discrete, highly internalised national automotive industries have given way to a more integrated global operations where lead multinational firms organise their production facilities around regions and countries where specialisation can take place, and higher productivity is gained along the value chain. In other words, it is high time we move on from “industrial nationalism” to “industrial globalisation”.

Take the example of the automotive industry in the Philippines. The country’s strength is in the production of electrical and electronic automotive components, especially wire harnesses that hich direct the flow of current and electronic signals throughout the vehicle. Official trade policy briefs reported that six out of the country’s largest 10 exporters are wire harness companies, and this trend will grow in importance given the increasing use of electronic components in vehicles.

Furthermore, with increasing specialisation, the Philippine automotive industry is ripe for upgrading to produce batteries for electric cars. Also, the spillover effects are already being demonstrated with companies leveraging their capabilities in automotive wire harnesses to enter into the electrical systems of the aerospace industry. Therefore, in the age of industrial globalisation, economies may be better off carving out niche production areas while seeking to undertake industrial upgrading over time.

So, what does this recent development mean to the country’s National Automotive Policy?

It is expected that Miti will incorporate future business trends and market demand in its upcoming revision to the policy document. But more crucially, does the third national car project hint at a reversal to the 2014’s policy revision to promote greater liberalisation of the domestic market? Also, given past experience, will policymakers consider returning to protectionist measures to support the third national car?

There is an opportunity cost to state intervention in the economy. To ensure a sustainable automotive industry, the policymakers should focus on parts of the value chain where Malaysian manufacturers can specialise and be regionally competitive, at least. Tax and investment incentives should also be given with proper monitoring to promote accountability, as guided by the Korean lesson. Over the years, much has been invested to encourage the use of public transport, and that should still remain as the policy priority moving forward.


Lau Zheng Zhou is research manager, Economics & Business Unit, at the Institute for Democracy and Economic Affairs (IDEAS). His research interests include financial development, global value chains and China’s Belt and Road Initiative (BRI).

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