Buy A Proton, Save Malaysia's Auto Sector: Did Japan Succeed The Same Way?

News headlines over the past week have been dominated by roving calls for continued protection for Proton against foreign competition, citing examples in Japan, and also Korea as examples.

On Friday, Proton's adviser Tun Dr. Mahathir Mohamad lamented that Malaysian consumers don't care enough about Proton. Prior to that, Proton's chairman Tan Sri Mohd Khamil Jamil told the Business Times “Look at the Japanese and how they are supporting their carmakers. Another example is South Korea, which supports local players like Samsung and Daewoo. I don’t understand why Malaysians are not supporting Proton.”

When justifying for continued protection for our national car maker, the proponents often use Japan as an example. It is often repeated to us that Japanese manufacturers thrived on the back on strong government support and patriotic Japanese citizens who buy Japanese cars. The same goes for Korea. 

But is it this true? Let's take a short history lesson with LiveLifeDrive.com

Similar to Malaysia, Japanese policy makers attempted to kick-start heavy industries by adopting an import substitution policy of raising taxes on imported vehicles and components.

Under the 1936 Automotive Manufacturing Industries Law, the Japan Ministry of Commerce and Industry imposed a 60 percent import duty on imported vehicles. It also imposed a limit on locally assembled foreign brand vehicles.

Resentment From Japanese Public, Japanese Car Manufacturers Hauled Up To The Parliament

By the 1950s, Japanese manufacturers began distributing dividends to its shareholders. This upset the Japanese government, who took it as a sign that Japanese manufacturers were profiting excessively from the protection accorded to them.

Amidst strong opposition within Japan, the Ministry of International Trade and Industry (MITI) could no longer justify its position to protect Japanese car manufacturers from foreign competition.

A lack of economies of scale meant that Japanese cars were more expensive than equivalent foreign-made models, while high taxes and import duties meant that Japanese buyers had little choice.

Contrary to what the proponents of protectionist policies want Malaysians to believe, the Japanese public was upset about the quality and high prices of Japanese cars. Is that even surprising at all? It would be very naive to think that the citizens of a country would throw their money to support a group of powerful industrialists in the name of patriotism.

The issue of public resentment against protecting domestic manufacturers from foreign competition was serious enough that it was debated in the Japanese parliament, known as the National Diet.

Six representatives from six Japanese car manufacturers, including the then president of Toyota Motor Corporation Mr. Taizo Ishida, were hauled to explain themselves during the 36th meeting of the Upper House Transport Committee of the 13th Session of the Japanese Diet on July 26, 1952.

In his book, The Toyota Leaders, veteran business journalist Masaaki Sato described the confrontational atmosphere faced by Ishida.

Lawmakers grilled Ishida saying "Consumers are annoyed at having to buy unreliable domestically produced cars built with inferior technology. Shouldn't we therefore import more cars from abroad?"

"Manufacturers are dependent on MITI's protection of domestically built cars!" said another lawmaker.

Toyota was also accused of reaping huge profits, which Ishida denied.

"Don't bullsh*t me! According to what I've heard, aren't you paying 100 percent dividend and rewarding your board members with million-Yen bonuses? It's downright criminal that you're living it up while you go around peddling jalopies. You're making a mockery of the Japanese people," lambasted another lawmaker.

A Bold Promise Made

Ishida not only denied all the accusations, but made a bold promise to the parliament.

"If it turns out that our technology cannot keep pace, I am ready to heed the criticisms we have heard today by giving up the idea of a Japanese-made vehicle... we feel sure that, in the near future, the day will come when people will say that we did a decent job, and we look forward to that day."

He also said "Maybe not right now, but I guarantee that one day every one of you will be a Toyota customer."

In any case, the Japanese government warned domestic car makers that the protection will be removed soon.

To boost Japan's economy, Japan wanted to join GATT (General Agreement on Tariffs and Trade), a precursor today's World Trade Organization (WTO) and thus it was obliged to (gradually) remove import duties on imported cars.

Import control quota (which limits the number of imports in a similar manner like our Approved Permits or APs) was removed in 1965.

Of course, it can also be argued that Japan maintained a series of non-tariff barriers like fuel-economy regulations that benefitted Japanese manufacturers, but that's another topic.

Malaysians Not Supportive Of Proton?

Back to Proton, it is also not true that Malaysians don't support Proton enough. Far from being unsupportive, Malaysians voted with their hard-earned money, propelling the Proton Saga to control a shocking 73 percent of the Malaysian car market within just three years of its launch.

Contrary to popular perception, the Malaysian public was not 'forced' to buy Proton cars, at least not in 1985 when the Proton Saga was launched.

Despite the Proton enjoying 100 percent exemption on import duties for automotive parts (CKD packs), 50 percent exemption in excise duties, and the government levying an increase in import duties of automotive parts for locally assembled foreign cars (from 15 percent to 25 percent in 1983, and to 40 percent in 1984), a similarly equipped Nissan Sunny 130Y and Toyota Corolla was only around 20 percent more expensive.

Consumers saw that it was only logical to support a Malaysian car that was not only cheaper, but was just as good as many Japanese cars.

Prices of locally-assembled foreign cars only went up in the late '80s as a result of rapid appreciation of the Japanese Yen and the then German Deutsche Mark, and weakening of the Ringgit, which made import of assembly kits more expensive. The price gap has never closed since then.

How Proton lost the support of Malaysians is another story altogether.

Toyota's Rise Was Primarily Because Of Its People, Not Patriotic Japanese Buyers

The support enjoyed by Proton in its early days was not too different from Toyota's experience. There was a large group of Japanese citizens who were keen to buy Toyota's first (monocoque) true passenger car, the Crown, which was launched in 1955, three years after Ishida's grilling at the parliament.

Chief engineer Kenya Nakamura reckoned that Toyota could easily sell the first 1,000 units to Japanese citizens who sympathised with Toyota, but Nakamura knew that Toyota can't go on like this.

The difference was that the scions of Toyota's founding family Kiichiro Toyoda and Eiji Toyoda (who later established Lexus) were in the business not because they were asked to by the government, but because they genuinely believed in building a Japanese car with Japanese talents.

The cars were built by engineers like Nakamura who was burdened by the promise President Ishida famously made to the parliament three years earlier. They couldn't just stop at people buying their cars out of charity.

Early buyers of the Crown tolerated quality issues. They happily reported the problems to Toyota in the hope they could improve.

Sato's book described Nakamura’s relentless efforts to iron out quality issues. No defect was too big or too small. He would analyse each report to determine if the root cause was due problems in the vehicle's design itself, or a problem with the manufacturing process.

Two years later, the Crown was exported to the United States, where it failed miserably. But Toyota kept learning. By 1969, twelve years after Toyota's first export, Toyota became the second-biggest import brand in the US after Volkswagen.

Like Malaysian buyers, Japanese buyers were skeptical of the quality of Japanese cars. Toyota had to work hard to convince the Japanese public that Toyota cars are reliable.

To silence its critics, in 1964 Toyota conducted non-stop 100,000 km endurance drive back and forth along the Meishin Expressway with three Toyota Coronas. The event was heavily covered by the Japanese press. The three Coronas finished the trial with no problems after 58 days of driving. After that, the Corona became Japan's best-selling car for 33 consecutive months.

The Corolla and Land Cruiser nameplates were introduced to many other countries, and the rest was history.

Honda - No Support The Japanese Government, Who Even Tried To Stop Its Business

However arch-rival Honda's story is even more interesting, for it not only had no support from the government, MITI actually tried to block Honda from making cars!

Founder Soichiro Honda hated MITI's meddling in the affairs of the industry: as in the opinion of MITI, Japan's automotive industry needed a central direction from the government to optimize their potential.

MITI believed that there was already an over-capacity in the country and wanted to group different companies to specialise in different type of products. Honda, being the youngest car maker, was not part of this plan, and was not allowed to build cars, which riled up Mr. Honda who was known for his fiery temper.

Soichiro was an eccentric person. To force MITI to delay a proposed Specified Industry Promotion Bill that would in effect block new entrants like Honda from making cars. Soichiro Honda tried all sort of tactics, including one where he pretended to be drunk and entered MITI's office with a bottle of sake.

Masaaki Sato's The Honda Myth described Soichiro in his drunken stupor, saying, "The Ministry! The Ministry of what? You're a bunch of morons! You're the reason the Japanese industry is so damn weak!"

In another incident, he snapped at a MITI officer by saying "Government employees are supposed to dedicate themselves to the public good, but every time we try something new, all we get are complaints and rejections! If you've got a problem about Honda's policies, why don't you become a shareholder first? Buy some stocks and then I'll listen to what you have to say."

Honda also strongly opposed MITI's position to protect the established Japanese car manufacturers. He famously twisted MITI's logic on its head when he said "If you can't be No.1 in the world, you can't be No.1 in Japan."

In his writings in the October 1952 issue of Honda's internal bulletin, Honda Monthly, Mr. Honda told his employees:

"I simply cannot go along with the idea that in order to protect our jobs, we should set limits on the import of foreign cars. Technological competition should be conducted by technological means. No matter what barriers we put in their way, quality products will always find a way in... Good products know no national boundaries... ‘The best in Japan’ means nothing when you are only comparing yourself with the rest of Japan... the moment a better foreign product is imported, that kind of ‘Number One in Japan’ is toppled. Being ‘Number One in Japan’ is but a stage on the way to being ‘Number One in the world.'"

In short, the Japanese government's support was only limited to drafting guidelines to establish a domestic car manufacturing base. It did not extend special privileges to any one specific company. That's a very big difference from the position adopted by Malaysia. Not only that, companies like Honda actually had to go against restrictions imposed by the government.

It was a similar stance adopted by Korea. Hyundai, Kia, Daewoo (now under GM), Samsung (now under Renault-Nissan) and Ssangyong had to compete against each other.

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