Car Industry Economic Analysis

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Abstract The article titled '16pc fall in motor sales expected' (Hamid H. and Ismail Z.I. 2008) cites rising fuel prices, inflation and stricter vetting by finance companies on hire purchase loan applications as among the factors contributing to the slowdown of the Malaysian automobile market in the second half of the 2008. The first part of this essay is antecedent in that it provides a treatment on the Malaysian automobile market. The key topics covered here are the market history, market segments, market performance, market players, market structure and the behaviors of competing firms. The second part of this essay rationalizes the effects of the factors specified in the article, and goes beyond to identify other factors that are relevant to the eventuation of the industry. This final part of this essay recapitulates the forces that drive, restrain, threaten or provide opportunity for the industry by way of the SWOT principle, and concludes with recommendations on how firms may compete in light of these forces. (Total word count = 5089) 1. Market Overview

1. Market History

The auto industry is deemed the ‘industry of industries’ of the twentieth century due to its scale and spin off effects (Dicken P. 1998). The strategy to form a national auto industry in developing countries has to follow to some extent a particular sequence of national auto industrial development stages listed below (adapted after Dicken P. 1998, p.318).

1. Stage 1: Import of vehicles in the CBU (Completely Built Up) form by local distributors. 1. Stage 2: Assembly of semi or fully CKD (Completely Knocked Down) vehicles by subsidiaries and licensed/franchised domestic companies, where parts and components are imported from the brand corporation. 1. Stage 3: Assembly of CKD vehicles with increasing local content. 1. Stage 4: Full-scale manufacture of automobiles, firstly for a protected domestic market, secondly for the export market, and thirdly for transplants in the export market.

Malaysia too, has evolved according to the prescribed sequences outlined above. Prior to the 1960s, the majority of motor vehicles used on Malaysian roads were imported in the CBU form. In September 1963, the Malaysian Government announced its intention to establish an automotive industry as part of the nation’s industrialization program (Simpson et. al. 1998). Policies encouraging the domestic assembly of automobiles and manufacturing of automobile parts/components were introduced with the intention of substituting the import of CBU vehicles. As further measure to boost growth in the domestic assembly and component manufacturing industry, the Malaysian Government introduced requirements mandating the use of local content in automobile assembly and implemented a duty structure imposing high taxes and tariffs on CBU vehicles (United Nations Economics and Social Commission for Asia and the Pacific 2008). Thus Malaysia began its undertakings in the manufacturing of CKD vehicles.

These strategies were effective, in that, by the 1980s, there were 15 automobile assemblers in Malaysia. However, the needs of each automobile assembler were dissimilar and the disparateness resulted in low demand for any particular type of component. This rendered economies of scale on the part of component manufacturers unattainable (Mahidin U. and Kanageswary R. 2004). In response, the national car project was created with the inception of Perusahaan Otomobil Nasional Berhad (Proton) on May 7, 1983. This project signifies a giant leap towards developing an integrated automotive industry in Malaysia. Following the success of ‘Proton Saga’ (Malaysia’s first national car), a number of derivative projects producing other types of motor vehicles were introduced, further fuelling the growth of supporting industries.

Approximately 20 years later (in 2003), Malaysia produced 456,882 units of...
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