1.

0 Background of the firm and industry

The automotive industry is one of the most important industries in the manufacturing sector in

Malaysia. Comparing with other manufacturing industries, the automotive industry is a promising

one and contributes boosting and evolving economic and industrialization processes which

leads Malaysia to change into a developed country in the foreseeable future.

The automotive industry in Malaysia started in the 1960s and the Government of Malaysia

began to encourage the establishment of the automotive industry in 1963. Initially, the assembly

plants were mainly joint venture projects between European automobile manufacturers and

local partners were previously their local distributors. Although at the beginning there was

requirement to promote the growth of components manufacturing, but the industry was not very

successful until 1980s. At that time there were some assemblers who just produced vehicles for

European and Japanese manufacturers and there were large amounts of import. In fact the

development in auto industry was started by launching of the National Car Project which was

PROTON in 1983.

1.1 Company Profile

Proton Holdings Berhad (PROTON) is a Malaysian automobile manufacturer. It is

headquartered in Shah Alam, Selangor and operates an additional manufacturing plant

in Tanjung Malim, Perak. The company was founded in 1983 and was the sole vehicle

manufacturer in Malaysia until the establishment of Perodua in 1993. Proton is a Malay

acronym for Perusahaan Otomobil Nasional Sendirian Berhad. (English: National

Automobile Company Private Limited).

Proton was largely a manufacturer of badge engineered vehicles from Mitsubishi Motors

between 1985 and the early 2000s. The company has since produced several
indigenously designed vehicles and operates in at least 26 countries, of which the

majorities are in Asia. Proton was formerly owned by Khazanah Nasional, the

investment holding arm of the government of Malaysia. In January 2012, it was taken

over by DRB-HICOM, a Malaysian conglomerate in a transaction amounting RM1.2

billion.

Proton, predominantly reliant on the local industry is currently undergoing major

structural and internal changes, as evident in the appointment of a new owner, partner,

Chairman and the launch of various new and upcoming models in an effort to gain an

international presence and increase profitability.

Proton which is the acronym of Perusahaan Otomobil Nasional Berhad was founded in

1983 as a manufacturing, assembling and selling motor vehicles and related products

which then produced Malaysia’s first car named Proton Saga. The main plant of the

company was established in Shah Alam, with the capacity of 80,000 units per year.

Proton could increase this capacity to 230,000 units per year in 1997 by constructing

another factory next to its main plant. Today, the factory in Shah Alam has the capacity

of producing 240,000 vehicles per year. PROTON has a total of 11 subsidiaries and 11

associate companies, which are involved in manufacturing, research and development,

as well as sales and service activities. Proton exports to 50 countries including the

competitive markets of UK and continental European markets as its objectives include

research and development capabilities, world class manufacturing and production

standards, design capabilities as well as a presence in the global market.

Considering Malaysia’s short and long term economic objectives, Proton was

established to fulfill these goals with the help of technological knowledge and know-how.
 As a result, with the use of resources, technology, innovations, and design capabilities

the national car project resulted in remarkable impact on automotive industry.

PROTON was Malaysia's dominant auto manufacturer until the establishment of

PERODUA, in the year 1993. Now the Malaysian auto market is dominated by

Malaysia's national cars, PROTON and PERODUA which jointly accounted for 90 per

cent of the vehicles sold annually.

PROTON’S production was based on technology and parts from Mitsubishi Motors, and

it produced the first model which was Proton Saga in September 1985 at its first

manufacturing plant in Shah Alam. At the beginning the components were made by

Mitsubishi but gradually the company began producing those parts with the help of

technological knowledge.

PROTON also entered the international markets through exporting. For instance it began

its exports from Malaysia to other right hand drive markets like New Zealand and UK as

well as the Middle East, South-East Asia and Australasia, but it was mostly successful in

UK. It is possible to say that proton which came as a national auto manufacturer 25

years ago, now evolved to an international auto maker.

2.0 Characteristics of industry

2.1 Oligopoly

i. Number of firms competing

ii. Small number

iii. Nature of the product

 iv. Undifferentiated or differentiated

v. Entry

vi. Many barriers

vii. Information availability

viii. Asymmetric

ix. Firm’s control over price

x. Some

An oligopolistic market is the one which is dominated by some large suppliers.

Homogeneous products, mutual interdependence, few large producers and high entry

barriers are oligopoly characteristics prevalent in such markets. The three most import

characteristics of oligopoly include:

i. Industry dominance by few large firms

ii. Products sold by these firms are either differentiated or identical in nature

iii. Various entry barriers depending upon the industry

‘Few large firms’ is a very crucial oligopoly characteristics which states that these

markets include few large firms which are dominant in existence, and each of these firms

is comparatively larger than the market size. This particular oligopoly characteristic

ensures that all these large firms have a fair amount of market control.

The automobile industry is a very good example of an oligopolistic market. There are a

few car manufacturers in the market across the world as against the demand for millions

of cars every day. The dominant car manufacturers include General Motors, Honda,

Chrysler, Toyota and Ford, to name a few.

The automobile industry in an oligopolistic market is a Differentiate Product Oligopoly

where the products manufactured are for personal consumption as consumers need a

variety of products since they have different needs and wants.

In Malaysia, the national automobile industry is dominated by the country’s two leading

manufacturers, namely PROTON and PERODUA. PROTON is 42% owned by the

Government.

Rising car sales in 2010 has pushed up production in all car assemblers in Malaysia

except for the national car maker, PROTON. PROTON’s market share has reached 80%

at its peak but now it has lost its market share to local and foreign competitors from 60%

of the domestic passenger car market in 2001 to 26% for year 2010. Proton’s brand

value has also dropped from RM239 million in 2007 (rank 19) to RM150 million in 2008

(rank 23). It was revealed in November 2009 that Proton’s ranking has dropped from

Malaysia’s 30 Most Valuable Brand (MMVB) ranking.

It was reported in the newspapers that PROTON is only operating at half of its capacity.

PROTON Shah Alam was operating at 54% while PROTON Tanjung Malim is at 42%.

The combined installed capacity production for PROTON’s two plants is 350,000 units

per year and PERODUA 250,000 per year that is about 48.7% and 79% respectively,

accounting for about 61%, more than half of the total industry output. As reported by the

Malaysian Automotive Association (MAA), UMW Toyota Motor Subsidiary, Assembly

Services, was operating at 215 per cent production capacity, Honda at 212 per cent, Tan

Chong Motors at 143 per cent, and PERODUA at 164 per cent.

For years, both PROTON and PERODUA have led charmed lives as national car

companies, indulged by the Government and over-protected behind a wall of tariff and

non-tariff barriers, tax exemptions, rebates, subsidies and other special favors. PROTON
has only introduced four (4) new models in recent years – the second generation Proton

Saga in 2008, Exora in 2009 and Inspira in 2010.

PROTON was knocked off as the top Malaysian car producer in 2006 by PERODUA

which becomes Malaysia’s largest vehicle maker. PROTON is the second most popular

marque for year 2010. PERODUA remains the most popular make in the passenger

vehicle category while third-place Toyota is the most popular foreign car at 12.9%

market share. PROTON’s market share is 26% and PERODUA is 31.2%. Their

combined market share has fallen to 57% today, with more than 30 foreign makers now

in Malaysia competing for the remainder.

PROTON remains handicapped by lack of scale, overcapacity, outdated technology, a

limited product line up, and other disabilities. The company suffers from state

protectionist policies and need a strategic partner for growth. PROTON also needs

technology it does not have to produce attractive new models. Malaysia’s revised

National Automotive Policy (NAP) that took effects on 1 January 2010 ostensibly to

deregulate the domestic market attract more foreign auto makers into the country and

would not likely meet the government’s expectations.

To sop up some of the excess capacity, PROTON managers are adopting an Asian

multi-local OEM strategy focused mainly on expanding exports into Southeast Asia,

China, India, the Middle East and North Africa. How well this will work is questionable

given the intensifying competition among global auto makers for export sales, the

models PROTON has to offer, and the minor role of exports so far in the auto maker’s

operations. Proton exports 81,000 units of cars between 2008 – 2010. For year 2010,

total export revenues amounted to only RM889 million.

3.0 Degree of competition in industry

The first Malaysia national car is PROTON. The main competitor in Malaysia in term of

automobile companies and affordable car is PERODUA. The competitive environment as we

can see approximately in Malaysia is affordable car where all native of Malaysia can buy it and

the car maintenance is reasonable.

3.1 Porter Five Forces

The Porter’s Five Forces clearly shows that the competitive environment is not only about the

competitors itself. It can be about the economic decline, natural misfortunes and so on.

3.1.1 Competitive Rivalry

In Malaysia, after PERODUA that is main competitor for proton, there is not too much

competitor around affordable car. The low cost car as mentioned above is not having a

lot of competitor in generally. The affordable car in Malaysia has a more potential to sell

compared to luxury car that only specific people are used it.

A family will have more than 1 car. Definitely, the first car they will choose the cheaper

car and affordable car.

3.1.2 Threat of New Entrant

Recession the economic will be a big threat for PROTON. We know that, all big

company will facing over budget or does not achieve the sale for that year. The

government will lose a lot of money cause of policy and shareholders. By the way,

economic downward tendency actually comes suddenly without notice.

3.1.3 Threat of Substitutes

Malaysia has two national cars. First: PROTON, second: PERODUA. The substitutes will

high in term of car model and some of them look similar.

3.1.4 Buyer Power

Buyer will choose the cheap car for the first car and buyer also actually are fragmented.

Therefore, it will not have much influence.

3.1.5 Supplier Power

Nowadays compared to the many years ago, this is not giving a big threat for PROTON.

3.2 Competitor Analysis

Category Luxury Executive Family MPV Compact

Brand

Proton - Perdana Waja Exora Savvy

Toyota Camry Altis Vios Avanza Yaris

Wish

Honda Accord Civic City Stream Jazz

We try to see how PROTON brand product categories placed itself against its competitors,

namely Toyota and Honda. Product extensions for each brand are grouped together. Under

‘Luxury’ category, there is no compatible PROTON product as to compare with Toyota Camry or

Honda Accord. However for ‘Executive’ category, we are comparing PROTON Perdana against

Toyota Altis and Honda Civic. PROTON Waja is grouped together with Toyota Vios and Honda

City while for MPV category; we grouped the newly launched PROTON Exora with Toyota

Avanza. As for compact car category, we put PROTON Savvy, Toyota Yaris and Honda Jazz in

the same group.

From here we figure that PROTON cars are available in almost all product categories as what

the competitors have. In term of price, we see that for most of the categories, PROTON cars are

more competitively priced rather than Toyota or Honda.

4.0 Pricing strategy by the firm

Setting the price for a market is not an easy task. This is because it contributes to the

profitability and the survival of the company itself (Yusniza Kamarulzaman & Nor Khalidah Abu,

2012). If the price is too low, the company might incurred lost. In the other hand, if the price is

too high, customers may not buy the car. Furthermore, setting too expensive price may attract

new rivals to enter the industry and produces the similar products at a lower and affordable

price.

As a national car manufacturer, Proton adopts target pricing strategy. Proton adopts target

pricing strategy since its first car launching in 1983. Target pricing strategy can be defined as to

offer the lowest and affordable price based on the corporate sales in the stated financial year.

For Proton, its target is to produce between 150,000 to 200,000 units car vehicles per annum.

It offers the lowest car price compared to its other competitors such as their nearest

rival, Perodua and for instance Honda and Toyota. For example, Proton, for C segment cars,

Proton offers Saga FLX for RM 34,000 compare to Perodua which offers MyVi for a slightly

higher price of RM 60,000. Moreover, Proton is guided and protected by the Government’s

regulations and policies in setting their car prices.

Here are the Proton pricelists:

Brand Price (RM)

Suprima S 76,338

Exora Bold 1.6 68,550 to 69,000

 Exora 1.6 M 59,562 to 60,012

Exora Bold 67,212 to 71,762

Exora Bold 1.6 CFE Premium 79,562 to 80,012

Inspira 1.8 MT 78,565 to 79,015

Inspira 2.0E 86,450 to 86,900

Inspira 2.0P 92,450 to 92,900

Persona 1.6 Std. 48,113 to 51,113

Preve 59,540

Preve 1.6 Executive 59,990 to 62,540

Preve 1.6 Premium 72,540 to 72,990

Saga FLX SV 33,888 to 36,438

Saga Std. 38,811 to 41,361

Saga Executive 42,611 to 44,761

Saga Executive CVT 47,992 to 49,913

Sateria Neo R3 61,250 to 64,250

Sources: www.proton-edar.com.my

5.0 Other business strategies of the firm

As Proton is going globally, they are setting up other business strategies. This is because good

business strategies are very important for its profitability and survival. For instance, Proton takes

few steps to go beyond its domestic market to an emerging and bigger market that is going

internationally. Other business strategies of Proton are as follows:

a) Export

To enhance its market and increase its market share, Proton is exporting its cars to 26

countries such as United Kingdom, Sri Lanka, China, Thailand, Indonesia, Australia,
 Egypt and Taiwan, with China and Australia remaining the group’s most prominent

export markets. Its total shipment to overseas markets increased 12.3% for 2011

compared to the same period last year (Annual Report, 2011). According to Yow Hong

Chieh (2010), export volume to China is expected to grow by three folds this year under

Proton’s CKD (complete knock-down) programme with Jinhua Youngman Automobile

Group to assemble rebadged versions of Gen-2 and Persona models.

b) Car rebranding

Proton is using rebranding for their car segments. For instance, Wira is rebranding to

Proton Impian for United Kingdom’s market. Branding strategy is a valuable asset for a

company. It adds value to its product and plays an important role in product

management. However, it is huge challenges for a company like Proton to create,

maintain, enhance and protect their brands (Yusniza Kamarulzaman et al., 2012).

c) Strategic alliances or joint venture

Proton builds a strategic alliance for example with Jinhua Youngman Automobile Group

(China) in order to penetrate China market and benefited from the joint ventures. For

instance, through this partnership, the market demand of China for Proton’s cars has

increase about three times for the financial year of 2010. It also collaborates with Lotus

Group for its technology and high-skills transfer.

d) Operations strategy

Operation strategy can be defined by which operations implement the firm’s corporate

strategy (Lee J. K. & Larry P. R., 2005). Proton takes initiative to do market analysis by

categorizing its potential customers, identifies their needs and accesses competitors’
 strengths. This information is then used to develop their competitive priorities for

processes which deal with its internal and external customers.

6.0 Future challenges

Like any other company in the world, Proton cannot ‘run’ from the incoming challenges in the

future. The challenges include:

a) New industry players

As many competitors and new players enter this industry, the existing competition

becomes stiffer. It influences the demand making the market share getting smaller.

Proton has to be aware and always find the solution such as to create a more reliable

and better car with lots of accessories and able to offer a competitive but yet affordable

price so that customers will perceive their range of car as ‘high quality’ and valuable or

worth-buying.

b) Bargaining and buying power of the potential customers

As household income increases, the bargaining and buying power of customers also

increases. The power of buyers describes the impact that customers have on the

profitability of its business (Zainal Abidin Mohamed, H. J. Ann & W. F. Yee, 2010).

Customers become aware and sensitive to the price changes. They also become more

demanding for value added things or accessories such as safety and interesting feature

for their car of choices. They want more value such as striking rims, potent design,

amazing lights, electric foldable wing mirrors and so on (www.proton.com.my).

 c) Green technology

Proton is supporting the Government’s initiative to make Malaysia a regional hub for

hybrid, electric and environment-friendly vehicles (Annual Report, 2011).

More questions come out. What needs to be done today so that Proton will be survived

forever for Malaysia? Here are list of plans that Proton should adopt for its long-lasting survival

including:

a) Encouraging new ideas

Proton is recommended to encourage brainstorming, new and innovative ideas among

its employees. By doing this, they will be able to produce more quality, reliable and

better-designed cars.

b) Building strong corporate culture

Proton must encourage positive behaviors such as teamwork, open communication,

trust and industrial relations (Maimunah Aminuddin, 2011). A strong corporate culture

can be promoted through suitable reward system whether it is monetary (financial) such

as bonus, profit sharing, salary increments and incentives; or non-monetary (non-

financial) such as gifts, sponsoring vacations, letter of appreciation and so on. According

to Maimunah Aminuddin (2011), if well-designed, reward system can attract and help to

retain good workers and also motivate them to perform at their highest levels possible.

Moreover, rewards reinforce desirable behaviors among workers so that they can

achieve their highest productivity in order to accomplish corporate objectives.

 c) Empowering teamwork

Based on John R. Schermerhorn, Jr., James G. Hunt, Richard N. Osborn and Mary Uhl-

Bien (2011), teamwork occurs when team members live up to their collective

accountability for goal accomplishment. For its long survival and continuous profitability,

Proton should encourage more empowerment and teamwork. Member of a team should

play his or her role to do the best or solve problem collectively for the corporate success.

d) Improve productivity and employee commitment

The company should upgrade their productivity and employee commitment through Total

Quality Management (TQM) programme, reward system which can be seen as ‘fair’ and

‘interesting’, suggestion schemes and others. Through this quality programmes,

employees’ confidence and motivation levels will be improved and this can geared the

company to achieve their objectives, mission and vision (Maimunah Aminuddin, 2011).

7.0 Conclusion

The automobile industry in Malaysia falls under the oligopoly market structure where the market

is dominated by a few or handful of suppliers and a large number of buyers. The infinite or large

number of buyers often put producers in an oligopoly market structure in quite an advantageous

situation due to the fact that buyers have less alternatives to choose from. Since the automobile

industry in Malaysia is in an oligopoly market structure, it gives PROTON a head-on advantage

of assured revenues. This assured revenue basically arises due to the lack of alternative goods

or services. This situation is quite advantageous to PROTON as it gives PROTON a great

opportunity to inflate the prices of its goods.

In some cases, this may also work in a reverse manner as in an attempt to attract more

customers; PROTON reduces the prices which eventually lead to a deflated general price level.
The assumption that every element, that is PROTON and buyers, has a perfect knowledge of

the entire market does not hold true in the case of oligopoly. It is true that PROTON and other

producers in the industry have a perfect knowledge of consumers, but the consumers do not

have knowledge on the producers and price fixation. Such a situation has given rise to odd and

negative effect of oligopoly on the national economy.

The most prominent negative effect on the national economy is that since this is an established

form of market system, PROTON can prevent entry of new producers into the market by

controlling price fixation and thereby creating an acute loss of revenue for the new producers.

The proposed idea for PROTON and PERODUA by the Prime Minister of Malaysia during

PROTON’s 25th anniversary recently to share markets may eventually lead to inflation of

general price level. This may seem great for PROTON and PERODUA but a nightmare for

consumers. This phenomenon of assured market and sales stagnate research and development

which eventually will lead to PROTON and PERODUA churning out sub-standard goods.

Entry barriers prevent other entrants and pricing is mostly by competition and mutual

understanding between these top producers. These firms manufacture branded products and

high competition among them results in tremendous advertising and marketing. PROTON being

the leading firm in the industry may be able to make abnormal profits in the long run as new

firms have numerous barrier entries.

Economic philosophers often criticize oligopoly markets for several different economic problems

such as inflation, price hike, materialism, and wrong resource allocations. Though there are

some negative probabilities of oligopolies, there are also some genuine advantages of these

market systems. Oligopolies are genuine contributors to the national income and exports. Even

though an oligopoly means inflating price levels, the government has sought to control these

producers as they provide people with important necessities.

Oligopoly markets are bound to exist in all national economies and it is the duty of the producers

to optimize their outputs instead of just enjoying assured profits. What matter is the

temperament of producers to strive for excellence and greater performance because it bears

good fruit in the form of hefty profits for the producers and better products for the consumers?
8.0 References

Briswajit Nag. Saikat Banerjee (July 2007), Changing Features of the Automobile
Industry in Asia : Comparison of Production, Trade and Market Structure in
Selected Countries.

Lee, J. K. and Larry P. R. (2005), Operations Management: Processes and Value Chain

(7th Ed.), New Jersey: Pearson Education.

Maimunah Aminuddin (2011), Human Resource Management: Principles and Practices

(2nd Ed.), Selangor: Oxford University Press.

McGuigan, Moyen, Harris (2008), Economics for Managers 12th Edition.

Rizal, Iman, Yuan sun, National Cheng Kung University International MBA (2008),
Forecasting Demand of Malaysian Automotive Industry & Transportation Problem
Analysis: The Case of Proton.

Sharidan Salleh, Malaysia Rating Corporation Berhad (March 2012), Automotive Parts
and Components Manufacturers.

Schermerhorn, J. R., Hunt, J. G., Osborn, R. N. and Uhl-Bien, M. (2011), Organizational

Behavior (11th Ed.), USA: John Wiley & Sons (Asia) Pte. Ltd.
Yusniza Kamarulzaman and Nor Khalidah Abu (2012), Marketing Management,

Selangor: Oxford University Press.

Zainal Abidin Mohamed, Ho Jo Ann and Wong Foo Yee (2010), Strategic Management,

Selangor: Oxford University Press.

Websites

www.autoworld.com.my retrieved on 1st October 2013 at 12.10pm

http://ir.chartnexus.com/proton/flash/ar_2011/index.html retrieved on 2nd October 2013

at 12.18pm

www.iservices.ilokabenneth.com retrieved 15th September 2013 at 3.08pm

www.proton.com/

www.proton-edar.com.my retrieved 15th September 2013 at 4.45pm

www.themalaysianinsider.com retrieved 22th September 2013 at 10.12pm