Staff Paper 8/2006

Business Response to the Regional Demands and

Opportunity: A Study of Malaysian Automobile
Industry

Rashid Abdullah
Faculty of Economics and Management
Universiti Putra Malaysia
43300 UPM Sedang, Selangor, Malaysia
 Business Response to the Regional Demands and Opportunity: A Study of
Malaysian Automobile Industry

Rashid Abdullah
.

Abstract

This paper examines the business response taken by both automakers (Proton) and
supplier (Ingress) in preparing them to face the regional market liberalization of AFTA.
As the key automaker in Malaysia, Proton sale is mainly in domestic market and able to
capture 68 percent of the total market because of the highly tariffs and custom tax is
imposed on all foreign cars. However, things wont be the same when AFTA is
implemented. Both Proton and suppliers should be wise to take measures in to be more
competitive among in this auto sector by the year 2005. The key competitiveness lies
mainly on technology and market. In order to achieve it, they have to consider their
limitations accordingly by put more investment particularly in four main core items
namely; technology, own design, cost and quality control, and penetrating into new niche
market. New export market and new collaboration with foreign giants and counterpart
may workable in both domestic-Malaysian, and regional-ASEAN market.

Introduction

Over the past four decades, the automobile industry has been the subject of long
government intervention. The industry has driven industrial development and
experienced upgraded domestic technological capabilities (Humphrey, 1999;
Abdulsomad, 1999). The automobile industry has also been politicized, and thus was
incorporated into national development strategy (MIDA, 1986) 1 . Promoting the
automobile industry in developing economies requires protective instruments (tariffs,
quantitative restrictions, investment controls, refund schemes, etc.) by national
governments to protect local industry. External pressures (Rasiah, 1999) due to the World
Trade Organization (WTO), Association of South East Asian Nation (ASEAN) Free
Trade Area (AFTA) and Asia-Pacific Economic Cooperation (APEC)to reduce tariff
and other protection have had direct implications for automakers and national
governments. With these commitments, the push towards freer markets is putting
tremendous pressure on governments and industry players alike to re-position and re-
engineer them in the light of a liberal regime.

AFTA was established in fourth ASEAN summit in January 1992 in Singapore.

Its objective is to create an integrated domestic market within ASEAN and increase the
regions competitive edge as a production base in the world market. A crucial in this
direction is the liberalization of trade through the elimination of tariffs and non-tariffs

1
Malaysia, for example, initiated a national car project in the early 1980s.

1
barriers (NTBs) 2 among ASEAN members. This activity has provided the push for
greater efficiency in production and long-term competitiveness in the automobile
industry. Moreover, the expansion of intra-regional trade will give ASEAN consumer
wider choice and better quality products. In principal, AFTA covers all manufactured and
agricultural products, although the time table for reducing tariffs and removing
qualitative restrictions and other NTBs differ for the two groups of members the
original six (Thailand, Malaysia, Singapore, Indonesia, Philippines) and the newer four
countries (Cambodia, Laos, Myanmar and Vietnam). The CEPT 3 scheme, which is
instrument to achieve AFTA, requires tariff notes levied on a wide range of products
traded within the region to be reduced to 0-5% by 2002 4 . Quantitative restrictions and
other NTBs are also to be eliminated accordingly. With AFTA, the national automotive
markets in ASEAN which have been protected by high tariffs will eventually be
opened to foreign competition. (Table 2 Tariff Rates in Malaysia). Although the
automotive sector of member countries was until recently in the Temporary Exclusion
List (TEL) 5 of the CEPT, it should have been phased into the Inclusion List (IL) 6 by the
year 2000. Tariff reductions on items in the IL are targeted at stimulating economic
growth and enhancing trade in the region.

Theoretically, the transition to a free trade will allow economies of scale in the
production of vehicles and auto component parts in the ASEAN region. It will also
enable firms to undertake greater specialized production runs and reduce the unit cost of
production, thereby making suppliers more efficient in pricing and quality. Competitive
producers can in turn export their productions throughout the region at almost duty-free
prices. For the automotive industry, the bottom line attraction is lower production costs,
lower prices and a bigger market. AFTA could well translate into price cuts of about 20-
50% on vehicles in several ASEAN countries, where high tariffs and inefficient domestic
industries been resulted in consumer welfare losses. However, in practice, differing
objectives and political considerations of member countries suggest that a consensus may
be difficult, though not impossible to achieve.
Getting automotive industries off the ground was no easy task for countries in

2
Article 5 of the CEPT agreement makes it mandatory for countries to remove any qualitative restrictions
and other NTBs for products already included in the CEPT scheme for AFTA. Among the NTBs faced by
the private sectors are: discretionary import licenses; custom uplifts; delay in clearance of goods at custom
check points; the need to comply with differing national products standards and rules and regulations. All
Quantitative Restrictions (QRs) such as quotas, licenses also will be eliminated.
3
CEPT (http://www.asean.or.id/economic/afta/afta_ag2.html) scheme for AFTA list. Retrieved on
st
1 August, 2002.
4
As per status of the tariff reduction as of January 1, 2002, 98.4 per cent of the total tariff lines (products)
for the original six member countries are already in the Inclusion List of the CEPT Scheme for tariff
concessions. Of this 96.2 per cent have duties between 0-5 percent. Individually, the percentage of products
at 0-5 per cent is as follows: Brunei-99.8 per cent, indonesia-99.1 per cent, Malaysia- 90.8 per cent,
Philippines- 96.3 per cent, Singapore- 100 per cent, and Thailand- 94.8 per cent.
5
Products in the TEL can be shielded from trade liberalization for a temporary period only. These
products will have to be transferred into the IL and be subjected to tariff reductions until tariff reach 0.5%.
6
Products in the IL are those that have to undergo immediate liberalization through reduction in CEPT
tariff rates, removal of quantitative restrictions and other NTBs. Tariffs on these products should have
been down to a maximum of 20% by 1998 and to 0-5% by 2000.

2
ASEAN region because at the time they had weak, primary-industries-led economic
bases. But for all that they had in common, each ASEAN country had its own approach
to the automotive industry depending on how it viewed the effects of competition and
how nationalistic it felt-whether it thought we can increase our competitiveness as a
country by letting the foreign manufacturers we have attracted compete freely in our
markets (liberals), or we will become more competitive by giving monopolistic
protection to specific automakers, preferably our own (protectionists). Malaysia was
originally the only protectionist; the other three adapted liberal policies (Thailand,
Philippines and Indonesia. Still both approaches have their strengths and weaknesses
(Table 1), though the weaknesses tended to be more visible, first because demand, while
growing, was still small in absolute terms and second because industrial base in the
region were rather too frail to push ahead with domestic production. National car
program resulted so far indicate that by doing so will enable the country to (1) have more
control in what happens, and (2) enable support industries to grow (to achieve higher
local content). Some of the merits and demerits of liberal and protectionist approaches
adopted by the ASEAN-4 are highlighted in Table 1.
Automotive development and the local content policy became prominent
following the launch of Proton, Malaysias first national car project (NCP) in 1983. There
were several reasons for the governments shift in policy in the automotive industry.
Among them were the limited success of the initiatives in the 1960s and 1970s, and the
desire to promote local Bumiputera participation in the industry (Abdulsomad, 1998). A
joint venture between Mitsubishi Motor Corporation (MMC), Mitsubishi Corporation
(MC) 7 , and the Heavy Industries Corporation of Malaysia (HICOM), Proton rolled out its
first cars in 1985. The national car project was aimed at rationalizing the automotive
industry, promoting related industries (parts, components and supporting industries),
enhancing greater utilization of locally made components, encouraging the upgrading of
technology, engineering and technical skills, and increasing the participation of local
suppliers in the industry which was then dominated by foreign and local-Chinese
capitalists. The rapid growth of Proton can be attributed to the strong government
support, protection and preferential treatment measures (Table 2).

Apart from the preferential import duties and sales taxes accorded to Proton, the
government provided technical, financial and other assistance through a special vendor
development program to develop the entrepreneurship of the local suppliers. Local sales
were also boosted by government procurement orders for the national car. In addition,
civil servants were given low interest rate loans to purchase Proton cars.

This study focuses on the Malaysian automobile industry and the possible
disadvantages and advantages that may be caused by the introduction of the AFTA. The
disadvantages can include loses incurred by the alleviation of protectionist measures,
reduction in the overall import, and can have a negative affect on marketing position. On
the other hand, it may open greater opportunities for the automotive industry through the
regional cooperation and allow the industry to penetrate both regional and global
markets. In order to do this, the goals of automobile industry are as how to become cost
7
Mitsubishi Motor Corporation (MMC) 15%, Mitsubishi Corporation 15%, HICOM 70%.

3
competitive, improve quality, maintain dominance on the domestic market and became
competitive in the international market.

The purpose of this paper is to examine business strategies taken by both

automaker and supplier in Malaysia facing the implementation of AFTA after 2005. It
argues that regional market liberalization, in the form of AFTA affected their strategies
shaped towards preparing themselves to be more competitive. This paper is divided into
three parts. The first part gives background overview of the automobile industry in
ASEAN and Malaysias current position. Part two examines the strategies implemented
by both automaker-Proton and a supplier (Ingress) company in facing the AFTA
challenges and finally, a conclusion is offered in the final part.

Literature Review

One of the classical strategy recommend for industries is the Porters (1980)
generic business strategy. According to him, these are three generic strategies that can be
adopted by firms in an industry: cost leadership, differentiation, and focus. The cost
leadership strategy can be obtained by having access to cheaper inputs or by being more
efficient. This strategy emphasizes on lowering costs as opposed to lowest price as to
obtain the greatest profit. The cost strategy includes control of the operating costs, lowest
cost of sources of supply, keeps costs under control, and maximizes utilization of
resources or capacity. On the other hand, differentiation can be achieved through better
quality, unique products or services, product image, lower price, customer sensitive,
customer service and reputation. Focus strategy is a niche marketing strategy that can
be obtained through lower costs or differentiation, addressing at specific target markets.

Dess and Davis (1982) examined the generic strategies of Porter, and found that
the lowest cost and differentiation strategy were supported in their findings. The third
strategy, focus, was found to be less conclusive; this was due to the differences in opinion
of the panel of experts on the interpretation of the focus strategy. Bowman (1992)
explored the managers perceptions of the generic business strategies in the United
Kingdom. By using factor analysis, he found that the generic strategies were grouped
into four factors: competing on price, offering unique products/services, cost control, and
product/service development. The result implies that the two factors were associated
with competitive behavior; while the second two factors were associated with internal
competencies which may or may not lead through to changes in the offerings of the firm
(Bowman, 1992). As such Bowman believed that the results shared that the business
strategies were related to the internal activities and the external competitive market
positioning.

Md. Zabid (2000) found that the competitive strategies pursued in the electronics
industry were cost, differentiation, cost price, and marketing niche strategies. There also
a positive relationship between the competitive advantage positions and the generic
strategies pursued. Competitive advantage can be defined as a unique position a firm
develops vis--vis its competitors (Bamberger, 1989). A firm can create and sustain its

4
competitive positions by developing distinctive competencies with its available skills and
resources. Bamberger also identified general factors contributing to competitive
advantage positions like product quality, quality of management, good image and
personal contact, reliability of delivery, reputation, low costs positions, market share,
financial capability, pricing policy and modern production techniques. Bamberger also
found that the critical factors important for competitive advantage might not be similar in
different industrial situations like the electronics, clothes and food. In the electronics
industry Md. Zabid (2000) found that the seven competitive advantage factors were
marketing capabilities, organizational capabilities, product/service quality, image and
financial integrity, technological competence, sales management and network, and socio-
financial capabilities.

Methodology

This study relies mainly on primary information. The author conducted two field
surveys, from April to May 2001 and from March to April 2002. After objectives were
set to tracing the trends of automaker and suppliers relationship particularly between
Proton and its vendors 8 , the first step of this research entailed visiting Proton and selected
12 vendors and interviews have been conducted with their staffs. The author was able to
interview Protons manager of Supplier Sourcing and Technology (SST) department and
its executives and selected 12 suppliers. Additional to this, structured questionnaires
were sent through mail to 78 Protons suppliers categorized under Small and Medium
Industries (SMIs) 9 with 30 or 40.5 per cent response rate. This study also applies case
study approach particularly on Proton (only one automaker is selected. Malaysia has two
automakers namely Proton and Perodua) and Ingress represented the suppliers. The case
study is the preferred strategy for this study for two main reasons. The first is closely
related to the objective of the study, that is, to discover to what extent both automaker
and suppliers have arranged their response to the current challenge of regional changes
particularly AFTA. Secondly, it involves the question of what type of business response
that has been arranged, and how far the responses have been taken place. Ingress is being
selected because it involved in strategic alliance to acquire technologies from foreign
Multi-National Corporations (MNCs)-Katayama through a "hands-on learning process
(Ali, 1992; Hensley and White, 1993). The same also applied for Proton as it acquires
technology learning from MMC.

Result and Discussion

8
Vendor is Malaysian term of supplier.
9
The new definition for the small companies are companies who have 50 workers and less; and annual
sales of not more than 10 million. While the medium companies are companies that have less than 150
workers and annual sales of not more than RM25 million (Berita Harian, 1998).

5
AFTA and Its Implications for Malaysian Automobile Industry

For automobile industry, all the components and parts that are needed to the car industry
will be affected. From tires till the engines are included in the CEPT. Malaysia has used
high import duty and local content policies to protect national cars, domestic assemblers
and component part makers. (Refer to Table 2). With the introduction of AFTA, all trade
barriers will be removed and this is turn can have the negative implications for Malaysian
automobile industry. Domestically, Proton has the advantage in terms of dominant
market share and a well-established distribution and service network. Mentioned
situation will remain for the next three years at least, following Malaysias deferment to
2005 of market opening measures for the auto sector under the AFTA agreement and
Malaysias commitment to WTO. But the situation concerning the Protons dominance in
the local market after the 2005 can be threatened. Removal of all the trade barriers can
result the following: (1) Foreign competition, which can pose serious threat to the future
development of the local automobile industry, (2) Outside pressure on the local market
from other manufacturers in both component and finished products, and (3) Collapse of
the inefficient and weak firms at the expense of stronger ones. The issue is what can be
the way? Do Proton and its suppliers ready for this? This paper attempts to discuss
alternative measures taken by them to face the challenges.

However, AFTA, for auto, in a positive perspective would drive the regional
manufacturing integration and cost competitiveness among ASEAN countries rather
being a threat to them. It is expected will be more technology transfer to this region and
more opportunity to the labor. ASEAN is a key strategic automotive market for many
reasons: ASEAN population is 510 million. Currently the car sales have been increasing.
In 1998, it was 500,000, in 2000, 1 million and projected to be 1.5 million in the year
2003. The leading supplier for the whole ASEAN region is Proton with 22 per cent of the
market due to its monopoly in the Malaysia market. Toyota is the second in the list with
20 per cent share 10 .

Another reason is the growing economic growth of the ASEAN countries. Despite
of the effected GDP in 1998 due to economic turmoil, its growth average in selected
ASEAN countries (Indonesia, Malaysia, Philippines, Thailand, and Vietnam) is averaged
at 8 percent and projected growth rate for the year 2000-2004 will be the same average at
8-10 per cent. Since the market is very attractive, many foreign giants from Japan and
the US have already invested in this region. From 1995-1999, US giants like Ford,
General Motors (GM) 11 , Daimler, Chrysler, have invested in Thailand.

Malaysia has delayed the inclusion of 218 tariff lines (products) on Completely
Built-in (CBU) and Completely Knocked-down (CKD) automotive products until 2005.
The delay was due to providing domestic automotive industry more times to recover from

10
The integrated sales of this region would be the fifth in the world by the year 2005-ARA.
11
GM has invested 750 million in Thailand to open up a base. Volvo has already negotiating with local
Thailand companies to open a base. Comparatively, their investment in other ASEAN countries rather low
due to the flexibility and trade regulation that is not so tight in Thailand compared to others in ASEAN.

6
the impact of the regional financial crisis of 1997. The delay also to allow domestic
industry to undertake necessary restructuring exercise and prepare for market opening
under AFTA, without disrupting long-term development of the industry.

Proton business response to AFTA

Proton has to response accordingly and has to take into account its vision,
position, challenges ahead and to prepare the strategy 12 . Currently, Proton cars 13 are
conquered 64 per cent of domestic sales since 1987. From that year their market share
was always above 60 per cent and has been improving the sales every year until 1997
before dropping because of the economic downturn. Proton also gains its mileage as one
of the top three players in the domestic market share: (1988-73%; 1991-64 %; 1994-71
%; 1997-64%; and 1998-63%) (Proton, 2000).

The challenges for Proton facing AFTA including (1) Low exports volumes 14 , (2)
Proton doesnt own its products. Proton models line up includes Saga, Iswara, Wira, and
Satria (including Satria Gti). Tiara, Putra and Waja, which comes on various body sizes,
were ranging from 1.1, 1.3, 1.5, 1.6, 1.8 and the 2.0 litter engines. Models Wira and
Perdana, which are largely Mitsubishi designs 15 , while Tiara, which is Citroen design,
and for Satria and Putra which are Malaysian redesigned variants of Wira. Except for
Waja, other products are not owned by Proton per se including engine. In addition to
that, all those key models (except Waja) are aging. (3) Although Proton already
penetrated the export market since 1986 but its seemed that Proton acquired low brand
power outside Malaysia 16 . As a result, Proton received weak customer loyalty and
retention rate besides perceived quality of Proton is not encouraging. (4) Competition
from MNCs in ASEAN. US giants like Ford, General Motors (GM), Daimler, Chrysler,
already has invested in Thailand. Proton should successfully place itself to be domestic
or regional player or prepare it response to these challenges. In order to achieve this, a

12
Protons vision is to become a successful Malaysian automotive engineering and manufacturing company
globally by being customer oriented and producing competitively priced and innovative products.
13
Proton models line up includes Saga, Iswara, Wira, Satria (including Satria Gti), Perdana V6, Tiara,
Putra, and Waja, which comes on various body sizes ranging from 1.1, 1.3, 1.5, 1.6, 1.8 and the 2.0 liter
engines. Models Wira and Perdana which are largely Mitsubishi designs, Tiara which is Citroen design,
and Satria and Putra which are Malaysian redesign variants of Wira, and the latest Waja is purely
Malaysian engineering and design. Proton has also acquired Lotus Engineering of Britain, and has since
manufactured the Elise model (sport classic model) in its Shah Alam plant).
14
Less than 10 per cent of its total sales: Proton Corporate Information, 2000.
15
As far as product development is concerned, Mitsubishi plays a very important role in engines and
transmissions as well as body structure design. Meanwhile, Lotus, a subsidiary of Proton, is contributing its
expertise to Protons existing model line, especially in area of ride, handling and noise vibration.
16
According to a survey conducted by JD Power and Associates of United Kingdom on Cars Customer
Satisfaction Index Study in 2000, in term of vehicle quality and reliability, Proton should give priority to
these items accordingly: power window and locking system; no.2. Seats; no.3. Rear parcel shelf; no.4.
Rust/corrosion; no.5. Heater, air con. & Ventilation; no.6. Sunroof; no.7. Mirrors; no.8. Water leak; no.9.
Carpet; no.10. Fuel gauge; and no. 11. Wipers for almost all of its models sold in the UK.

7
few strategies should be carefully selected and implemented accordingly. Given
promising position in the auto market of ASEAN, Proton has potential to gain success.

Protons strategies lie on focusing on these few viable measures that it has
capability to do it: (1) Proton has to look on new product development to improve the
capability of the existing models; (2) Venture to new market, (3) Flexibility in
manufacturing; and (4) Building network of alliance. (5) Improve customer care and
brand image, and (6) Building world-class vendor.

Attaining Cost Leadership and differentiation: Product development investment

and product image

Proton needs to take measures like developing domestic technology, and rapidly launch
new product and attaining cost leadership. In order to come up with new products, that
achieve the target of development in speed, cost effective, product appeal, and better ride
and handling, Proton moves to produce its own-design car and has invested a lot in R&D
capabilities to create its own product brand- the Waja (GX) model. This strategy is to
produce models that will compete in the same space as imports that qualify for tariff
reduction under AFTA. As a result, Proton eschewed the use of existing Mitsubishi or
Citroen chassis to design its own platform. With the exception of engines and
transmissions, it is local in term of design engineering, and manufacturing. Waja makes
its debut in September 2000 after 1.7 million man-hours of R&D effort over three years
and investment of close to RM1 billion. A hefty RM600 million alone was spent to
develop the platform for the Waja. It was the First Proton Model to be largely designed
and engineered in-house. The Wajas high local content is perceived able to greatly
reduce the companys foreign exchange outflows and royalty payments. Approximately
RM400 million (US$105 million) would be saved on foreign exchange outflows by
minimizing the import content for the car and a further RM500 million on royalty
payments over the lifespan of the product. In addition, Proton could earn as much as
RM450 million in foreign exchange inflows through exports. The car meets Euro III
emission levels and new EU impact regulations (40% offset deformable barrier crash and
50km/h-side impact). Consistent with the introduction of Waja version 1.6, Proton is
planning the production of the next models begin with extended version of Waja, GXM
scheduled to be produced in the mid 2003, the next models line up including SCM24 in
the third quarter of 2003 and SCM 44 in the first quarter of 2004.

Although, it is not yet clearly decided, Proton should think to replace its Wira
range of passenger cars. Proton still may retaining the Wira brand name but only
following a substantial increase in import of Malaysia engineering expertise involving the
use of Protons own camshaft profile (campro engines). The move will be a departure
from Protons practice of producing and branding variants of the Mitsubishi Lancer for
Malaysian market. By using the Malaysian engine (Campro) can help bring down the
costs by between 20 percent and 30 percent. The current Wira models consist of about
60 percent imported components, including gear and engine parts.

8
 In order to enhance its brand image, coincides with the Wajas arrival, Proton
introduces new marquee identity of gold tiger stripes 17 instead of crescent logo placed in
the previous models. This is a part of a broader effort to strengthen the brand locally and
abroad.

Complementary to this, Proton also moves a step further to produce its own new
engine and EMS 18 . The EMS 400 19 has been produced in mid 2001, while both
EMS700 20 and CAMPRO 21 scheduled to be produced on first quarter 2003. CAMPRO
engines took just nine months from the drawing board to the first working prototype,
against a typical industry period of 12 months, with collaboration between Proton and
Lotus engineers. Proton also doing R&D collaborating 22 with Petronas Sauber Formula1
teams to come up with its own engines and car. Proton also has a network of alliance
with Renault to produce GX 1.8 model engine and transmission. Network strategies
alliance is very important to acquire new technology, marketing and resources
acquirement and improvement. Proton made a major step in upgrading its engineering
capabilities with the acquisition of Lotus Group International Limited 23 , a British
automotive engineering company and manufacture of luxury sports car in October 1996.
With this acquisition, Proton gains a great engineering expertise, which will enhance
them to improvise and come up with new models that are globally competitive and
innovative.

Improving Research and Development (R&D)

Some US$23 million was invested in Computer Aided Design (CAD) and Computer
Aided Engineering /Manufacturing (CAE/M) software before the US$255 million
development program got underway for the companys fifth major model line after the
Saga, Wira, Tiara and Perdana. The GX (Waja) platform enables can house various
power trains and will spawn several models. It was developed on a modular blueprint (the
finished car has more than a dozen modules including fuel tank, suspension, steering and
17
Previously three different logos were used in the domestic, European and general exports markets. The
new logo- the Protons Mark of Pride will singularly represent the Proton brand in all domestic and
international markets. A shield shaped badge featuring the Proton brand name and a tiger head, to portray
the power of a single idea: The Spirit of Achievement. The symbol can be interpreted through a number
of levels, all pointing to the ideas of pride, leadership and performance. The diamond shape, derived from
Protons very first top mark and the color scheme maintain a sense of continuity with the past and are
symbolic of the Protons pride in its achievements. The tiger head is a reference to the two tigers displayed
on Malaysias coat of arms and conveys national heritage. It is a reference to Malaysias origins and clearly
communicates Proton as a national project.
18
EMS stands for Engine Management System i.e. the electronic control unit of the engine to determine
engine tuning for fuel, air mixture, etc.
19
EMS 400- electronic control unit for current Wira engine coded as 4G1 developed with Siemen VDO.
20
EMS 700- electronic control unit for CAMPRO engine developed with Siemen VDO.
21
CAMPRO is Protons newly developed engine with LOTUS, ranging from 900cc to 2.2 liters V6.
22
Proton also working with SIRIM to develop high-tech, low-cost engine components, as well as with
PORIM to developing alternative fuel using palm oil. The agreement for this has been signed on 24 August
1999. In addition, Proton also works for hybrid technology to effectively reduce engine emissions.
23
Proton purchased 80 per cent of lotus from URL http://www.britain.org.my/trade/sector-
summary/automotive.htm

9
doors) in 30 months with design-in help from 20 First Tier local suppliers. This current
Waja model contains a local content ratio of about 80-90% in the first cars to roll off the
assembly line with 1.6-liter Mitsubishi mated to either an automatic or manual
transmission powers the launch model. The next version of 1.8 liter powered by a Renault
engine, will be available both for domestic and export markets, in mid 2003 24 . In the
second phase Proton will install its own engine into the car, making good on the Wajas
description as the first true Malaysian car. Handling and suspension was engineered by
Lotus, Protons British subsidiary. Although facing the aging of the existing key products
(LM, M-Car, and PF 41 models), the Wira model at present is seemed will be continued.

To enhance their design capability, Proton now have invested in a much faster
and cost-effective alternative with the advent of Rapid Prototyping (RP), a relatively new
class of computerized technology used for building physical prototype parts and tools.
RP enables Proton to build prototype parts and tools directly from 3D CAD 25 data
utilizing state-of-the-art Stereo lithography and Laminated Object Manufacturing
machines. This is an important step in the process, simply because a rendering of a solid
model communicates information 10 times more easily than engineering drawings. In a
short period of time and with excellent detail, finish and accuracy, RP prototype is able to
provide solution for new design concept. Proton invested more than US$100 million in a
modern R&D facility, featuring the most advanced rapid prototype center in South East
Asia, the only climatic chamber test lab in ASEAN and the only passenger safety sled in
Asia outside Japan and Korea. Proton can also handle short-run productions of plastic and
metal prototype parts with the modern technology such as the Homologation and Testing
Department ensures domestically manufactured cars meet international standards before
they are exported and sold 26 .

RP sees to it that the product that gets manufactured eventually fits all
engineering requirements. Here, the engineers will be able to measure cost savings and
quality, and consequently make improvements to a product before it goes into mass
production. This is obviously a highly specialized facility. In Proton, RP serves both
internal and external customers. RP is also able to produce a prototype within an hour to
two days, depending on the parts involved when it would take a traditional machinist or
craftsman at least two weeks. Due to its ability to build prototypes in a very short
timeframe, RP actually empowers the R&D Division to be more creative and be able to
embark on varying degrees of experimentation in terms of product design and
engineering. To improve its production capacity, Proton is planning to build its second

24
GXM model an extended model of the currant GX.
25
CAD (IBMs CATIA) and computer system also ensures effective data transfer and communication
between Proton and its vendors and other related companies.
26
For instance, if a Proton car were to be sold in Europe, the model would have to be homologated to
comply with European design and engineering specifications, as well as legislative requirements, before the
car was allowed to go on the road. Development testing spans the full spectrum static, running, turning,
braking and all other aspects of drive ability to ensure that in-house requirements are met. Other tests
include emissions, noise, engine power, safety and strength, which forms part of the more comprehensive
crash test. All aspects of testing are simultaneously taken into account during product development. In
most cases, development testing is more stringent and severe than homologation testing.

10
plant in Tanjong Malim in the state of Perak and expected to be established in the first
quarter of 2003.

Focus: Markets and distribution

Domestically, Proton already acquired about 65 per cent of the market share with the
acquisition of USPD 27 and transformed it into Proton Edar in order to position itself
closer to customers as its marketing strategy. Thus, domestic distribution and sales is
being channeled through both Edaran Otomobil National (EON) and USPD, effectively
turning them into competitors. Previously, these two sales operations sold different
models. Through this new acquisition of sales and distributor company, Proton is directly
accessible to enhance customer care. As for export markets, UK and Australia remains
major export market 28 . Consistent to the existing exports market, Proton is developing
the markets in the Middle East and other Muslim countries as well as in the ASEAN
countries. Currently, Proton has CKD assembly plants in Iran (from August 2002) and
China, India (with Hindustan Motors), and a joint venture set up between Proton Edar
and PT Ningz Multiusaha in to assemble and distribute Proton vehicle in Indonesia is the
first effort to penetrate the regional market.

Building World-Class Vendor-Procurement practices of Proton

Local component parts vendors also have important role to play. If Proton were to
graduate into a global player, so too must its vendors. The tiering of vendors under
modular approach adopted for the Waja is a step in the right direction. For the first time,
20 tier-one vendors designed and made components in collaboration with Proton
engineers. By working closely with Proton and taking on more R&D, design and
engineering responsibility themselves, these vendors can hasten the manufacturing
process and improve on product quality whilst allowing the national car to better utilize
its resources. In order to be competitive particularly consistent to AFTA challenges,
vendors have to ensure every part or component supplied to Proton is consistently good 29
and reliable in use. Two main challenges to vendors are cost reduction and continuous
improvement. Proton encourages and liaises with third party vendors, and in doing so,
achieves two objectives. Firstly, encourages vendors to be more involved in the
development stage of the process. Vendors are invited to work together with engineers on
the design of new models. This saves time and ensures that market feedback is taken into
account when new models are introduced. Secondly, this is a good opportunity for Proton
to educate vendors. In this instance, design intricacies and development processes are
explained, so vendors appreciation and learn about them. This leads to better cooperation
among all parties concerned, and at the end of the day; engineering design objectives are

27
Proton owned 100 per cent equity; business activity is sales of motor vehicles and related spare parts and
accessories.
28
As at September 2000, total export to UK was 124,380 cars and Australia are 14,814 cars. International
Business Division, Proton Corporate Information, 2000.
29
Good according to Protons standard means not only meeting the specifications, but surpass them.

11
achieved in a shorter timeframe. However, in order for vendors to be a partner in product
development (design-in), vendors should achieve a certain level of capability.

Generally Proton could acquire the necessary inputs through three different
activities, which are import, to manufacture in-house, and outsourcing from local
suppliers. However, there are two major choices of procurement activities in which
Proton could select either to import or to procure domestically. The decision is not only
based on commercial considerations but technically competence to be sufficiently
competitive. The further discussion only will examine the practices of procurement
activities through local channels. Commercially, Proton would procure inputs from the
cheapest and most reliable source. In other words, the alternative that provides the lowest
price plus transaction costs to Proton will be selected. In regards to procuring parts
domestically, Proton also find itself faced with the decision of whether to undertake a
particular activity in-house or to outsource from its local vendors. Procurement activity
also could affect the benefits on local vendors. The decision to produce in-house or
outsource will depend on comparative costs and benefits of the alternatives. Proton
outsourced most of non-body and engine and transmission parts domestically from its
vendors. Table 3, shows the 3 major items from each group outsourced by Proton
domestically.

In order to be sufficiently competitive, Proton is very careful in its procurement

practices. From the interview conducted with the Suppliers Sourcing and Technology
(SST) department of Proton, this paper could concludes that Proton is very careful to
place its investment if the local suppliers could supply the required quality and price
accordingly.

Fig. 1 provides the reasons of domestic procurement of Proton that gives very
high ranking of additional investment in almost all categories of parts it outsourced
except for wheels. This is very important as additional investment could lead to the
increment of its parts and components overhead costs. Most of the automobile parts and
components are very customizes items in its nature according to the models. Proton cars
production also very limited about 25,000 cars for all models (Protons Vendors Briefing,
April 2002). Thus, this additional investment cost will bear by vendors, as they already
possessed lower overhead costs and their own expertise. In other words Proton could help
in nurturing the local vendors and helps them to increase their organization learning.

In case of domestic procurement, Proton is also very careful in vendors selection.

Generally, Proton must control the quality of their products in order to maintain high
quality parts and components. This study uses an open-ended questionnaire to proton to
enable it identify how they screen and select the vendors. Vendors undergo a very high-
scrutinized process before them being appointed as suppliers. The result shows two of
the major channels preferred and practiced by Proton in vendors selections: (1)
Searching through its own procedure and (2) vendors approached Proton directly.
Although the role of the Vendors Development department of the Ministry of
Entrepreneurs Development and introduced by Proton Vendors Association (PVA), but it
were less preferable. Thus, vendors have to aware and familiar with all the requirements

12
needed by Proton before they are appointed. Vendors selection and developments taking
time are almost thirteen months before they could start the first trial production and
followed by mass production. Typical lead-time for pre-selection of vendor to mass
production stage is between 15 to 27 months.

Proton gets to know the suppliers by searching itself and from the introduction of
suppliers themselves. Therefore suppliers have to present themselves and their products,
which might not necessarily match the parts, required by Proton. The suppliers usually
have good performance records, sufficient machinery, and experience in that particular
production, good financial status and technologically competence. In order to examine
how Proton scrutinizes its potential suppliers and also its existing suppliers, this research
find that Proton prefers to use standard criteria commonly used as devices in the selection
of vendors. Proton listed the criteria according to degree of preference as below:

Criteria number 1, 2 and 3 were given top priority as usually practiced meant that
51-90 per cent of the time. While factors number 4 and 5 were occasionally practiced this
meant that 21-50 percent of the time. Proton from the beginning gives much attention on
QCD matters. The author asked Proton on what factor ii gives most attention among
QCD, trust and technology, QCD has been opted as the most priority taken when it
makes deal with suppliers. This priority was interpreted in its Supplier Chain Strategy
Policy of Proton as: 1) Intense Competition 4 Suppliers per Part Group; 2) Encourage
New Capable Players; 3) Export 20-30% of Production; 4) 3 Years Contract with
Minimum 3% per annum Cost Down (currently practiced by Proton) year on year; 5)
R&D Center; 6) Innovation that gives Competitive Edge-Rewarded.

The result of the field survey also attest on the practice of long-term relationship
between Proton and its suppliers to the fact that on-going or long-term relationships could
reduce transaction costs, which are the cost of registration about the price and the cost of
controlling the suppliers quality and delivery. Moreover Proton still states that long-
term relationships and regular orders make them more flexible than trying to specify a
complicated contract. Proton is very sure that through this kind of relationship it could
save cost and time to investigate and screen the new supplier candidate. It also could
reduce the costs in controlling the suppliers in term of QCD. Through these relationships
Proton is familiar with the supplier and dare to provide assistance in order to improve
quality, reducing cost, efficient in delivery and assisting their development technically.

The interesting point is that the long-term relationship makes Proton more willing
to provide some assistance to its suppliers in order to improve quality of parts and to
reduce the costs of production. Due to the harsh competition in the final market
particularly facing the market liberalization and tax deduction of AFTA, Proton has to
reduce cost of production by improving their productivity as well as requesting their
suppliers to reduce price in order to increase, or at least maintain their competitiveness.
This research finds that Proton requested cost reduction, usually about 3 to 5 per cent,
annually and the present practices recorded that Proton is cut the price 3 to 5 per cent per
year automatically. Table 5 shows the request about Proton agreement in each aspect
derived from long-term relationship.

13
Ingress 30 Business Response to AFTA

With the liberalization of domestic markets arising from Malaysias commitments

to AFTA and WTO, the local vendors too will face increased competition and hence will
have to turn to foreign markets for their long-term survival. Liberalization of automotive
trade may see Ingresss orders from its Malaysia buyers decline slightly, but its orders
from buyers in Thailand would increase their production. The region vehicle production
would be consolidated, boosting production volumes and making more projects
economically viable for Ingress.

Ingress is principally an investment holding company whilst its subsidiary and

associated companies are principally involved in automotive component manufacturing,
engineering services, power and electrical services and railway electrification. The range
of automotive manufacturing and services offered are as follows: (1) Co-extruded
Moldings 31 (Belt-line Molding, Quarter Moldings, Door Sash and Related Components,
Rain Rails, Glass Guides, Bellows 32 , EGR Pipe 33 ) Weather-strips, Roof Drip Moldings,
Windshield Moldings; and (2) Complete Door-in-White 34 , and Apron. As at 15 January
2001, the Ingress Group has a total of 827 employees 35 . To date Ingress has 5 associate
companies namely IESB, IPSB, IRSB, IAV, ITSB 36 . If ASEAN automobile trade is
liberalized, how will Ingress be affected? The answer is complex, as it will

30
Business vision of Ingress is To be a leading ASEAN-based automotive components manufacturer by
winning more customers with global reach utilizing and optimizing state-of-the-art technology. It was
founded in May 1991 and incorporated in Malaysia under the Companies Act, 1965, on 9 August 1999 as
Ingress Corporation Sdn. Bhd.
31
IESB-Co-extruded moldings are parts made from extruded polyvinyl chloride (PVC) over a roll-
formed steel core. The moldings are generally used to seal around windows, doors and other gaps or joints
in the vehicles exterior
32
IAV-Bellows-(also known as flex joint) is a component of the vehicle exhaust system which, being
flexible, absorbs engine vibration. The bellows comprise a roll-formed steel tube surrounded by braided
steel. Production of bellows shall commence in 2001 for supplying MSC pick-up trucks and GM/Isuzu
models in the following year. Its technology source and partner, Katayama, presently manufactures
bellows in Japan. Bellows are supplied either directly to the automaker or to the automakers exhaust
system supplier, depending on the automakers preference. Bellows tend to be employed only when
vibration suppression is of great importance, such as on medium/upper-level passenger cars, and
commercial vehicles (including pick-ups) with diesel engines.
33
EGR Pipe-Exhaust Gas Recirculator Valve (EGR) pipe is another new product of Ingress. It is a metal
pipe with a bellows feature at its center used for recirculating the exhaust gas from an engine to the
intake side in order to achieve a reduction in emission level of nitrous oxide (a harmful component in the
engine exhaust) to the environment.
34
IRSB-Complete Door Assemblies (Door-In-White)-At present Ingress uses its press line and hemming
machinery to produce the door-in-white, a complete door assembly consisting of outer and inner door
panels and door sash. It has the ability to produce a variety of other large steel parts that its customers may
wish to outsource in the future. These are all high-value parts, and are used on every vehicle.
35
Management 75, Executive 100, Clerical jobs 63, General workers 589.
36
IESB-Ingress Engineering, IPSB-Ingress Precision, IRSB-Ingress Research, IAV-Ingress Automotive
Venture (Thailand), ITSB-Ingress Technology. (Ingress Prospectus dated 22 January 2001).

14
simultaneously assist and disadvantage the company in different ways 37 .. In line with
these risks, Ingress has given priority to put challenges in term of QCDE I 38 -(Quality,
Delivery, Cost, Environment, and Innovation) by looking inward, including maintaining
its competitiveness technologically, in terms of cost efficiency, products and services
quality and reliability of the company by utilizing all expertise possessed by Ingress.
Looking forwards, including maintaining the relationship with its customers
domestically, and diversifying its customer base especially through joint venture and
searching for niche market domestically and regionally.

Facing the Challenges

Ingress should response carefully and appropriately particularly related to the new
trends brought by new approach of what so called world car projects. As parts and
components supplier, Ingress should able to read and define these challenges and
transform it into strategies. World car projects are a new trend that is related to parts and
procurements concepts summarized as follows: (1) Common design for all cars to be
manufactured, (2) Design-in supplier will jointly design the parts. QCD and VAVE
issue will be taken-up in the design stage, (3) Consolidate effort in the development-able
to reduce the development period from 3 years to less than 1 year, (4) Nominated supplier
must have affiliate companies in the production location for parts production, and (5)
Utilization of local inputs: materials and tooling.

QCD matters are very important issue to look upon and highly emphasized by
Proton and other Ingresss buyers. QCD challenges faced by Ingress could be
summarized as follows:

(1) Quality: Comply to the world standard e.g. for the rejection, it is 40 PPM (Toyota
target is 10 PPM);compliance to the world quality system e.g. ISO 9000, QS 900
and ISO 14000; additional compliance to specific quality standard awarded by the
buyers; and continuous improvement on quality level including. Value
added/value engineering (VAVE) activities.
(2) Cost: Including incorporating local value added; comply with the basic costing
requirement standard costing; and including future cost reduction in costing
proposal.
(3) Delivery: 100 percent achievement to on-tine delivery; availability of a
comprehensive material ordering; production planning; and delivery tracking and

37
The risks include constraints in labor supply, the possible increase in the operating and capital costs due
to increase in labor supply, changes in economic and business conditions, foreign exchange rate
fluctuations, increase in the prices of the imported and local components, unfavorable changes in
government and international policies, the introduction of new and superior technology or products and
services by competitors.
38
Quality including targeted reject part e.g. PPM-parts per million, warranty and market recall, reputation,
etc; Delivery means has to be near to customer, to be global suppliers and put the companys product
presence everywhere in the industry; Cost including yearly reduction, penetration pricing, cost saving
program, etc.; environment- recycle ability and deletion of PVC, towards pollution free products, etc.; and
for Innovation including to follow the innovative trend in the industry for example all-aluminum
construction, etc.

15
 stock control system; and complying ability to the electronic ordering and
invoicing system e.g. EDI and able to meet the sudden increase in volume.

This is supported by the research result provided. 28 suppliers or 36% out of 78

respondents (100%) agreed that price and quality are very important and highly
emphasized by Proton. 17 of them or 22% agreed that prompt delivery is the third
criteria that paid high attention by Proton. On the other hand, three most important
aspects considered by Proton that being the primary and major priority are QCD,
Uninterrupted Supply and Technology; while Proximity is given secondary (less
important but not trivial) priority.

Reputation and Capability Building

In order to accelerate its reputation among the customers, Ingress is working hard to
achieve certain standard in its products. Some of the main achievements are tabled in
Table 6.

Maintaining Major Buyers/Searching Potential Future Buyers and Niche Market

The major customers of Ingress together with the number of years of relationship and the
contribution of each customer to the companys turnover for the financial year ended 31
January 2000 are as shown in Table 7. Although its seemed that Ingress is dependent on
four major buyers, Ingress has tendencies to maintain its favorable position in the
domestic market, whilst diversifying its customers especially in the fast growing ASEAN
market. Additionally through IRSB and TSSB two of the Ingresss subsidiaries, Ingress
are actively participated in providing engineering services to the sub-sector of industrial
automation, computer aided design and manufacture (CAD/CAM) of jigs, tools and dies.
Given this scenario, Ingress is successfully maintaining its favorable condition in
domestic market and penetrating ASEAN markets through long-term relationship with
the current customers.

Maintaining Advantages vis-a-via the Competitors

Ingress uses steel roll-forming and large steel pressing technologies to produce the parts:
co-extruded moldings, door sash, bellows, and door-in-white assembly. At present level,
Ingress is achieving some advantages particularly on market and technological levels in
order to position itself as one of the regional in its product specialization (Table 8).
Currently, Ingress is capable to maintain its position in its main products competitively.
This position has been enhanced by a few strategies taken in the domestic and regional
markets. Table 5 (p9) shows how Ingress has maintained its domestic and regional buyers
through a long-term relationship. As a result of new collaboration with its technical
provider cum its joint venture partner, (Katayama), Ingress has achieved some new
development in penetrating the regional market. Ingress presently supplies door sash for
the Ranger/Fighter pick-up truck produced by Auto Alliance Thailand (AAT) Thailand
since its launch joint venture with Katayama that already a Mazdas supplier for the parts
in Japan. Regarding co-extruded moldings, Ingress is a potential supplier candidate for

16
AAT in near future, as AAT currently does not apply bellows on either its petrol or diesel
pick-ups. In the long term, its seem that Ingress remain a candidate to supply new
programs which emerge from AAT based on the current development and good
relationship with. General Motors (GM) also has awarded the roof ditch moldings
contract to Ingress for the new-aborted Astra passenger car. Katayama supplies bellows
to GM in the US. Isuzu currently is emerging as a key buyer for Ingress in Thailand.
Ingress and Katayama have won a contract to supply co-extruded moldings for the
1190/GM355 worldwide model. Katayama is the worldwide development source for
bellows for the model, and Ingress is supplying the Thailand volume. These two
contracts will cause Ingress to double its investment in Thailand. Ingress also supplies co-
extruded moldings for the L200 (TOACS also supplies Mitsubishi with co-extruded
moldings). Mitsubishi sources the door sash for the L200 model from SAB, the two
companies have also relations and SAB is likely to supply door sashes for the future
models. Mitsubishi granted Ingress a mandate to supply bellows for its L200 model.
Ingress from the beginning has had a relation with Nissan in Thailand. Nissan is started
opening to new suppliers, including Ingress, for the future contracts for these parts. In
addition to these automakers, Toyota Thailand is expected to remains its traditional
suppliers in Thailand for the next few years at least, and the chance of Ingress supplying
Toyota soon is small. At present Toyota Thailand sources co-extruded moldings from
TOACS, door sash and bellows are imported from Japan.

Domestically, Ingress has supplied Perodua the second Malaysian automaker

since 1996. It presently supplies co-extruded moldings, door sash and door-in-white
assembly for the Kancil model. The two companies have close relationship: Ingress
Technologies was established for the purpose of producing door-in-white assemblies for
Perodua, and its 30 percent owned by the automaker.

It secured contracts to supply fenders for Kancil model, and door-in-white

assembly, tailgate and hood for the second car model. As for Proton, Ingress currently
supplies co-extruded moldings and door sash for the Waja model. Table 9 is providing
the summary of the current position of Ingress in the domestic and regional market. This
result shows that, the strategy to venture to a new niche regional market in Thailand with
Ingresss technical provider-Katayama was fruitful particularly to establish its production
and market base in Thailand as a hub of ASEAN automotive industry.

Technological Internalization

Ingress places much emphasis on quality, both in its products and services. This is
reflected in a number of accreditation and rewards achieved/obtained to-date such as the
ISO 9002 and QS 9000 in 1977 and 1998 respectively (Table 6 p10). All standards
procedures are guided by the principles of Total Quality Management (TQM) in
accordance to the requirements of ISO 9002 and QS 9000. R&D is well emphasized by
Proton in particular, on its suppliers and the same concern is applied in Ingress. These
certificates cover the area of manufacturing of moldings and weather-strip as well as door
sash. Undertaking the important of R&D, Ingress has established a wholly owned
subsidiary namely IRSB in 1996, to undertake all the R&D jobs. Ingress has invested RM

17
4.3 million including in providing the CAD and CAE/M between the years 1997-2000.
On-going technical assistance with Katayama Kogyo of Japan and presently Ingress has
on-line data transfer and consultancy that would pave the way for joint development and
work sharing. IRSB or presently known as ITC possesses mechanization including semi
and fully automation besides fully robotic mechanization 39 . In addition to this, ITC is
going to have its own fabrication not only in Malaysia but also within ASEAN region
including fitting and assembly at customers site. In term of quality, Ingress should
strengthen competitiveness by setting high quality standards and competitive cost. In
particular, Ingress has successfully achieved parts quality level to comply with the world
standards- e.g. 40-PPM 40 . Through various internal engineering, Ingress has achieved
compliance the world quality system- various ISO standards as well as accredited with
various Protons award 41 .

Marketing and Building Network of Technical Alliance

Ingress possesses technologies that scarce in ASEAN. Steel roll forming is

applied in both its co-extruded moldings and door sash operations. Co-extrusion,
flocking and stretch bending technologies are employed in the manufacture of moldings;
sash operation requires various welding technologies including seam and plasma
welding, as well as a rotary-bending process. Strategically, the focus on specialization for
rolls forming, extrusion/stamping, and to build own and internal expertise in product
development and product extension for these related specialization seems reasonable. In
order to acquire adequate forces to build its own internal stabilization, the collaboration
with existing technology provider-Katayama Kogyo of Japan 42 , has been enhanced. As a
result of this long-standing and stable relationship, Katayama advanced its commitment
from being merely the technology provider for Ingress, by being the partner of the
company by acquire 10 percent share in Ingress Precision. On a long-term basis, both
companies endeavor an international operation for the Southeast Asian market with the
establishment of Ingress Auto ventures (IAV) 43 with Katayama provides 23 percent of
share to tap into domestic and export markets in Thailand. As a parts and components
supplier, Ingresss localization in Thailand would reduce cost and limits exposure to
currency fluctuation- one of the challenges that vulnerable to Ingress. Currently, Ingress
is the suppliers for Mitsubishi Sittipol Corporation (MSC), Isuzu Manufacturing
Corporation Thailand (IMCT), and Honda Automobile Thailand Company (HATC) 44 .
Thailand market is very important to Ingress as the gate to penetrate ASEANs market.

39
ITC own products are robotic, plasma welding, MS cutting, dust collector, anti rust spray and turkey
molding line. With all this, ITC is adequately provides the service to Ingress.
40
PPM denotes that rejected parts per million; Toyota target is 10 PPM. This data is acquired from the
authors recent case study at Ingress- April-May, 2002.
41
Accredited various automakers awards-Most Improved Vendor in 1996; most successful customer
award 1997, Product Development awards 1996, etc.
42
Katayama is a shareholder of Ingress (IAV Thailand-23 percent and IPSB (Malaysia) -10 percent) and
Ingresss main source of technology and one of Japans largest producers of roll-formed automotive
components, including co-extruded molding, door sash and bellows.
43
IAV operated since 1998, manufactures and supplies roll-formed plastic moldings and weather-strips as
well as roll-formed metal automotive door sash and related components in Thailand.
44
Sash COMP, R/L FR DR UP; sash R/L FR DR, and CTR LWR.

18
 Technologically, through partnership, Katayama developed the manufacturing
processes used by Ingress. The automated facility installed in its manufacturing plants
ensures consistency in product quality whilst minimizing rejects. With the assistance of
Katayama, Ingress has modeled its productivity and quality standards after those of
Katayama. Regular technical audit were held jointly in Malaysia to establish Ingresss
capabilities and measures were taken under the supervision of Katayama so that
improvement targets are met. This systematic approach in transfer-of-technology has
been instrumental in the rapid progress of Ingress. In summary, the key benefits of
Ingress relationship with Katayama are: (1) Up-to date technology; (2) Access to global
contracts; and (3) Acquire broad customer base.

Conclusion

Business collaboration in the auto sector is also extending beyond partners to

include competitors. However, Proton may not yet reach this point at the moment. The
same also applied to vendors. They may collaborate with their technical provider into
strategic alliance and explore the new niche market and new product development. Even
if both Malaysian automaker and vendors are not willing to trade its equity for
technological or market gains, they should expedite the search for compatible global
partners that have strategic and synergistic fits with its aspirations. Domestically, Proton
has the advantage in terms of dominant market share and well-established distribution
and service network. This status quo will remain for the next three years at least,
following Malaysias deferment to 2005 of market opening measures for the auto sector
under AFTA. But there is no guarantee that Proton cars dominance in local scene will
not be threatened beyond that date. It is becoming increasingly clear that trade and
market liberalization will have significant implications on how business is done in a
globalize market and the automotive sector is no exception. Liberalization will cause
some firms- especially the inefficient and weaker ones-to collapse at the expense of
stronger ones. To meet the challenges of liberalization, it is imperative that Proton and
vendors link up with the best players in the automotive business. A strengthened Proton
and vendors both financially and technologically-will definitely be better positioned to
reap the benefits of trade and market liberalization.

The additional timeframe, which Malaysias has gained from a delayed entry into
AFTA, should also put to good use. Getting into and nurturing any sort of alliance and
technological internalization takes times as it involves building trust into relationship and
internal capabilities building. Both Proton and vendors should move fast to identifying
the right partners for collaboration and the right technical expertise to acquire, in order
for both strategies to capitalize effectively on the breathing space they have been given to
prepare for open competition in the future. Thriving under a protected regime in the long
term is not the answer and unless efforts through alliance and upgrading the technology
while venturing to new niche market are created, it is unlikely Proton and its vendors will
continue to enjoy the dominance it presently hold in the domestic market. As for both
Proton and suppliers, the ultimate test will come when protectionist measures are

19
removed. The latest spate of achievements has undoubtedly placed the national
automobile industry in a much better position to compete with its established contenders.
Yet, the risks associated with doing it alone can be significantly lowered if the players
were to enter into strategic and technologically tie-up for win-win situation. To be cost-
competitive and efficient in facing the challenges of liberalization, both Proton and
vendors may have to collaborate at various fronts. Some examples as already discussed
including joint R&D, product development, venturing into the use of more common parts
and components, combined purchasing strategies and complementation through
specialization in production and supply as well as accurately venturing into the new niche
markets beyond domestic level.

This study found that among Protons strategies are (1) Attaining cost leadership
and differentiation strategies by improving the R&D sector and accelerating investment
in product development, (2) Exploring new niche market and alliance in order to expand
the distribution channels, (3) providing new brand images to accelerate public confidence
and brand loyalty in the domestic and international market, and (4) Diversifying parts and
component sources and selecting reputable suppliers would help in achieving cost
reduction effort of the company, and creating strategic alliance to improve technical
capability as well as to penetrating new market and acquiring faster transfer of
technology and technical-know-how. Local vendors also have to follow the steps taken
and advised by Proton as they also depend the market on Proton cars at least until they
also could graduate to be regional players. Tiering of vendors for components parts
supply is already the norm among global auto markets. And unless Proton has a core
group of reliable vendors that can supply it with high quality components parts at
competitive costs on a timely basis, Proton may be forced to look elsewhere to fulfill its
dream of becoming a truly world-class player. As for Ingress, these main strategies
perceived workable: (1) To establish itself as an ASEAN based regional player by
winning more customers with regional reach, (2) To rationalizing its operations
particularly technological internalization efforts and embark on continuous improvement
programs in Malaysia and Thailand to increase its competitiveness, (3) To look at the
possibility penetrating of direct exports to other assemblers outside and within ASEAN,
such as Japan (possibly through strategic alliance with Katayama), and the growing
markets such as in India and Turkey; and (4) To participate actively in global bidding of
projects in partnership with Katayama. In general, local suppliers are suggest to have two
major choices to enhancing its technological capability: (1) To work with their technical
counterpart (through new collaboration in order to tap both technical expertise and
market opportunities at regional level, and, (2) To speed up technology learning and
release their dependence on technical provider by enhancing their in-house R&D
capability. By this way, they could gradually implant the technology learning and
decreasing royalty payment as well. The problem is, establishing in-house R&D is not an
easy job and needs high capital and time consuming. However, they could position
themselves to be second tier suppliers for the time being and gradually increase their
organizational learning to speed up their capability to be the first tier supplier. They
should learn carefully from the buyers development planning on supplier development
and outsourcing trend to accurately position them in this industry.

20
 The results of this study is supporting Porters generic strategies which found that
cost leadership through enhancing R&D, outsourcing practices to access cheaper inputs,
and product development, would be the choices for business strategies to be practiced by
both automaker and suppliers. The third strategy, focus, was found supporting the former
strategies through exploring niche market; increase public confidence and venturing with
new partner in marketing. For the same purpose, differentiation strategy supported by
organizational learning on technological improvement and R&D would help them to
come up with new brand image and new product development. This study suggests that
both cost leadership and focus in niche market be highly supported by differentiation
practices in order to make the main strategies more workable. The results also suggest
that, the sources of competitive advantages are many, and firms need to find that fits with
its business strategy. Base on the firms own resources and capabilities, it could provide a
basis for their business strategies.

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Abdulsomad, Kamaruding. (1999). Promoting industrial and technology development

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Oxford University Press.

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firms. Long Range Planning. Vol 22 (5), pp. 80-88.

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The Challenge of Strategic Management. (Eds.), London: Routledge.

Dess, G.G. , & Davis, P.S. (1982). An empirical examination of Porters (1980) generic
strategies. Academy of Management Proceedings, pp. 7-11.

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Integrating build-operate-own and build-operate-transfer techniques within the
national privatization strategy. The Columbia Journal of World Business. pp. 69-
82.

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Brazil and India. In Gereffi, G. (Ed.), Global Production and Local Jobs.
Geneva: International Institute for Labour Studies.

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Malaysia Industrial Development (MIDA). (1986). Various Publications. Kuala Lumpur.

Md.Zabid, M.A. Rashid. (2000). Business strategies and competitive advantage factors in
the electronics industry. Journal Pengurusan. Vol.19. pp. 27-39.

Porter, M. (1980). Competitive Strategy. New York/London: Macmillan Press.

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Kuala Lumpur: Institute of Malaysia and International Studies. (IKMAS),
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Paper #99, Department of Intercultural Communication and Management,
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Acknowledgement

My gratitude is extends to all those who assisted me in my research in Malaysia and

Japan though I am not able to list their names. Credit also goes to my academic
supervisors, as well as top management executives and managers of both Proton and
vendors in Malaysia, which provided me guidance and advises at different stages of my
research in 2001 and 2002. I am also grateful to the Setsutaro Kobayashi Memorial
Fund, Fuji Xerox Company of Japan for awarding me research grants in order to conduct
my work successfully.

22
 Table 1:
Merits and Demerits of Liberal and Protectionist Approaches

Approach Merits Demerits

Liberal Small burden as the government Leadership in the hands of foreign
capital
Smooth response to market Difficult for large production lots
expansion to come about
Difficult for support industries to
follow up

Protectionist Large production lots possible Large burden as the government

Relatively easy for support Over protection inhibits business
industries to grow up Leadership by diversification causing delayed
host country responses to liberalization
Source: Adopted from Bank of Tokyo-Mitsubishi Review, Vol. 1. No.4. September 1996.

Table 2
Automotive Tariffs Rates in Malaysia

CBU Prohibited in principle unless an approval permit is obtained.

Passenger car: Less then 1800 cc: 140% More than 1800 cc: 170% More
than2500 cc: 300% .
Commercial vehicles: Vans: 35-50% 4WD vehicles: 50% Trucks & buses: 35%
CKD Passenger car: National cars: Proton-113%, Kancil-0% (for limited
period) Non-national cars: 2% Commercial vehicles: Vans 5%;
4WD-5%, Truck & buses-0%

Source: Adopted from Philippine Automotive Federation, Inc., 1999.

23
 Table 3
Three Major Parts Procured Domestically by Proton

Type Parts and Components

1. Engine Flywheel, Engine Brake, Water pump
2. Power Transmission Transmission casing
3. Electric & Electronic Starter motor, Alternator, Wire harness
4. Brake Disc brake, Booster, EHCU
5. Suspension & Steering Steering column, Rack & pinion, Steering
6. Wheels wheel
7. Body Tire, Steel Wheel, Alloy Rim
8. Direct Consumable Door sash, Fuel Filler Door, Door Hinges
9. Accessory Sealant, Paint, Grease
Air Conditioner, Radio, Reverse Sensor

Note: Proton only requested to list up to three items from each group, which it procured
domestically.

Source: Field Survey 2002.

Table 4
Criteria Commonly Used in the Selection of Suppliers

1. Technology (including tooling, design and development planning, and technology

support;
2. QCD (Quality, Cost, Delivery);
3. Suppliers reputation (including mass production capability, ISO standards possessed,
financial and management (strength);
4. Degree to build-team relationship;
5. Overall value improvement (including R&D capability, and VA/VE practices).

Source: Field Survey 2001, 2002

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 Table 5
Sources of Protons Agreement in Each Aspect Derived From Long-Term
Relationship According to Priority Preference

1. Can save time and cost to investigate and screen the new supplier candidate
2. Contributes to reduce the costs in controlling the suppliers in terms of quality, price
and delivery (QCD)
3. Makes Proton familiar with the supplier and dare to provide assistance in order to
improve quality, reducing cost, efficient in delivery & assisting their development in
technology capability;
4. Make it possible to establish more flexible purchasing system than specifies a
complicated contract;
5. Can save time and cost to find new supplier;
6. Can make the solving problems become easier when supplier cannot satisfy the
requirement.

Source: Field Study 2000, 2001

Table 6
Main Certification Achievement of Ingress

M.S. ISO 9002 Certifications
Ingress Engineering Sdn. Bhd. & Ingress
Precision Sdn. Bhd.
1994 Quality Systems Models for Quality
Assurance in Production Installation and
Servicing awarded by SIRIM QAF in 1997 for
the manufacture of moldings and weather-strips

QS 9000 Certification to IAV
Awarded the QS9000 in 1998 and ISO 9002 by
1994 certification respectively by TUV
Anlagentechnik GmbH, a certification body in
Germany since 1999 for manufacturing of
molding parts and door sash.

Source: Field Survey 2002

25
 Table 7
Major Automotive Buyers as for January 2000

Customers/Buyers Length of Contribution to Ingresss

relationship Turnover (%)
Proton 8 26.8%
Perodua 5 11.9%
AAT, 3 2.8%
Thailand 3 3.1%
MSC - -
Thailand - -

Source: Field Survey 2001 and 2002

Table 8
Ingresss Position Among Its Competitors

Competitors Remarks
1. Automotive Industries Sdn. Bhd.
ASB is a producer of exhaust systems in
Malaysia, supplying Proton and Perodua.
2. ASAB Thailand SAB produces varieties of Ingresss roll-forming line comprises of 43
stead auto parts in Thailand, including door stages, where as SABs only 18 stages. This
sashes for Mitsubishi and Nissan. allows Ingress to produce more complex door
sash designs for use in a wide variety of
vehicles; SAB is limited to supplier designs as
used on pick-up trucks.
3. TOACS Thailand Co-extruded company in Besides Ingress TOAC is the only other
Thailand. company in ASEAN producing steel/PVC co-
extruded moldings.
4. Calsonic, Japan Produces exhaust system in
Thailand.
5. Hashimoto, Japan Japans leading producer Not indicated it intends to establish operation
of door sashes. in ASEAN.
6. OM cooperation, Japan Suppliers door Not indicated it intends to establish operation
sashes to several automakers in Japan. in ASEAN.
7. Nishikawa Rubber, Japan and Thailand Presently (2002 no indication to expand its
Japan NR produces both steel/rubber and Thailand operation to produce steel/PVC
steel/PVC co-extruded moldings, but in moldings.
Thailand just steel/rubber moldings.
8. Shiroki, Japan A components maker Have no operations or partners in Thailand or
produces door sash and co-extruded Malaysia and gave no indication that they will
moldings. Operated also in Vietnam Vina be established.
Shiroki

Source: Field Survey 2001 and 2002

26
 Table 9
Current Marketing Position of Ingress

Automaker/Buyer at Parts supplied

domestic level
Proton Co-extruded moldings for Perdana, co-extruded
moldings and door sashes for Wira.
Perodua Co-extruded moldings, door sashes and door-in-white
assembly for Kancil, and fenders, door-in-white, tailgate
and hood for Kenari model.
Automaker/Buyer at Parts supplied
regional level
AAT, Thailand Door sash for Ranger/Fighter pick-ups
GM, Thailand Roof ditch molding for Astra model
Isuzu, Thailand Co-extruded moldings for 1190/GM355 model
Mitsubishi, Thailand Co-extruded moldings for L200 model
Nissan, Thailand Potential supplier for co-extruded moldings
Toyota, Thailand Potential for door sash and co-extruded moldings

Source: Field Survey 2001 and 2002

27
Fig.1: Reasons of Domestic Procurement Through Local Outsourcing

28