Proton: Its rise, Fall, and Future Prospects

Abstract

This case focuses on the challenges faced by a Malaysian state-owned automobile manufacturer, Proton. In so doing, it exemplifies the political context in which businesses, both domestic and foreign, operate in Malaysia. What makes Proton unique is its origin as the brainchild of Tun Dr. Mahathir bin Mohammad, Malaysia's fourth Prime Minister. Mahathir was one of the longest-serving leaders in Asia when he resigned in 2003. Over his 22-year reign, Mahathir and his government made several fundamental changes to Malaysia's institutions and his legacy is still reflected in the current social, political and economic institutions. One of the more controversial economic programs he championed was the National Car Project, under which Proton was established. When Mahathir decided to industrialise Malaysia's economy, he did not look to the west for direction, but instead turned to the east — Japan. He adopted the Japanese economic development model that emphasises hands-on government involvement in the economy. To form Proton, he selected Japanese Mitsubishi Motors as the joint venture partner and within two years Proton was rolling out its own vehicles, which in effect were the “rebadged” version of Mitsubishi's Lancer. To ensure there were customers for Proton vehicles, the government raised import tariffs, making it very expensive to buy foreign imports. It also made Proton the official supplier for almost all government passenger vehicles. Under the protection policies of Mahathir, Proton grew to dominate the domestic market. However, it was unable to succeed in obtaining the desired technology from its Japanese partner, or in developing the ability to survive independently and compete effectively, especially in the international market. Part of Proton's weakness stemmed from its social agenda, which favoured bumiputera suppliers, even at the expense of cost and quality efficiency. Proton therefore serves as a good example to illustrate what can happen to a business when it is over-protected, and when business decisions are not made on merit-based principles. Proton's weaknesses were further exposed when the government allowed the establishment of a second national automaker, Perodua, in 1993. The recent free-trade policies adopted by the ASEAN countries, and also by China and India, have put even more pressure on Proton to transform. But the question is how?