Malaysian Automotive demand and pricing strategy

When the first Proton introduced in Malaysian automotive market in 1985, Proton Saga appeared to be the cheapest priced car among its competitor in the same market segment. Proton was priced at least 20% cheaper than non-national makes in the same 1.3 to 1.5 litre class. With both the low price and a dash of national pride working for it, the Proton got a rapid hold on the market. By 1988 the Proton, with a model lineup of one, had overtaken all other makes and models and grabbed 73% of the Malaysian passenger car market.

In 1983, when the 'national car' was planned, Malaysia had an annual new car market of about 90,000 units, and the market was growing annually by 20%. The Proton plant was designed to produce 80,000 units a year and could be geared up to 120,000 units. But in Proton's first full year of production (1986), total car sales took a severe dip to 47,000 and next year, due to a worsening economic situation, just 35,000. Only in 1988 did the market begin a recovery to 54,000 units, by now most of them Protons. Since then, the market has grown steadily to a 2005 peak of 417,000 cars.

Government policy has kept the Proton cheaper than other makes by the simple strategy of taxing the competition, while giving Proton exemptions or rebates from these same taxes. Duties on packages of parts for assembly into complete

cars in Malaysia is said to average about 30%. Proton is exempted from most of these.

On 1 January 2008, the postponed-several-times full implementation of an ASEAN Free Trade Agreement, which Malaysia originally signed on to in January 1992, was to finally have come into effect. The agreement would effectively bar practices that discriminate against goods (including vehicles) that are considered Made in ASEAN by the use of Tariff and/or Non-Tariff Barriers. This would practically eliminate most of the price advantage, achieved by way of the 50% rebate Proton (and other Malaysian-made cars) enjoy on a hefty (75 to 105%) engine-capacity-related Excise Duty applied to new cars sold in Malaysia.

As 2008 progressed, this initiative seemed not materialise in order to protect local automotive manufacturer. This derailed these manufacturers' previous plans to use Thailand (principally) as their ASEAN manufacturing hub, and forced them to reintroduce Malaysian-assembly of some models from CKD. This move allowed these foreign Marques to benefit from better tariff structures applied to such vehicles, in an effort to remain competitive (in the non-National car segment), and to narrow the price difference between their models and equivalent (Excise Duty rebated) Malaysian-made cars.

The lack of direct competition at Proton models' price points (in Malaysia) has also allowed Proton, for many years, to continue selling very outdated designs,

generally with scant regards to providing basic safety equipment such as airbags and anti-lock braking in domestic models. This scenario kept Proton left behind in term of quality and innovation in its products and not very successful in foreign market, and lack of economy of scale. In 2006, Proton's sales dropped 30.4% from 166,118 in 2005 to 115,538 for the Malaysian market, indicated a 55% fall of sales to 962.3 million ringgit, its lowest in at least seven years. This allowed Perodua to overtake Proton as the country's largest passenger carmaker for the first time, with a 41.6% market share, while Proton's market share fell from 40% in 2005 to 32% in 2006. As at June 2010, proton has only 26.6% of market share, whereas Perodua has led the market at 31.5%.

Under oligopoly market structure, which the number of firms is small enough that action from any individual firms in the industry on price, output, product quality, introduction of new models, and terms of sale have a perceptible impact on the sales of other firms in the industry. They are interdependence, and any new move is likely to evoke a countermove by its rival.

Automotive industry in Malaysia seems in line with what Augustin Cournot said in his model called The Cournot Model, asserts that each firm, in determining profit-maximising output level, assumes that the other firms output will not change and continue producing the same amount of output in the next period. This is what happening in automotive industry in Malaysia. Proton tried to

produce more output by penetrating more market in overseas and produce lest cost per unit. But it has not been very successful yet as its product lacks of technologies and the quality of products produced not as good as its competitors. Even some of its local market share has been taken over by world automotive company such as Toyota, where their market share has been increased to 14.8% for the first half of this year compared to 11.9% for the same period in previous year.

Cartels and other forms of collusion have been practised by some of firms in automotive industry in Malaysia, but not really obvious in term of price standardisation. It is more toward to non-price collusion. This can be seen in one of Perodua initiatives. Perodua had teamed together with Daihatsu and Toyota to come out with new model. 80 engineers were sent to Japan to work on the new model and to provide their inputs right from the very start of the project which was in early 2002. What this meant was that the model which is now to be known as the Daihatsu Boon/Toyota Passo/ Perodua Myvi. Besides the R&D

personnel, there were also Malaysian engineers from the manufacturing side who were sent to Japan to work simultaneously on the production issues related to the new model. Such collaboration is necessary nowadays because the cost of developing an all-new model is incredibly expensive and being able to share the cost makes it possible to price the product more competitively. In the case of the Myvi, Perodua says that it spent around RM210 million, a fifth of what it would have cost if it had tried to develop the model alone.

This is part of the international firms strategies in avoiding price wars, reduces their production cost and produced a better output, where they are for sure cannot reduce the price alone in competing Proton cars as it is protected by government policies. Perodua now has dominated Malaysian market and their move could affect the decision by other firms in this industry and could be a price leader and set them as a benchmark for product pricing in Malaysia market.

References: 1. www.peroduapromosi.com 2. Malaysian Automotive Association, Market Review for 1st half 2010. 3. Dr. Mohd Rosli, The Automobile Industry and Performance of Malaysian Auto Production, Journal of Economic Corporation 2006. 4. John Petroff, www.poei.org