Friday 10 January 2014

The Costs of "rent-seeking"

A central theme of this blog is economic inclusion and the need to do away with rent-seeking behaviours.  In the article I last posted, I argued that people feel they are unfairly suffering the pains while not benefitting equitably from the gains.

The rising cost in Malaysia is partly a consequence of these inefficiencies, where a few people are extracting the resources of the country at the expense of many.   The Edge last week carried an excellent analysis of the auto industry in Malaysia.  It is also a very good example of the rent-seeking behaviour that this blog seeks to highlight and articulate against.  We would like to share a couple of these articles in this blog with you, reproduced with the permission of The Edge.

The Edge Jan 6, 2014, issue
The opportunity cost of having a national car

Malaysia received RM2.2 billion in automotive FDIs between 2006 and 2012, while Thailand got RM22.3 billion. 


Malaysia and Thailand both have automotive industries that started in the 1960s, assembling mostly Japanese marques for the domestic market. However, during the 1980s, they took different paths in pursuing their respective industrialisation agendas. Malaysia took the less travelled path by setting up its own national car programme with Proton, while Thailand opened up its market to all. The rest, as they say, is history. In 2012, Thailand produced 957,623 units of passenger vehicles and 1.53 million commercial vehicles for a total of 2.48 million units, out of which over one million units were exported.

In terms of domestic sales, Thailand hit 1.3 million units in 2012, versus Malaysia’s 569,620 units. Compared with Thailand, Malaysia’s vehicle exports remain lacklustre at about 20,000 units a year.

So, what went wrong? Many experts blame the malaise in Malaysia’s automotive industry on the government’s auto policy that revolves around protecting the national car.

Since the establishment of Perusahaan Otomobil Nasional Sdn Bhd (Proton) in 1983, Malaysia has not been able to keep up with Thailand, and more recently Indonesia, in getting foreign direct investments (FDI) for the automotive industry.

Between 2006 and 2012, Malaysia’s automotive industry only attracted RM2.2 billion in FDIs while Thailand received a staggering RM22.3 billion.  The high level of automotive FDIs received by Thailand translates into a large production base, dominated by Japanese and American car makers. In 2012, Thailand’s automotive assembly capacity was 2.78 million units yearly, with Toyota Motor Corp the largest assembler with a 700,000 annual capacity.

In February 2012, Toyota announced plans to add another 200,000 units annually to its production capacity in Thailand by 2015. Mitsubishi Motor and Isuzu will add another 100,000 units a year each to their annual capacities of 400,000 and 220,000 units respectively. Suzuki, meanwhile, will add another 65,000 units in capacity, to produce 200,000 units by 2015.

On the other hand, Malaysia’s total production capacity stood at about 960,000 vehicles per year. As Malaysia’s total industry volume was only 627,753 units in 2012, this means the industry is facing severe overcapacity, producing at just 65% of installed capacity.

The overcapacity issues rest mainly with Proton and its huge but underused facility in Tanjung Malim. In comparison, Thailand’s plants were running at 89% capacity as in 2012.  The national car programme in Malaysia and the resulting two-tier mass market coupled with a high excise duty structure have also been blamed for high car prices and high household debt among Malaysians.

According to Bank Negara Malaysia statistics, almost 26% of the total household debt of RM784 billion borne by Malaysians was for car loans. Along with the agenda to promote the national car programme, with Proton needing the critical mass to survive, much of the government’s resources and planning priorities have been channelled towards building expressways and highways to support the vast growth in private vehicle usage, at the expense of improving the public transport infrastructure.

The price to pay for a poor public transport system is that the government is also forced to keep fuel prices low through subsidies as private vehicles have become a necessity for Malaysians.  The funds spent on expressways and highways as well as the annual allocation for fuel subsidies could have been better utilised in other productive areas such as education, public transport and healthcare.  Supporters and promoters of the national car can deny it all they want, but the facts clearly show that the consequence of the decision to start Proton in 1983 has been a very costly one. The country has not been able to achieve the sizeable automotive industrial base, capacity and capability that Thailand has achieved.

While Thailand welcomed the world, we chose to protect the one.


  1. I think partly the car in Malaysia is much more expensive because of the taxes impose as compare to Thailand. Essentially Thailand car is cheaper than Msia but their petrol more expensive . Protecting proton is only going to in fact benefit the local industry which supply parts to proton and the distribution channel and drb hicom which in other words only benefit syed moktar .. for normal citizen who already feel the pinch or rising inflation and housing , a more expensive car doesn't really benefit us at all and in fact it will prevent housing ownership as most ppl will start off with a car loan first and cannot afford housing until much later. there is a study that the more expensive car actually sort of prevented ppl from owning a house . While car is a depreciating assets but house is better asset and will rise with inflation . it's time we relook at competitiveness rather than protectionist and closed economy. As without foreign investment the industry will remain uncompetitive and we will lose out to other countries in getting the foreign investment .. If in the old days it's illogical to park major corporations under halim and tajuddin the gov certainly has not learn their lesson and now seem to park under syed mokthar. This brings to the issue if there is a downturn and syed moktar which has been buying on debt crumbled under debt pile , will the gov again does a similar bailout ? I prefer to walk than buying a proton as I use to own several cars in US and they are powerful sports car and i find that the second hand sports car quality and price is still cheaper than proton!

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