Easy money, who can let it go?

The Government just announced that excise duties on cars will remain, dashing hopes of any reduction in car prices. Excise duties generated RM7.09 billion in 2012. Together with other forms of taxes, the Federal Government collects RM11.14 billion in 2012 from the car industry.

This RM11.14 billion is equivalent to 48% of personal income taxes, 22% of corporate taxes and 33% of petroleum taxes. For 2013, this revenue source is likely to be higher. The Edge Malaysia carried a thorough report and analysis of the Malaysian automobile industry in the January 6, 2014 issue.

At a time when fiscal restraint is critical to rein in the budget deficit, to counter possible credit rating downgrades and capital outflows, this revenue source is proving too hard to let go.

In the same announcement, the Government has deferred any decision on removing the approved permits (APs) system for importing cars into Malaysia.

In a system where a few individuals can make huge amounts of money by simply being granted the rights to bring in cars, this easy money is too hard to let go. For the interest of making a few rich elites richer, the rest of the population continue to suffer high car prices.

Here is an idea. Remove the excise duties and the Government owns all the APs. Profits from the APs now become Government revenue, replacing the excise duties. And removing the excise duties lowers the price for cars. So, why not?

Edge Education Forum, the what and the why

What factors are responsible for the poor state of affairs of our public education? The mushrooming of international and private schools catering to Malaysians, not just foreigners, best exemplified this situation. Results from internationally recognized assessments such as TIMSS and PISA, highlighting the weaker performance of Malaysian students, is another.

For many, this is the consequence of the poor quality of teachers. While this may be true, it is only the symptom. What are the causes? A lack of training or too low a salary scale, which drives away capable candidates from the profession? Or is it more to do with the absence of meritocracy, where the quality of teaching is not relevant to the teacher’s career development? Is our education policy too “centralized”, driven by bureaucrats that have lost touch with the needs of teachers and students?

What about the language of instruction? Was the change from English to Bahasa a fundamental cause? It is hard to imagine that language does not affect quality of the students and their capabilities when they subsequently join the workforce.

Why must we improve the quality of our public schools?

Quality of education directly impacts the livelihood of the individual and his family, and the growth and prospect of the entire nation. For the individual, it determines his employability, wages and in the longer term, his upward mobility through gaining greater knowledge and experiences.

For the nation, it creates national wealth, innovation and creativity, job creation, higher income, higher tax revenue to fund national development, better institutions and so forth.  One is tempted to argue that the quality of education may be the single most important factor to move the country out of the middle income trap.

Two other related issues are equally important.

Education should be a unifying factor for Malaysia, given our diversity in ethnicity, religion, languages and wealth.

Those of us who went to public schools in the 1970s not only remember fondly our teachers, their passion and commitment to the wellbeing and quality of their students, but also our classmates. Every class was multi-ethnic, Malays, Chinese and Indians. We were all Malaysians, we played football and badminton together. We cheered for our school teams, not our race. We ate together, even if at times, we cannot participate in each other’s food.

Are our schools now contributing to racial and religious polarization? The Sekolah Kebangsaan are predominantly attended by Malay children. Chinese and Indian children go to vernacular schools. If the children do not learn to live and play together when they are young, how much more difficult will it be for them to live together later, when their prejudices have already been formed?

Those with the means send their children to private and international schools. Does this not create another layer of polarization? Between the haves and the have nots?

And if education is meant to be the universal “leveler”, giving equal opportunities to all, the fact that we have so many private and international schools, which charges exorbitant fees, is contradictory. These privileged schools will obviously be able to hire better teachers and provide superior resources. A further question is whether education should be a business for profit. Is it more of a social good or a private good? Should everyone have equal access to the same quality or should those with money be advantaged?

I hope these issues and more will be debated at the upcoming “The Edge Education Forum 2014” and I look forward to many of you participating.

Invitation to The Edge's Inaugural Education Forum

Further to my article on "An alternative solution to Malaysia's education woes" published in this blog last Nov and the interest shown by many readers on this topic, I am pleased to share that The Edge is hosting its Inaugural Education Forum on Saturday, Jan 18, 2014. Readers who are interested to attend the forum may register online here for free seats.

A tale of two diverging carmakers

The Edge, Jan 6, 2014 issue
By Kamarul Azhar 

South Korea’s Hyundai Motor was established in 1967 and has a 16-year head start on Malaysia’s national car company, Proton Holdings Bhd, which was set up in 1983, two years after Tun Dr Mahathir Mohamad became prime minister.

Proton, which started with Japanese partner Mitsubishi Corp, was to be the centrepiece of Dr Mahathir’s ambition to make Malaysia an Asian industrial powerhouse.

While the 16 years’ advantage is big, the reality is the gap in the performance of Hyundai and Proton is far bigger than the difference in their age.  Hyundai is now enjoying immense success and is a global car company with annual sales of 4.4 million cars. Together with its 32.8%-owned associate KIA Motors, Hyundai Motor Group is the fourth largest carmaker in the world, with 7.12 million cars sold last year, after Toyota, General Motors and Volkswagen.

Proton, meanwhile, continues to languish even in its protected home market and has hardly any export market to talk of. In Malaysia, it is now the No. 2 carmaker with 141,121 units sold in 2012, behind Perusahaan Otomobil Kedua Sdn Bhd (Perodua).

Why is it that South Korea could create world champions in the automotive industry? Today, Hyundai and KIA cars can be seen on the roads from Panama City to Manila, not to mention major markets like the US, Europe and China.  

The picture for Proton is totally different. Despite all the protective measures put in by the government, it has not made any impact outside of Malaysia. When Hyundai launched its first model in 1967, it was a rebadged Ford Motor Company’s Cortina. Proton did the same, with its maiden model launched in 1985 — the Saga, a rebadged Mitsubishi Lancer Fiora. After almost a decade of rebadging Ford’s models, Hyundai graduated as a fully fledged carmaker when it introduced its first home-grown model, the Pony, in 1975. Soon enough, the car was exported to Ecuador, the Benelux countries and Canada.  In 1986, Hyundai exported its cars to the US, then the largest car market in the world. While Hyundai cars used to be dismissed as unreliable, the company persevered and continued building its brand image by investing in design and build-quality as well as undertaking long-term research of its cars.

The rest, as they say, is history, with its current flagship model, the Sonata, competing at the same level with the likes of Toyota Camry and Honda Accord.

Proton, meanwhile, only managed to launch its own model, the Gen-2, in 2004, to mixed reviews. With mounting challenge in the domestic market, notably from Perodua, it continues to struggle with lack of economies of scale and the heavy burden of having to invest in developing new technologies and models.  

Proton has not utilised the protection and privileges it enjoyed over the past 30 years to become a globally competitive car company that is able to stand on its own. Instead, it is still dependent on some form of protection.  And it continues to enjoy a research and development grant amounting to close to RM200 million a year from the government, even though Proton is now privately owned by Tan Sri Syed Mokhtar Albukhary, who bought Khazanah Nasional’s stake in the company several years ago.

Indeed, now that it is in private hands, should we still give it national car status and the privileges that come with it?

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.