Malaysian Maverick: Mahathir Mohamad in Turbulent Times Page 14
Japanese and South Korean construction companies swooped on Malaysia and bagged about RM5 billion in major contracts within three years, frustrating and angering local builders.[31] Making use of official assistance in the form of cheap finance from Tokyo and Seoul, they won not only private contracts but also jobs for Malaysian government-linked agencies. Their prizes included an office block and convention centre for UMNO, a new headquarters for the National Equity Corporation, and a 55-storey tower for state-controlled Malayan Banking Bhd.
None caused more offence than the RM313 million contract awarded by the government to two Japanese companies to build the sprawling Dayabumi complex in Kuala Lumpur, then Malaysia's most expensive building, even though a local company bid RM71 million less. Dr. Mahathir's defence, that the Japanese would introduce new management skills and modern building techniques, proved hollow. The bumiputra engineering company that the Japanese were required to work with subsequently complained that its Japanese partners were using it merely to maintain good relations with the government, and said that no technology transfer was taking place.[32]
Complaints that Malaysia was reaping few tangible benefits from Look East extended into trade, investment, management and shipping. After nearly three years, Malaysia's trade deficit with Japan had widened sharply, and the Malaysians had little success in persuading the Japanese to buy more of their manufactured goods. Japanese companies were slow to invest in skill-intensive industries in Malaysia, and even slower to transfer new technology to their Malaysian units and establish research and development facilities in the country. They also tended to bypass local contractors and suppliers and acquire components, materials and services from Japan. Japanese manufacturing companies employed more expatriate managers and staff than most other foreign investors, locking Malaysians out of decision-making functions and inhibiting their career development. With appeals to Japan to use more Malaysian vessels for their bilateral trade going unheeded, the shipping imbalance contributed to a large and widening deficit in their invisible trade as well.[33]
In a hard-hitting speech in August 1984 that reeked of embarrassment, Dr. Mahathir registered his unhappiness over the way Malaysia's relations with Japan had failed to evolve. Accusing Tokyo of conducting a colonial economic relationship, he said the Japanese economy was extremely protectionist, and the Japanese were guilty of "improper behaviour" over air rights while engaging in "the dishonest and tension-generating" practice of transfer pricing, by which companies show minimal profit, or even losses, to avoid taxes. "We cannot and will not remain merely as hewers of wood and drawers of water," he said. Not for the last time, Dr. Mahathir called on Tokyo to exercise the "duties" of leadership: "I ask the Japanese to look not only at what they can take but also at what they can give."[34]
Malaysia's attempt to duplicate the Japanese-style trading companies known as sogo shoshas — at least six were formed in the early and mid-eighties — also went nowhere. Malaysia lacked the close connections between the banks, government and industry that were needed to facilitate their trading operations. When they did get going, the Malaysian sogo shoshas found themselves competing with the real thing: Many countries preferred to use the services of the Japanese, who provided better marketing information, offered more competitive prices, made loans and opened letters of credit on their behalf.[35] After a few years — in some cases a few months — the imitation sogo shoshas closed down after losing a great deal of money.[36]
Nevertheless, Dr. Mahathir remained enamoured with Japan, basing two of his other major development policy innovations on the Japanese experience: Malaysia Incorporated and heavy industry. His concept of Malaysia Inc., modeled on Japan Inc., was simple: Government and private business must cooperate closely to enable companies to flourish. He said Malaysia should be viewed as a company, in which "the government and the private sector are both owners and workers together". More efficient and prompt government services would increase prospects for company profits, he said, creating more jobs and related enterprises, paying more taxes and spreading income to people who would in turn purchase goods, some of which would also be taxed. His administration also encouraged the formation of docile in-house unions, as in Japan, which "appeared intended to further weaken the already weak trade union movement in the country".[37]
No undertaking gave Malaysians a better understanding of what Dr. Mahathir was all about than the country's head-long crash into heavy industry. With almost all commodity prices dipping on world markets simultaneously in the early 1980s, the weakness of Kuala Lumpur's diversification strategy was exposed. After a threefold increase in export earnings between 1975 and 1980, the country's economic planners had forecast exports to top RM63 billion by 1985. They failed to reach RM38 billion. Dr. Mahathir blamed rapidly advancing technology as well as manipulation by the developed countries for the collapse, and declared that "there is no future in commodities".
As trade and industry minister as well as deputy premier from 1978 to 1981, Dr. Mahathir had sold Malaysia to American, European and Japanese multinationals as a platform on which to manufacture industrial products for overseas markets. But as prime minister he argued that export-oriented manufacturing was insufficient. "We do not want to be grounded in the mediocrity of mere assembly operations," he said.
Although the world was entering a recession that would inevitably affect Malaysia, Dr. Mahathir pushed ahead with plans for a Malaysian car, steel and cement industries, motorcycle-engine factories, an oil refinery and a pulp and paper mill. The vehicle was the Heavy Industries Corporation of Malaysia (HICOM) that he had established in 1980 and taken with him to the prime minister's office. In quick order, HICOM negotiated joint ventures mostly with Japanese and South Korean companies, usually taking 70 per cent of the equity. By 1983, heavy industry plans were expected to require more than RM8 billion in investments.[38]
The arguments against the programme were formidable, though few businessmen, academics and officials expressed their doubts publicly for fear of offending the prime minister. Heavy industries would require massive amounts of capital and foreign borrowings over long gestation periods, diverting investments from other projects. Given Malaysia's small population — 14 million in 1983 — cars and steel especially were unlikely to be profitable in the domestic market unless sheltered behind protectionist walls or subsidized. Either way, it would be a burden on local consumers, who enjoyed easy access to imported manufactured goods. If Malaysia tried to export its output, it would find itself competing with established producers in fields already threatened by global over-capacity.
Dr. Mahathir would have none of it. He regarded heavy industries as an expression of nationalism that would show how Malays could advance beyond the economic limits previously set for them.[39] He was thinking beyond individual products, prices and market share to the next stage of industrialization, as in South Korea. Seoul had ignored conventional advice and refused the temptation to continue buying steel cheaply from Japan, Dr. Mahathir said, and now the South Koreans were selling steel to Japan. He was certain heavy industry would bring similar substantial benefits to the Malaysian economy through technology, skills and numerous spin-offs. Large manufacturing enterprises needed supporting industries and services, which must be provided mainly by locals. "The spillover is literally tremendous," Dr. Mahathir said, echoing his primary school teacher's message. "Whole new towns spring up where industries are located...new services and trades spring up."[40]
Dr. Mahathir conceded that cars, for example, could be imported cheaper, but insisted the capacity to produce vehicles was a necessary component of Malaysia's industrialization. He was frustrated that many Malaysians did not share his enthusiasm about building a great nation and, worse, some did not even believe it was possible. He urged them to "overcome the mental block which condemns us to being the producers of primary commodities to fuel the growth of the industrialized countries".[41] Just as "everybody" had said South Korea was "stupid", Dr. Mahathir disparaged his
own critics, predominantly economists. "These people don't have the faintest notion of what they are talking about", because "what they say is purely academic based on theories learnt in universities".[42]
One theory that kept cropping up was economies of scale. Dr. Mahathir had a typically novel solution: Malaysia should increase its population by 400 per cent to 70 million by 2100 to create its own market. He recommended five children in a family. His pronouncements jolted the family planning authorities, who had been trying to hold down population growth, as was standard practice in most developing countries, to increase the per capita benefits of economic expansion. So the official target was set at 70 million people by the end of the twenty-first century, even though no serious thought was given to how they would be productively absorbed.
From Dr. Mahathir's standpoint, the government's lead in the heavy industry charge would also help it meet its NEP targets, by giving bumiputras the chance to train as industrial managers and skilled blue-collar workers. But in bypassing the Chinese who dominated domestic manufacturing, the government was forced to rely "almost exclusively on mostly inexperienced, often inept and sometimes corrupt elements from the Malay-dominated government apparatus" — and foreign companies.[43] Most of the business went to large Japanese and South Korean companies without any open, competitive tendering. Particularly lucrative were turnkey contracts that gave them total control over design, material and construction. The Malaysians found out later they had been ripped off by some of the foreign outfits, which overpriced imported technology and supplies.[44] Altogether, it was "a helluva expensive way to transfer technology to a few workers".[45]
Launched as the global recession gripped Malaysia, with projects run by bureaucrat-managers lacking appropriate training, Dr. Mahathir's heavy industrialization programme floundered. Saddled with huge foreign debts and high interest rates, ventures that were commercially unviable generated few jobs and failed to spark an economic take-off. Two cement plants, one in Perak state and the other on Langkawi Island, doubled Malaysian capacity but did not justify their combined cost of more than RM2 billion. HICOM's three motorbike engine joint ventures — one each with Honda, Suzuki and Yamaha — found themselves in disastrous competition with each other. A steel complex, Perwaja Trengganu Sdn. Bhd, swallowed billions and never worked properly, crossing the line from ill-conceived and executed to financially improper.
Malaysia's most visible foray into heavy industry was in pursuit of a goal dearest to Dr. Mahathir's heart, a national car. It became a reality and a point of considerable pride for many Malaysians before succumbing to the laws of economics. Having commissioned a feasibility study as early as 1980, Dr. Mahathir nursed the venture for two decades, glorying in its many milestones and stubbornly resisting its numerous setbacks, before railing against its inevitable decline. With Dr. Mahathir in retirement after 2003 and no longer able to protect it against foreign rivals, Malaysia's car simply ran out of competitive gas.
HICOM and two Mitsubishi companies formed a 70 per cent-Malaysian owned joint venture in 1983, Perusahaan Otomobil Nasional, known as Proton, and promised to have a car on the road "in record time". The prime minister was fed up with the slow pace at which local assemblers of foreign vehicles were increasing their Malaysian content. He also was prepared to write off private-sector attempts to establish complementary car industries in the then five-member Association of Southeast Asian Nations (ASEAN), where parts produced in one country might qualify as local content in the others.
Although the first Proton Saga was essentially a Mitsubishi Lancer Fiore, imported in crates and assembled in Malaysia, Dr. Mahathir drove it off the assembly line in September 1985 in a burst of ribbons, balloons and nationalistic hoopla. He had a stretch version made as his official car. Proton's logo initially featured the crest from Malaysia's coat of arms, and subsequent models followed the Saga, meaning a kind of seed from the saga tree, in bearing patriotic Malay names: Wira (hero) and Putra (prince). And the Proton assembly line was depicted on the country's 100-ringgit note.
In contrast to South Korea, Taiwan and elsewhere, Proton did not seek to export, even as worldwide auto trends made economic nationalism a precarious adventure. Proton took aim squarely at the domestic market, where Malaysians had developed a love affair with the car in the buoyant 1970s. In Asia in the early 1980s, per capita auto ownership in Malaysia trailed only Japan and Singapore, with sales of about 90,000 cars a year. By offering a four-door sedan with a choice of 1300 c.c. or 1500 c.c. engines, Proton targeted the segment of the market accounting for the bulk of sales. Proton expected demand to keep increasing by leaps and bounds, and figured the company could capture 60 per cent of it in the first year.
But those easy assumptions evaporated as the Malaysian economy stagnated and passenger-car sales dropped to fewer than 70,000 in 1985 and 40,000 in 1986.[46] At the same time, Proton's costs soared, reflecting the price of yen-denominated loans and parts imported from Japan. As the yen continued to appreciate, Proton was forced to raise its prices, further dampening sales, though the company also had to absorb mounting losses to hold its position as Malaysia's cheapest auto. By the end of 1986, the Proton plant was working only three days a week. It produced about 24,000 cars during the year, less than a third of the 80,000-unit capacity under a two-shift schedule, and the outlook was no better for 1987.[47] Each sale was costing Proton an estimated RM35,000. In desperation, the company turned to export markets.
Highly protected at home and not designed for sale abroad, Proton predictably flopped. Exports accounted for only about 10 per cent of production in the mid-1990s, and declined later. Small numbers of vehicles were shipped to Bangladesh and other Asian and Middle Eastern countries with low emission and safety standards. They proved more popular in Britain, where they required more than 400 costly modifications to meet British standards,[48] but could not escape their stodgy image. Despite being given catchier names later, such as Gen-2 and Savvy, they appealed mostly to elderly drivers and car rental companies that were offered generous buy-back arrangements.
Nonetheless, Proton on paper became one of Malaysia's most successful and financially sound companies. It soon dominated the Malaysian car market, the biggest in Southeast Asia, capturing more than 70 per cent at its peak in 1988. After four straight years of losses, the company announced a modest profit in 1989. Earnings over the next year wiped out accumulated losses, and Proton Holdings Bhd. was listed on the stock exchange in 1992, where it became a favourite of institutional investors. By 2003, the company had cash reserves of RM4 billion and projected profitability.
But Proton's success came at a heavy cost to Malaysian consumers: taxes ranging from 140 per cent to 300 per cent on imported vehicles, and up to 40 per cent on cars locally assembled from imported kits. Built in to the protection, and little known to the motoring public being slugged, was an opaque import-licensing system for foreign cars. Introduced in the mid-1970s to encourage bumiputras to enter the vehicle distribution business, then dominated by foreign companies and business groups owned by Chinese Malaysians, the system covered trucks and motorbikes as well as cars. With the creation of Proton, the licensing system was blended with tariffs to protect the national car. Licensees were granted permits, which every vehicle manufactured or assembled outside Malaysia had to secure before it could be imported and sold locally. The Ministry of International Trade and Industry issued the permits to companies controlled by bumiputra investors. They did not have to bid openly, and nor did they have to pay a single cent for a permit, making permits, in effect, a licence to print money. Licensees typically sold the use of their rights to distributorships for between RM10,000 and RM50,000 per vehicle, depending on the make and model. This classic tollgate operation put more than RM1 billion a year into the pockets of the well-connected permit holders and yielded no benefit to the government.[49]
"You can buy a house in Malaysia cheaper than you can buy a car," one analyst wrote in 1989.[50] Malaysian car owners were gene
rally paying three times the price of a similar model in the United States. Not only were rivals Honda, Toyota, Nissan and Mazda priced out of the market, but their once-established local assemblers, all Chinese-owned, were decimated in the "ethnic bypass" exercise and forced to shed thousands of skilled workers. The cost of Proton to Malaysian taxpayers, in the form of subsidies, totaled between RMl1 billion and RM12 billion by the mid-1990s, according to a government study.[51] The full cost remained unknown.
Mitsubishi bailed out of Proton in 2004, ending a two-decade partnership that proved extremely lucrative for the Japanese group. When Mitsubishi was selected by Dr. Mahathir for the project without any competitive bidding, it had trailed its main Japanese competitors in Malaysia, with a passenger-car market share of less than 10 per cent. Mitsubish Corporation and its associate Mitsubishi Motors Corporation, which each held 15 per cent of Proton, were guaranteed handsome returns regardless of the venture's profitability. They were paid to provide the technology, components and training, as well as collecting patent, design and other fees. Dissatisfied with Proton's performance in 1988, the Malaysian government replaced the company's bumiputra management with Mitsubishi executives. Mitsubishi's withdrawal from Proton, through the sale of shares to other investors, reflected the Japanese companies' diminished role in Malaysia.[52] Over the previous decade, Proton had cut its dependence on Mitsubishi by acquiring auto-engineering companies such as Britain's Lotus Group International. Proton also started making its own engines, which it previously purchased from Mitsubishi and its Japanese suppliers. But it was not easy for Proton to strike out on its own.