Mahathir raises heat in feud on Malaysian carmaker
International Herald Tribune
July 29, 2005
Wayne Arnold 

SINGAPORE As the Malaysian government tries to overhaul the state-controlled national carmaker and open the domestic car market to greater foreign competition, Mahathir bin Mohamad, Malaysia's cantankerous former prime minister, is stirring things up by accusing his successor's government of cronyism in issuing auto import licenses.
 
The unusually public feud over the carmaker, Perusahaan Otomobil Nasional, or Proton, claimed its chief executive this week. Analysts say Mahathir's accusations could also force the resignation of the trade minister, Rafidah Aziz, whose ministry awards the licenses.
 
Prime Minister Abdullah Ahmad Badawi, who with Rafidah returned to the Malaysian capital on Thursday from a state visit to South Africa, was likely to address the accusations on Friday, said an official in the prime minister's office. Spokesmen said neither was available for comment. Mahathir could not be reached and telephone calls to Proton headquarters were not answered on Thursday.
 
Tackling the problems at Proton is part of a broader effort by Abdullah to dismantle the system of patronage established under Mahathir, which doled out key industries and contracts to politically connected Malay businessmen. While the system was intended to speed development and redress inequities between ethnic Malays and the country's more prosperous ethnic Chinese minority, critics say it eventually gave way to inefficiency and corruption.
 
Proton is another of Mahathir's creations, set up in 1983 with help from Mitsubishi Motors as part of the country's rapid industrialization drive. While there are three other small Malaysian automakers, Proton is the undisputed leader, with 9,500 employees producing about 150,000 vehicles a year. The government is Proton's largest shareholder. After ceding power to Abdullah in late 2003, Mahathir became a nonexecutive adviser at the company, which is publicly listed.
 
"It's always been associated with him," said Manu Bhaskaran, head of economic research at Centennial Group Holdings in Singapore. "That's very much his baby."
 
But now, faced with increasing competition from China for investment and trade, Abdullah is subjecting Malaysia to a gradual, and potentially painful, process of reform, uprooting corruption and liberalizing key sectors.
 
Proton is almost certain to become a casualty. To nurture its development, the government imposed tariffs on imported cars as high as 300 percent.
 
Even as the Association of South East Asian Nations agreed to cut import tariffs between themselves to below 5 percent to create a common market that could offset China's increasing pull, Malaysia insisted on maintaining its auto tariffs until this year to give Proton time to adjust.
 
The tariffs discouraged foreign investment in Malaysia's auto industry and stunted its growth, analysts say. Thailand, with no domestic competitor, has surpassed Malaysia as a vehicle manufacturer and exporter as a result, analysts say.
 
Proton has been losing customers to Thai-made Hondas and Nissans, and to locally assembled Hyundais and Kias. With its share of Malaysia's car market having dropped to 40 percent from 70 percent a decade ago, analysts say that the only way to save Proton is to sell it to a global manufacturer in order for it to gain access to the latest technology.
 
"An independent automotive company is not going to succeed in making automobiles that can compete with the big boys of the global auto industry," said John Bonnell, executive director of the consultancy Automotive Resources Asia in Bangkok.
 
But Mitsubishi Motors, which once provided technology to Proton in return for selling it components, sold its stake in Proton last year.
 
Proton is negotiating a partnership with Volkswagen under which VW could gain access to Proton's production facilities in return for its technology, but neither company has divulged any details of an equity sale.
 
In the meantime, Malaysia has been opening the auto market in fits and starts. This year, it fulfilled its promise to lower import tariffs but more than doubled the excise tax on cars and gave domestic producers a hefty rebate that analysts say effectively negated any savings to car buyers.
 
Proton clearly sees the writing on the wall. With factories in Indonesia and Iran, it is negotiating to open new plants in China and in Russia as part of a plan to fend off competition at home by increasing sales abroad.
 
Early this year, however, Proton experienced a boardroom revolt when Mahathir convinced the government to overrule the board's efforts to dismiss its chief executive, Tengku Mahaleel Tengku Ariff. Proton's chairman, Abu Hassan Kendat, resigned instead.
 
Proton's board said this week, however, that it had decided not to renew Mahaleel's contract and placed the company under two joint chief operating officers while it looks for his replacement.

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