State and Industrial Policy: Comparative Political...

60 State and Industrial Policy

Journal of ASEAN Studies, Vol. 1, No. 1 (2013), pp. 55–82© 2013 by CBDS Bina Nusantara University and Indonesian Association for International RelationsISSN 2338-1361 print / ISSN 2338-1353 electronic

State and Industrial Policy:Comparative Political Economic Analysis ofAutomotive Industrial Policies in Malaysia andThailand

Wan-Ping Tai Cheng Shiu University, TaiwanSamuel C. Y. Ku National Sun Yat-Sen University, Taiwan

AbstractNumerous differences exist between the neoclassical and national development schools ofeconomics on how an economy should develop. For example, should the state interfere in themarket using state resources, and cultivate certain industries to achieve specificdevelopmental goals? Although the automotive industries in both Thailand and Malaysiadeveloped in the 1970s with considerable government involvement, they have evolved alongvery different lines. Can these differences be traced to different interactions between the stateand industry in these two countries? This paper examines this issue and finds that althoughindustries in developing countries need government assistance, the specific political andeconomic contexts of each country affect the policies adopted and their effectiveness. Thechoice between “autonomous development” (Malaysia) and “dependent development”(Thailand) is the first issue. The second issue is that politics in Malaysia has deterred theautomotive industry from adopting a “market following” position. This paper finds that thechoice of strategy and political interference are the two main reasons the automotive industryin Malaysia is less competitive than that in Thailand.

Keywords: Automotive Industry, Developmental State, Malaysia AutomotiveIndustry, Thai Automotive Industry, PROTON, Political Economic Analysis

Introduction

In the wake of the 2008 economic crash,whether the U.S. government shouldfinancially support the domestic automotiveindustry has become a matter of debate. Theautomotive industry has been one of thethree main industries in the U.S. for the pasthundred years, and is involved in other

sectors and industries as diverse as iron, oil,manufacturing, sales, the stock market,credit, and insurance. Because of the hugeknock-on effects that a collapse of thisindustry might have on the wider economy,the possibility of government interventionin the U.S. automotive industry remains anoption (Yun-Han Chu, 2008: 20).


This debate has touched on issuesrelated to developmental economics suchas, when a new industry is launched orfaces crises, should the state intervene andhelp the industry, or should they follow theselective policy to help only certain firms?In what type of situation shouldgovernments intervene? Will state resourcesdevoted to the industry be used efficientlyto reach the development goal? These topicshave been the focus of debates that havenever reached a consensus.

Most scholars of developmentaleconomics feel that because of lackingmarket mechanisms and limited resourcesin developing nations, policy interventionin industry is necessary to accelerateindustrialization. However, althoughindustries in developing countries needstate intervention, not all such interventionsyield expected results. Could suchsupported industries survive when thegovernment withdraws its protection? Whatare the costs and benefits for thegovernment under these policyinterventions? How can internationalpressure to remove such protection behandled? To protect vested interests,manufacturers might use non-financialresources to raise barriers to entry, thusweakening their own marketcompetitiveness, which lead to poor resultsin the long term. All of these issues areimportant for studies of economic policiesadopted in developing countries (Wan-WenChu, 2001: 67).

Differing from the diverse studies ofEast Asian countries such as Taiwan, Japan,and South Korea, on official organizationand industry development, relevant issuesbetween the state and industrial policies inSoutheast Asian countries are seldomfocused. This study discusses the policiesfor the automotive industry in Malaysia andThailand because both of these developingcountries have been eager to upgrade theirdomestic industrial base by developing the

car sector (Rasiah, 1999). However, despitesharing a number of similarities in theirdevelopmental backgrounds and withgovernmental organizations taking aleading role in the industry, they have alsodiverged and chosen relatively differentpaths to further development. Malaysia hasadopted its automotive industry as anational industry, with an “independentdevelopment” strategy applied to establisha national brand, whereas Thailand haschosen to cooperate with international carmanufacturers and adopted the “dependentdevelopment” strategy, which has made itsdomestic automotive industry part of theworldwide supply chain. The results ofthese two strategies show that the“independent development” of Malaysiahas yielded fewer benefits (Fuangkajonsak,2006: 1-3).

Examining the development of theautomotive industry with the developmentof politics and economics in countries canobtain a clearer picture of the relationshipbetween the state and industrialdevelopment. This article does not focus onthe theoretical study of specific issuesrelated to developing countries, butanalyzes how different historical systemsresult in different strategic choices anddevelopmental effects by integratinginternational and domestic political andeconomic factors ( Abbott, 2003). Althoughindustrial development in developingcountries relies on governmentintervention, the economic and politicalbackground of each country affects theirselection of specific strategies: namely, thestrategic choice between the “independentdevelopment” of Malaysia and the“dependent development” of Thailand;then the “politicality” of the automotiveindustry in Malaysia intervened with the“follow-the-market” policy. The results of“strategic selection” and “politicalintervention” are the two main reasons thisarticle concludes that the development of

Journal of ASEAN Studies 57

the automotive industry in Malaysia hasbeen inferior to that in Thailand.

Theoretical Study: The state, industrialdevelopment, and automotive industry

policies.

The State and Industrial DevelopmentScholars typically discuss the

developmental patterns of a nationalindustry from two perspectives. Under agood economic environment, scholarsfollowing neo-classical economics believethat industry grows spontaneously with acomparative advantage. In their view,competition should be free and open at thestart of an industry to allow privateinvestors to allot resources based oneconomic rationality because this is bestable to raise competitiveness (Balassa, 1988:27-57; Bhagwati, 1988: 27-57). Scholars ofliberalism accept this view (Kruegert, 1993).The East Asian Miracle: Economic Growth andPublic Policy, published in 1993 by theWorld Bank, is a typical work from thisschool (Stiglitz and Shahid, 1994). Its mainconclusion was that giving up market pricecontrol is essential when hoping to developindustrial competitiveness in transformingagriculture in developing countries.

However, scholars from the school ofdevelopment economics have raisednumerous doubts of the neoclassicalapproach (Fishlow, 1994; Lindauder, 1994:12). Some make a case for the so-called“Dependency Theory,” which proposes thatinternational factors, particularly thepolitical and economic power fromhegemonic countries, such as the UnitedStates, play an active economic role indeveloping countries. This type ofdevelopment is known as “inviteddevelopment.” Other scholars state thateconomic progress is not mainly caused by“market” and “internationality.” They donot believe that economic development in

developing countries, particularly EastAsian countries, should ascribe togovernments remaining neutral, and theyalso criticize the World Bank report forneglecting the importance of the state inindustrial development.

These scholars offer an extremelydifferent explanation from neoclassicaleconomics (Jomo, 1994): 461-508). Forexample, Johnson introduced a concept of“developing-type country” for Japaneseindustrial research in 1982, which statedthat industrialization in the so-called NewNations is related to the great promotion ofeconomic development by the state(Johnson, 1982; Shumpei Kumon and HenryRosovsky, 1972: 109-141). Taking SouthKorea as an example, Hasan claimed that itssuccessful economy was based ongovernment intervention. Hasan also stated,“The economy in South Korea relies on theoperation of private enterprises that are infact directed by the central government. Thestate not only establishes policies and rules,but also dominates the economy bycontrolling market mechanisms, and thushas a critical impact on all entrepreneurialdecisions (Hasan, 1976).

Those scholars who support“Developmental State Theory” think thatindustrial development in developingcountries relies on intervention andprotection from the state. This authorizesthe government to control the production,allotment, and price of goods to reach thebest arrangement of resources (Kuckiki,2007: 3-6). They believe that despiteliberalism aiding industrialization, the lackof a market mechanism might lead to anenvironment that increases the risk toindustry and adversely influenceproduction. With insufficient privateinvestment and limited resources, selectivegovernment intervention becomesnecessary for rapid industrialization (Wan-Wen Chu, 1997: 99-100). These ideashighlight the following two phenomena for


the relationship between the state andindustrial policies:

1. The state provides necessaryproduction factors: To facilitateeconomic development, thegovernment commands the financialsystem to finance industries forupgrading or expansion. Thesefunds are typically preferential loanswith interest rates that aresubstantially lower than the marketrate, and are helpful for industrialgrowth.

2. The state launches policyintervention to protect industries: Atthe initial stages of development,industries are typically unable tocompete with foreign firms;therefore, to encourage industrialdevelopment and expand exporttrade, the state provides supportwith preferential tax policies andwork to limit competition (Freeman,1982: 90-112).

Industrial policy and automotive industry policyAutomotive industry has been an

important issue for scholars involved inresearch on “the State” and “industrialpolicy” in developing countries (Jenkins,1987; Jenkins, 1995: 625-645; Doner, 1991).Many developing countries, such as Brazil,Mexico, South Korea, and previouslyTaiwan, have attempted to make theautomotive industry the motivator ofindustrialization. However, for somecountries (such as Taiwan), suchintervention has proved unsuccessful in thecar industry and needs further research(Jenkins, 1995: 642). The application ofautomotive industry technology oftenexpands to other industries, thuscontributing greatly to the nationaleconomy by promoting technologicalabilities, increasing employmentopportunities, and revenue (Dicken, 1998:

316; Humphrey, 2000: 245-271). Theautomotive industry belongs to a highvalue-added industry, which is also acapital-intensive and technology-intensiveindustry. The production process involvesupstream industries such as steel,electronics, and plastic industries, and hasgreat influence on downstream industriessuch as marketing, service, maintenance,insurance, and finance industries(Konosuke, 1993). Therefore, based on thegoal of industrial development and politicaland economic backgrounds, many countriesemploy various policies, such as “Limitedlocal content rate,” “Energy consumptionstandards,” “Limited auto import tax,”“Limited import quantity,” “Importquotas,” and “Import SubstitutingIndustrialization Strategy,” to fulfill thepurpose of policy intervention in the autoindustry Rasiah, 1997). Scholars normallydivide automotive industry developmentinto four stages:

1. Importing Completely Built upvehicles (hereafter referred to asCBU)

2. Semi-Knocked Down (SKD) andCompletely Knocked-Down(hereafter referred to as CKD)

3. Full Assembly4. Manufacturing

National intervention has three goals inthese stages (Fitzgerald eds, 1995): First, toestablish the industrial scale. The statenormally assists local enterprises toestablish an industrial supply chain topromote local production of keycomponents through an “importsubstitution” policy. Second, to help theautomotive industry transform through the“assembly,” “semi-assembly,” “fullyassembled,” to “manufacturing” stages,which requires that the rate of locally madeparts must reach certain percentages. Third,the state becomes the driver of industrial


internationalization. When the localautomotive industry has the capacity tomanufacture a whole car, the state can helpthem export products to other countriesthrough consolidation, production control,and a unified development model. The finalgoal is for local firms to be able to set upproduction plants in other countries andform transnational automotive groups.

During the transformation process from“assembly” to “manufacturing,” the statenormally has two choices, “dependencydevelopment” and “independentdevelopment”. First, the dependencydevelopment mode is a way to increaseindustrial competitiveness that relies onforeign technology and fund of funds.Therefore, it is necessary to open domesticmarkets to attract foreign investment-ledindustrial development. This typicallymeans that after Transnational AutomotiveCorporations (TNCs) obtain a license, theyset up local assembly plants and helpdomestic enterprises establish an industrialscale of component manufacturing. Forexample, local firms in Mexico, Brazil, andSpain were all aided by multinationalcorporations and thus able to develophighly efficient supply chains to then buildan internationalized automotive industrywith some areas of comparative advantage(such as market, location, and labor force).

Second, the independent developmentmode is a policy that can raisecompetitiveness of the local automotiveindustry by relying on the development of amonopolistic market, with the supply chainformed by local investors and enterprises.For example, South Korea relied on its ownstrength to develop an automotive industry,gradually building up R&D capabilities anda local brand.1

1 Taking South Korea as an example, the AutomotiveIndustry Promotion Law was passed in 1962. Autoimports were prohibited and large-scale enterpriseswere chosen as the main participants of theautomotive industry. South Korea thus became the

These two approaches have bothadvantages and disadvantages (See Table1).

Based on this discussion, this researchmakes the following analysis: Because of thelack of market mechanisms and limitedresources, to accelerate industrialization,developing countries rely on stateintervention as a protection measure;therefore, selective intervention isnecessary. Furthermore, the automotiveindustry plays a major role in promotingindustrialization in developing countries.National intervention has the followingthree targets: first, to establish thefoundation of the industry; second,transform the industry from “componentassembly” to “manufacturing;” third, thestate becomes the driver of industrialinternationalization. Moreover, industrialinterventions do not necessarily reach thegoal of nurturing the automotive industry.Considering whether the industry could beself-reliant after receiving protection, and ifthe benefits outweigh the social costsproduced in the protectionist period, isnecessary In addition, how will a protectedindustry eventually adapt to a more openinternational market?

world’s key auto production base and the fourthlargest auto production country in a short period.


Journal of ASEAN Studies, Vol. 1, No. 1 (2013), pp. 55–82© 2013 by CBDS Bina Nusantara University and Indonesian Association for International RelationsISSN 2338-1361 print / ISSN 2338-1353 electronic

Table 1: Analysis of Different Automotive industry Development Approaches

Approach Advantages Disadvantages

Dependencydevelopment

Smaller financialburden on thegovernment

Less pressure on theopen market

The automotive industry isdominated by foreign capital

More difficult to develop theeconomic scale of mass

production Cannot bring about the growth

of related industries

Independentdevelopment

Protection brings massproduction

More likely to supportthe growth of related

industries Can use the homecountry’s resources

Greater financial burden on thegovernment

Over-protection cannot respondto pressure from trade

liberalization

Source: Organized and rewritten by the author, based on Rashid, 2006.

Establishment of Malaysia’s automotiveindustry

Establishment of the automotive industryMalaysia’s automotive industry was

established in 1963. Under the ColomboPlan, the Malaysian government formulateda localized production policy for theautomotive industry. In 1964, the Malaysiangovernment set out a policy of promotingvehicle assembly and localized componentproduction, and thus prohibited the importof completely built vehicles andimplemented localized production. TheMinistry of Trade and Industry founded theMotor Vehicle Assemblers Committee(MVAC), responsible for reviews of relatedinvestment. Consequently, companiesengaged in the import of CBU had tomanage complex import processes and payhigh import taxes, and thus the import ofassembly cars grew very rapidly (Torii,1991). Certain restrictions were employed,such as an import duty on CBU or control ofthe auto dealer by license renewal twice ayear.

In 1967, the Malaysian governmentapproved the establishment of six autoassembly plants. In the same year, it passedthe Investment Incentive Act to encouragemore assembly cars to use locally madeauto parts. At this early stage, assemblyplants were established by joint venturesbetween European manufacturers and localenterprises, and the assembled vehicleswere mainly European and Japanese cars,with the latter coming to dominate theMalaysian car-assembly market in the1970s.

Although Malaysia hoped to promotethe growth of the local componentproduction industry by increasing the levelof local manufacturing, because ofnumerous assembly manufacturers anddifferent vehicles needing variouscomponents, it was impossible to conductmass production, and thus the productsproduced did not have any price advantage.To elevate the quality of locally madecomponents, the Malaysian governmentproposed the Mandatory Deletion Programin 1979, to weed out unqualifiedmanufacturers, simplify production, and


increase industrial competitiveness.However, the Japanese-based group offoreign car manufacturers and Chinese-Malaysian investors still controlledautomotive assembly, componentproduction, and marketing. Therefore, theMalaysian government began to considertransforming its assembly-oriented industryinto a car manufacturing one.

Homemade vehicle plans andinternationalization of the automotive industry

The transformation of Malaysia’sautomotive industry began in 1982, whenPrime Minister Mahathir announced thehomemade vehicle production plan, whichwas controlled by The Heavy IndustriesCorporation of Malaysia Berhad (HICOM),the group responsible for implementing thecountry's National Heavy Industries Planand Industrial Master Plan Project (IMP).These actions were taken in hopes ofleading the automotive industry into theself-development mode.

To reach this goal, HICOM chose tocooperate with Japan's Mitsubishi Motors toestablish PROTON Motors (perusahaanotomotif). HICOM held 70% of the shares inthis company, and Mitsubishi Motors hadthe remaining 30%. At first, PROTON wasonly responsible for vehicle assembly, butwith government support, it graduallybegan to take charge of design, mechanics,logistics, and marketing. In 1985, PROTONSAGA launched its own brand car, SAGA.In the mid-80s, Malaysia underwent aneconomic crisis caused by the oil marketcollapse, existing markets re-shuffled, andPROTON became the leading brand in theMalaysia auto market (Wad, 1999).

The state of Malaysia and Automotive industryThe form of the state, its structure, and

developmental strategy have an obviousconnection to its interaction with civilsociety. In the social structure of Malaysia,

conflicts among ethnic groups are closelyrelated to industrial policy (Soong, 1996). In1969, because of economic inequality, theso-called “513 race riots” broke out andbecame an important turning point in theeconomic development of Malaysia.2

Afterwards, the Malaysian governmentproposed its New Economic Policy (NEP) in1971, developed a technocrat bureaucratauthoritarian regime, and directlyintervened in economic developmentthrough the “Kuota” (quota) system toreduce economic inequality between ethnicgroups.

The new economic policy was based onthe concept of “National Capitalism,” andtried to raise the proportion of the indigenousMalay Group” (or Bumiputra), an ethnicgroup that participated in the economy,3

thus promoting the ethnic redistribution ofwealth, and relieving conflict. Thedevelopment mode of national capitalism inMalaysia in this period was state-driven,with the government directly intervening inthe market (Soong, 1996).

The state during this period primarilyfocused on the automotive industry andconsidered it the national industry of

2 Malaysia's three main ethnic groups are Malays,Chinese, and Indians, and the respective proportionsare approximately 62%, 30%, and 8%. Most scholarsthink “Racial communitarianism” is the maincharacteristics of Malaysia. See Samuel C.Y. Ku,Government and Politics in Southeast Asia, (Taipei:Wunan, 1995), p.71. In the election of May, 1969,Malaysia's ruling coalition suffered defeat, whichcaused a series of racial conflicts, claimed 196 lives,and wounded 439. The Malay ruling elite believed thefundamental reason was long-term conflicts, unequalpolicy, mistrust, opposition, and ethnocentrismbetween Malay and Chinese. See B. T. Khoo, TheParadoxes of Mahathirism (New York: OxfordUniversity Press, 1995), pp. 52-54.3 Bumiputra originates from Sanskrit, which meanssons of the soil. According to the constitution ofMalaysia, it refers to the Malay community inMalaysia and the minority groups in Sabah andSarawak.


Malaysia.4 Malaysia’s automotive industrydevelopment started with car assembly(1963-1982), and then Mahathir promotedthe Homemade cars Plan in 1982 andencouraged the local automotive industry towork on exports. The aim of this plan wasto improve the low domestic rate and alterthe industrial structure, which wasdominated by ethnic Chinese investors. Inan attempt to lead private sectorinvestment, the state of Malaysia usedvarious strategic industrial policy tools,such as tax incentives and subsidies,preferential bank loans, market protection,government orders, and technologydevelopment to develop a strategicindustrial policy (Camilleri, 2000).

To ensure smooth development of itsdomestic vehicle plan, the state of Malaysiainstituted a series of industrial policyinterventions, including the followingactions (Gustafsson, 2006):

1. Increased import tariffs oncompletely built vehicles andcomponents;

2. Implemented quotas for importedcars;

3. Encouraged foreign capital toparticipate in domestic car programs

4. Offered production subsidies todomestic auto parts manufacturers,lowered the price of componentsfrom 10% to 12%, increased tariff onimported components, andprolonged items tax relief, so thatthe price of homemade vehicleswould be lower than that ofimported cars of the same standard

5. Encouraged domestic carmanufacturers to export vehiclesand auto parts (especial OEM parts)to ASEAN countries, and used the

4 Automotive Federation of Malaysia (AFM),“Submission of AFM on the Industrial Master Plan,”in The ASEAN Motor Industry in Economist IntelligenceUnit (KL: EIU, 1984), p. 1.

export channels of technicalcooperation plants to sell them toother Asian countries.

6. Offered civil service low-interestloans to purchase domestic cars.

With the Homemade Cars Plan to buildup the brand PROTON, Malaysia employedthe independent development strategy in anattempt to build the industry through stateprotection, which was initially effective. In1989, PROTON began to export vehicles toother countries. From the latter 1980s to theearly 1990s, the domestic market share ofPROTON SAGA models was nearly 45%.PROTON merged with Lotus, a leadingBritish brand, in 1997, and became the focusof the international automotive market. Inaddition to PROTON, the second domesticcar, PERODUA, was also developed withstate support in October 1992, with the aimto provide a large-scale supplier for thespare parts market. In its heyday, becauseof the automotive group formed byPROTON and PERODUA, the supply chainhad 350 chain-related companies, with atotal investment of RM 4.6 billion,employing more than three million people,and producing 6,000 auto parts, nearly RM20 billion worth. PROTON has not onlybecome the largest brand in the Malaysiacar market, but also the only domesticallymanufactured car brand in an ASEANcountry.

Establishment of Thailand’s automotiveindustry

Contrasted to Malaysia, the industrialdevelopment of Thailand was led by foreigncapital and the private sector, and the statedid not participate as an active leader. Inthe case of the automotive industry, theThai government mainly cooperated withmultinational corporations (MNCs),offering various incentives to encouragethem to build production bases in Thailand.


Local enterprises produced spare parts andbecame peripheral industries.

The development of Thailand’sautomotive industry is divided into fourstages: first, the establishment stage (1961-1970), focusing on creating productioncapacity; second, the national regulatoryperiod (1971-1989), focusing onstrengthening production and furtherlocalization; third, and fourth: liberalization(1990-now), focusing on full liberalizationand export promotion, in response to theliberalization trend of world trade.

The establishment period (1960-1980): importsubstitution policy

The automotive industry in Thailandbegan in the 1960s, following the period inwhich all cars were imported. The first autocompany, Thai Motor Industry Company,was established in 1961. The next year, TheOffice of the Board Investment was set upand offered many preferential terms for theautomotive assembly industry. Industrialdevelopment can bring economicdevelopment; therefore, the state began tonurture the domestic automotive industry,hoping to cooperate with European andJapanese manufacturers to establish anindustrial base. In this stage, the state ofThailand offered foreign investors thefollowing preferential terms (Fujita, 1998):

1. Fifty percent reduction in importtariffs on completely knocked-downvehicles (CKD) for five years;

2. Five-year joint venture income taxrelief;

3. Free remittance of foreign exchange;4. Free flow of capital and technology

in Thailand

After implementing these preferentialterms for industrial development, thenumbers of car assembly plants rapidlyincreased. In 1967, the state of Thailandestablished The Federation of ThaiIndustries, which took charge of integrating

and planning Thailand's state-led industrialdevelopment. At that time, Thailand lackedindustrial experience and local personnelwho were good at management, and thusneeded help from foreign investors andfirms. Therefore, during the early days ofthe automotive industry, the state allowedmultinational automotive groups tocooperate with local investors to form jointventures.

Those assembly plants that weregranted privileges from the state enjoyedlower tariffs for whole vehicle components.However, importing large quantities ofcomponents led to serious payment deficitsin Thailand. This problem became moreapparent in the late 1960s, and thus in 1969,the state ceased establishing automanufacturing companies under the adviceof the Parliament Automotive IndustryDevelopment Committee, reexamined thedevelopmental direction of the industrialsector, and changed to nurturing thedomestic industry by “import-substitutionindustrialization.” To ensure industrialautonomy, the Ministry of Industry (MOI)announced a comprehensive reformprogram for the auto industry in 1971,which required that local assembly vehiclesuse at least 25% locally made components.

The policy of economic nationalismupheld by Prime Minister ThanomKittikchorn was the main reason for thischange. Thanom tried to implementnational capitalism to revitalize industry,avoid economic exploitation of foreigncapital, and achieve the modernization ofThailand. He believed the state should leadin the development of the automotiveindustry through working with domesticinvestors and The Federation of ThaiIndustries, and help local producerscompete against imports throughprotectionist policies.

To strengthen the development of localindustry and reach an enhanced economicscale of production, in the 1970s, the state of


Thailand restricted the number of domesticassembly car models and further promotedlocalization, which aided the developmentof the component sector (Fujita, 1998). TheThai Auto-Parts Manufacturers Association(TAPMA) was established in 1978 andserved as a mechanism for industrialintegration and development of thecomponent manufacturing industry. In thesame year, the state of Thailand announcedthe prohibition of whole vehicle import(CBU) and increased tariffs on importassembly (CKD) as the first step to protectthe domestic automotive industry. Underthese measures, the state ceased grantingproduction privileges and increased therequired proportion of domestic productionparts, gradually increasing the number oflocal component manufacturers.

The relaxation period (1980-1989)Following the second oil crisis in 1979,

the prices of agricultural products inThailand fell and caused heavy economiclosses. In the hope of obtaining loans fromthe World Bank, and facing pressure frommultiple forces in society and multinationalcorporations, civil society groups, led by theJoint Public Private Consultative Committee(JPPCC, established in 1981), required achange in economic policies in Thailandfrom import substitution to export-oriented.This change had a significant influence onthe development of the automotive industry(Abdulsomad, 2003). In 1982, Thailand frozethe 1978 “Ratio of Origin” requirement. Inaddition to policy transformation, the stateof Thailand also hoped that the automotiveindustry could develop a key competitiveadvantage, and thus focused on pick-uptrucks as the main product, and worked toposition the nation as the global productioncenter for such vehicles.

To increase the use of local components,in 1984, the government announced a jointproject between Peugeot France and localenterprises, known as the Domestic Car

Manufacturing Project (Kesavatana, 1989).The plan projected that 95% of Thai carcomponents were to be locally produced.However, because this might have caused asignificant loss of tariffs for importedcomponents, several interest groups andgovernment agencies opposed this plan,which ultimately suspended the domesticcar project.

After 1985, Thailand's automotiveindustry underwent several significantchanges. The “Plaza Accord” forced theappreciation of the yen,5 and Japaneseenterprises needed to move overseas tolower-cost locations, causing Thailand tobecome the first overseas investment choicefor the Japanese automotive industry.6Taking this opportunity, the state ofThailand offered increasing tax concessionsto Japanese-based multinationalcorporations, and created an environmentthat was more conducive for theirinvestments. These industrial liberalizationmeasures caused foreign investment (FDI)to rise. Increased foreign capital maintainedThailand’s economic growth rate at 9% onaverage, causing the rise of a middle class,which increased demand in the domesticautomotive market. The rising middle classand the development of a partiallyliberalized automotive industry forced the

5 September 22, 1985, United States, Japan, Britain,France, and West Germany, the five industrialcountries, gathered at the Plaza Hotel, New York, fora secret meeting. Their finance ministers and centralbank presidents signed the famous “Plaza Accord” toundertake joint intervention in the foreign exchangemarket, forcing the U.S. dollar down against theJapanese yen, German mark, and other majorcurrencies in an orderly manner, to resolve themassive U.S. trade deficit, which led to significantappreciation of the Japanese yen.6Thailand particularly welcomed Japanese capital,mainly because Japanese investment was labor-intensive and could create more job opportunities.Moving the major market to a foreign country (i.e. re-exports) could reduce the exploitation potential by theJapanese market.


state to consider reopening the market forimport cars.

The export-oriented period (1990-2000)Under the ruling of reformist Prime

Minister Anand Punyarachun, the state ofThailand gradually abolished therestrictions on the automotive industry inthe 1990s by partially reopening the marketfor imported vehicles, and substantiallylowering tariffs on imported cars andcomponents. In 1993, the Thai governmentannounced the Export Promotion Project ofthe Automotive industry, and abolishedrestrictions on setting up auto assemblyplants by foreign firms, transformed thedomestic market-oriented industrial policyto an export-oriented one, and boostedexports to deal with increasing importcompetition. These changes led the growthrate of automotive manufacturing tobecome the highest in the world from 1990

to 1994, resulting in 20% annual growth ofthe domestic market.

The Thai government relaxed controlson the automotive industry because thestate sensed the necessity to closely followthe trends of technological development inmajor producing countries, such as Japanand Europe, to reach its internationalizationgoal. In view of this, it implemented anopen industry policy, and chose thedevelopment mode of cooperation withforeign investors. The Thai governmentthus developed a series of measuresincluding reduced tariffs, eight years ofcorporate income tax exemption, offsettingimport taxes on machinery and equipment,material import duty rebates, and furtherrelaxations of trade restrictions.

Table 2: Comparison of Thailand’s import tariffs on CBU and CKD (1986-2000)ModeYear

Sedan under2300cc

Sedan over2300cc

One-ton Pick-up truck

Big truck

1986199119921994199719992000

CBU CKDCB

UCK

D CBU CKDCB

UCK

D180604242808080

112202020202033

30010068.568.5808080

112202020202033

120606060606060

30202020202033

40404040404040

10101010101010

Source: Based on data obtained from the Board of Investment, Thailand, and the ThaiEmbassy in Japan,

The Period of Embracing Free Trade (2000-now)The internationalization of Thailand’s

automotive industry began in the 1990s.After the financial crisis of 1988, Thailandcontinued an active policy of opening itseconomy.7 To mitigate liquidity problems, it

7 The Asian financial crisis of 1997 hit the Thai

adopted deregulation to allow foreigninvestors to own 100% of their Thaisubsidiaries. This policy could solve theovercapacity problem caused by a shrinking

economy and caused great damage to the automotiveindustry, causing a sharp fall in the domestic andregional market demand, and thus shrinking carproduction by 40%.


domestic market by increasing exports.However, it was a response to globalizationand the need for greater regional economicintegration.

After joining the World TradeOrganization (WTO) in 2000, Thailandabolished its rules of origin on vehicle andcomponents, and allowed multinationalcompanies to set up wholly ownedenterprises. Consequently, foreign investorsdominated the auto assembly industry,while local firms were engaged in thesupply chain related to spare parts.

In addition to the WTO norms, regionalintegration in the ASEAN Free Trade Area(AFTA) accelerated the liberalization of theThai automotive industry. The AFTA normslowered import tariffs and non-tariffmeasures to between 0% and 5% in 2003 forold member states of the ASEAN (Brunei,Indonesia, Malaysia, Philippines, Singapore,and Thailand). The automotive industry inThailand was included in the list of fivemain industries by the Board of Investment(BOI) that the government used to attractmore multinational manufacturers to buildplants in Thailand. The ASEAN IndustrialCooperation Scheme (AICO) states thatwhen the auto parts manufacturingindustry of a country meets the standard ofusing parts that are 40% locally made, it canthen enjoy a 0% to 5% special tariff withinASEAN. Thailand implemented aliberalization policy and its tariff reductionprojects met the time frame and standards

set out in this free trade agreement.Therefore, since 2003, Thailand has reducedtariffs on imported cars to 5% (Hsu, 2002).

The dependent development mode ofThailand’s automotive industry led to thefollowing results: its automotive industryranks as the fifth largest export industry; asa car exporter, Thailand ranks the firstamong ASEAN countries and the third inAsia after Japan and South Korea; andThailand made cars are sold in the UnitedKingdom, Canada, and Australia. Thailandalso has the largest automotive assemblybase in Southeast Asia, and has become oneof the top ten auto manufacturers; it has 16domestic car assembly plants and 1,800component production plants; and after2005, it has produced more pick-up trucksthan any other country worldwide (Zhao,2006).

Thailand’s auto industry policy

In view of Thailand’s auto industrypolicy, the Ministry of Industry has beenresponsible for its control and adjustmentand the secondary Automotive IndustryAssociation has been in charge of setting upspecific industrial policies and developmentplans. The following chart shows theindustrial policies implemented from 1962to 2000 to nurture the Thai automotiveindustry.

Table 3: Thailand's auto industry policiesYear Industrial Policy

1962Implemented an automotive assembly industry-promotion

system (five-year reduction in import tariff on CKD to 50%, five-yearreduction of corporate tax).

1967Increased the import tariff on whole vehicles to 60%; lowered the

import tariff on CKD for sedans by 30%, special trucks 20%, andtrucks 10%.

1975 Implemented 25% localization.1978 Prohibited auto imports, reexamined import tariff rates, and


prohibited the establishment of car assembly plants.

1980Began domestic car parts design (achieving the goal of 50% in

1983).1982 Froze the ratio of automotive localization at 45%.

1983

Proposed a new auto industry development policy, the goal oflocalization, with sedans at 54% in 1987, special trucks at 62% in1988, and included the norms for new models, that imported body orengine parts and gearboxes only have one selection.

1985Allowed vehicle importation with over 2.3 L displacement,

although the import tariff was 300%.1986 Small commercial vehicles must use domestic engines.1989 Implemented the use of 20% domestic engines.

1991

Allowed the import of vehicles with under 2.3 L displacement,reduced import tariff rate for sedans with over 2.3 L displacementfrom 300% to 100%, that for under 2.3 L displacement from 180% to60%, for bulk-type sedans from 112% to 20%, and bulk-type trucksfrom 30% to 20%.

1992

Changed import tariffs on whole cars, with sedan under 2.4 Ldisplacement falling from 60% to 42%, sedans with over 2.4 Ldisplacement from 100% to 68.5%, special trucks from 120% to 60%,including Value-Added Tax and the repeal business tax.

1993Abolished the restriction of setting up auto assembly plants,

allowed vehicles less than two years old to be used as taxis.1994 Implemented preferential tariffs on whole car exports.

1997

Abolished a unified price system for vehicles with under 1.6 Ldisplacement; repealed consumption tax on vehicles for less than tenpassengers and priced below 100 million baht. The Value-Added taxrate was increased from 7% to 10%, all import tariffs on vehicleswere raised to 80%. Excise tax on sedans and special trucks wasraised to 5%.

1998Relaxed the restriction on auto financing payment caps, which

were relaxed from 48 months to 72 months, and lowered the downpayment ratio of the total selling price from 25%-30% to 10%-20%.

2000 Repealed all requirements for auto parts localization.

Thailand chose the dependentdevelopment mode based on its attitudetoward foreign capital. Thailand hasadopted an open-door policy since 1885,particularly under the effect of Britishcolonial policy development, and thus thelong relationship between Thailand andtransnational corporations has been veryclose. Because of this, the early stage ofeconomic development in Thailand reliedon dependency and economic interaction,

formed in the context of having a “UK-core”and “Thailand-frontier.” Since 1950, thestate has acted to gradually improve theposition of Thailand in the internationaleconomic structure. Therefore, its continuedcooperation with foreign investors andmultinational corporations has enhanced itsdomestic industrialization, dependentdevelopment has become the key policy forindustrialization, and the relationship andinteraction between the state and


multinational corporations has also becomemore important (Soong, 1996).

In the 1970s, during the earlydevelopmental stage of Thailand’sautomotive industry, high tariffs andrestrictions of origin were used to protectthe domestic industry, while a limitednumber of car models were produced togain the economic benefits of scale.However, these protectionist measures didnot lead to the rapid development of thelocal automotive industry, because high carprices limited domestic demand, which wasnot conducive to industrial development.After the 1980s, the middle-class had grownconsiderably in Thailand, the stategradually lost its ability to lead industrialpolicy, and the government bureaucracylacked effective tools to undertake this.Therefore, in the developmental mode,opening and renewing cooperation withforeign investors, particularly Japanesemultinational corporations, becamenecessary (Heggard, 1998). Economicgrowth in the 1990s caused considerabledomestic demand for automotive, whichforced the government to open the marketto car imports and relax restrictions on carmodels. Hence, the automotive industry-investment promotion policy in Thailandattracted multinational auto manufacturersto set up plants in the country, expand thescale of the industry, and establish aregional production centre. After thefinancial crisis in the 1990s, the state turnedits industrial policy objectives toward theinternational market. Because joint venturesproduced most of the cars and components,through the market channels andinternational operating experience of theirinternational cooperation partners, Thai

firms acquired the ability to integrate withthe international market.

Similar to Malaysia, Thailand attemptedto develop a domestic car in the 1980s.However, because high import tariffsresulted in substantial revenues for thestate, this plan was cancelled under thepressure of domestic tax units. Theevolution of Thailand's automotive industrypolicy has shown that the Stateimplemented import tariffs and localizationas protection measures and set up majordevelopment models, limiting carproduction to assist main products inreaching market size.

Comparison of the development of theautomotive industry in Malaysia andThailand

Sales, production efficiency, and technologyMalaysia also began to develop its auto

industry in the 1960s; however, the differentdevelopment mode adopted achieveddifferent results to those in Thailand. In theinitial stages of their industries, vehicleproduction volume and sales in Thailandwere both less than those of Malaysia, withthe former implementing protectionistpolicies. However, since the adoption of anopen market policy in Thailand in 1990,both its production and volume not onlysurpassed Malaysia, but also entered theinternational auto market. In 2000, autoexports in Thailand exceeded sales in thedomestic market, and since 2004,approximately one third of all vehiclesproduced in Thailand have been for export.In contrast, the auto industry in Malaysiahas been substantially more limited andwith far fewer exports, shown in Table 4.


Table 4: Comparison of auto production and sales in Malaysia and ThailandYear Thailand Malaysia

Homemade carproduction

Domestic sales

Homemade carproduction

Domestic sales

1985 83,105 85,222 107,030 94,9991990 304,843 304,062 191,580 165,8611995 525,680 571,580 288,838 285,7922000 411,721 262,189 360,105 343,1732003 750,512 533,176 426,646 405,7452004 928,081 625,435 471,975 487,605

Source: Fuangkajonsak, 2006, p. 24.

Table 5: JAMA manufacturing capacity ratings for Thailand and MalaysiaItem Thailand Malaysi

aEngine High Low

Engine parts High LowElectronicsystems

High Standard

Braking system Standard HighInterior High Low

Source: Fuangkajonsak, 2006, p. 45

Table 6: Price comparison of the same vehicle in Malaysia and ThailandModel Price in

ThailandPrice in

MalaysiaRemarks

NISSAN X Trail 120,909 136,030 RM unitscalculated on the

Thai baht 1:11(Pricein 2006)

TOYOTA Camry2.0E

105,000 149,149

HONDA Civic 2.0E 92,727 127,465Source: Organized from brand websites in both countries.

At the technical level, research by theJapanese Automotive ManufacturersAssociation (JAMA), indicates that the autoindustry in Malaysia performs worse than

Thailand for industrial technology, exportcapabilities, product cost, manufacturingcapacity, and other measures of industrialcompetitiveness, shown in Table 5.

When comparing the same models, theprices of imported cars in Malaysia aremore than 10% higher than in neighbouringcountries, shown in Table 6. In contrast,driven by the State and foreign capital,

Thailand has earned the reputation of beingthe Asian Detroit. Compared withThailand's “dependent development,”Malaysia’s “independent development” hasled to a lack of industrial competitiveness.

From an economic point of view,researchers believe that the competitiveadvantage of the automotive industry inThailand lies in the following elements: the

investment of foreign capital; emphasis ontechnology transfer from foreignenterprises, and training local technical staffto build up the industrial development


base; and support from the State encouragescar exports.8 In contrast, the literatureprovides six main reasons for the decline ofthe Malaysian auto industry: (1) Increasedcompetition in global markets, making itdifficult for domestic companies to enterinto direct competition with multinationalcorporations (MNCs)9; (2) Increasinglystringent new vehicle standards in theinternational automotive market, of whichmost small factories cannot afford therelated R&D costs; (3) A new era of high oilprices, which has reduced Page: 70consumer demand; (4) A globalizationtrend, which has led to the concept of a“World Car,” of which small regional firmscannot compete with such approaches; (5)Improved economy in Malaysia, resulting inconsumer desire to buy foreign cars10; and(6) An already saturated domestic market inMalaysia. Although Malaysia has promotedits domestic cars as an export brand, thecountry's limited market cannot achieve theeconomies of scale needed to reduce costs.The financial crisis of 1997 shrank thedomestic market, and hurt the industrialenvironment for the development ofMalaysia's domestic auto industry(Holland, 2001).

Although Malaysia built up theindustrial scale of its automotive industry,and the government continued itsintervention and protection, it neverconsidered the issue of industrial self-reliance. State protection caused lazinessand complacency in production and

8 Jing Liu, “The Development Status and Prospects ofThailand's Automotive Industry,” Auto IndustryResearch, No. 6, 2005, pp. 1-3.9 International auto plants brought the followingproduction modes and technologies, such as: “Just InTime” (JIT), global logistics, better component supplyrelationships with upstream and downstreamsecondary and tertiary level plants, and outsourcing,which depends on a great market size.10 To date, Proton's production has still not reachedeconomies of scale, and only a limited range of carmodels is offered.

operations, and managers lacked the powerto seek cost minimization, which led to lowproduction efficiency. Compared withMalaysia, the Thailand automotive industrycourted multinational corporations, whichnot only brought capital, but also advancedtechnology and management methods. Thisis why a more open attitude is consideredthe main reason for the positivedevelopment of Thailand's automotiveindustry.

Response to free tradeIn addition to technology and sales

issues, the bigger challenge for theautomotive industry in Southeast Asiancountries comes from international pressurerelated to removing market protection.Besides the World Trade Organization, thecooperation of automotive industries inASEAN countries, under the concept ofeconomic cooperation, has become a keyelement in the region's industrialcooperation plan. ASEAN countries thusbelieve that technical cooperation and tradeliberalization can help auto part and vehicleproduction companies achieve economies ofscale, and thus reduce production costs. Ifthe automotive industry in ASEANcountries is unable to cooperate actively toreach greater market size, it will be unableto increase its industrial competitiveness.The cooperation of regional industries canreduce the development costs of sharedcomponents, and help expand overseasmarkets.

However, under economic cooperation,the removal of trade barriers would causethe automotive industry in ASEANcountries to face challenges related togreater international competition, theliberalization of production and sale, andindustrial repositioning and efficiencyimprovement. The auto industry inMalaysia had enjoyed protection in manyareas, and was thus adversely affected byASEAN’s cooperation plan, which lowered


tariffs on vehicle imports and removed the“approved permit” of non-tariff barriers,increasing the pressures related to free trade(Abdullah, 2006). To protect its automotiveindustry, the Malaysian government haspersistently entered it in the list of sectorstemporarily excluded from tariffs, and thusdelayed tariff reductions from 20% in 2005,to 0%-5% in 2008. The government replacedimport tariffs with excise duties, which

proved to be a more flexible approach toavoid much of the effects of the ASEANopen market policy and did not considerabolishing import licensing until the end of2010. These practices all violated the termsof the ASEAN economic cooperationagreement specification, and have beencriticized by other member states.

Table 7: ASEAN countries’ tariff reduction schedule for imports of fully assembledcars

Country 2002 2003 2004 2005 2006

2007

2008

2009

2010

Thailand 15% 5% → → → → → → 0%Philippines 20% 5% → → → → → → 0%Indonesia 5% → → → → → → → 0%

Malaysia Noreduction

Noreduction

Noreduction 15% 5% → → → 0%

VietnamNo

reductionNo

reductionNo

reductionNo

reduction20%

→ 20% 5% →

Source: ASEAN Automotive Integration: Private Sector Perspective, reference paper in the8th APEC Automotive Dialogue, Bali, Indonesia, 15-18 May 2006.

In contrast to the situation in Malaysia,the ASEAN Industrial Cooperation (AICO)agreement offers tax incentives toautomotive factories in this region, and oneof the conditions for receiving this aid isthat over 50% of the products must beexported (Jing, 2001). Thailand has thelargest automotive market and productionin Southeast Asia, and thus is the biggestpotential beneficiary of this policy. Based onthe concept of free trade, Thailand alsoincluded auto parts as the main tariffreduction item in its free trade agreementswith Australia, New Zealand, and India. Inaddition to having export advantages, theThai government also announced that, since2009, for small vehicles worth less thanUS$15,300, the excise tax would fall from30% to 17%. The main purpose for thispolicy was to develop an eco-car model asthe country's second industrial

development plan, following the successfulexperience of the plan focused on pick-uptrucks. Given these preferential terms, someimportant international manufacturerschose Thailand as their production base.Thailand also allows transnationalautomotive groups to fully own theirfactories, thus reducing the problem ofpatent violations. The ultimate goal ofThailand’s national industrial policy hasbeen to make it the global production centerfor pick-up trucks and eco-cars (Jian, 2008).

The developmental scholar R. H. Wade(2003), has noted that economicglobalization has changed the globalindustrial environment and forceddeveloping countries to face diversesituations. When the ability to engage inprotectionism and state interventionbecomes limited, the state must face tradeliberalization issues by adopting different


strategies to obtain further economicdevelopment. The threshold for a country’sautomotive industry to enter theinternational market is rather high, andwhen facing the challenges of globalization,Thailand has been more flexible andforward-looking, while Malaysia, due to itsprotectionist policies and the lack ofmultinational strategic alliances, has lost theopportunity to enhance competitiveness.

Response and Reflection: the PoliticalEconomy of the State and Industrial Policy

The Choice of Industrial Strategies:“independent development” and “dependencemode” for the automotive industry

The preceding discussion of thedifferent industrial development strategiesadopted by Thailand and Malaysia showsthat the State played an important role inthe automotive industries of both countries,and that both economic developmentmodes are state-led. Both countries hopedto develop an automotive industry with theaid of state intervention, and both achievedrapid establishment of industrial scale, withthe goal of industrial internationalization toexport their production to other countries.

The main difference between theindustrial policies of Thailand and Malaysiais the specific developmental strategyadopted: the former chose the “dependencemode,” while the latter, “independentdevelopment.” While Thailand’sdependence mode went through anindustrial protection stage involvingnational intervention, the purpose of thiswas not to replace, but rather promote, localenterprises and investment. The State thenchose to form a relationship of productionand technological cooperation withtransnational automotive companies. Thissituation is similar to what Wadementioned: transnational (automotive)groups that wish to invest in developing

countries not only consider the domesticmarket, but also aim to incorporate theindustrial base of developing countries intotheir global production and supply chains.The automotive industry in Thailand wasbuilt on the following basis: the state’s"interactional voluntarism” was combinedwith international and domestic capital toform a “triple-alliance,” and this created themechanisms needed for independentdevelopment.

The developmental experience ofThailand’s automotive industrydemonstrates how the government ofdevelopmental states can remainindependent and make the industry self-reliant after it has first been established andbuilt up. Scholars of developmental statespropose that even though state interventionor protection might cause rent-seeking andlaziness, a period of protectionism mightbenefit industrial development in the longrun. When facing pressure from a moreopen market, and finding that nationalintervention and other strategies could notprevail, Thailand amended its industrialstrategy to one of following the market, andthus was able to continue to maintainindustrial competitiveness. This approach issimilar to a more recent idea in nationaldevelopment theory, the State-marketcondominium approach, which does not seethe state and the market as opposed to eachother.

Professor Wan-Wen Chu noted thatalthough national intervention might help,it will not necessarily promote industrialdevelopment. An examination of howdifferent countries developed theirautomotive industries revealed that SouthKorea as one of the few successful cases thatundertook an independent developmentstrategy. Thus the question must be askedas to why this is so rarely successful. Theanswer is because the automotive industryin developing countries must rely on thelocal market to establish the production


scale. However, the domestic market islimited by the country's economicdevelopment, and manufacturers must thusfight in a highly competitive and rathersmall market. To achieve greater success,most domestic manufacturers choose tointroduce transnational capital, technology,and brands. Hence, most automotivemanufacturers in developing countries havecooperated with major firms from the U.S.and Japan, and have become part of theglobal network of large, transnationalautomotive groups. In contrast to Thailand,after the 1970s, Malaysia developed a moreactive form of national capitalism based onthe New Economic Policy and EconomicNationalism, which considered theautomotive industry as a national industry,and one that should follow the mode ofindependent development. However, thepolicy of protecting a national brand, in thiscase Proton, meant that the industry lost theopportunity to integrate with the globalmarket. The small domestic market couldnot create economies of scale, the state didnot change its policy from one of market-leading to following the market, and thus,the Proton project gradually declined. Thisshows that within the global systemstructure, it is difficult for industries indeveloping countries to undertake self-reliant development.

Finally, research in the field of politicaleconomics shows that so-called triplealliances, the combination of internationaland domestic capital, and the State, can beboth dynamic and transformative. Theexternal structure (competition amongtransnational corporations) and the internalstructure (national and local businessalliances) change over time and allow thefluctuation of forces, which affects the formof such alliances. However, although theremay be changes, as the studies of Arrighiand Drangel and Gereffi (1992) have shown,it is rare to maintain their status of aconsistent upward or downward structure.

In the world system, 95% of countries stillmaintain their original structure. Therefore,even though a triple alliance can betransformative, whether the automotiveindustry in Thailand can break thestructural relationship of the internationalpolitical and economic system, and movetoward complete self-reliance in theindustrial development, remains doubtful.

Political nature of the Industry: Nationalpolitical and economic structure and rent-seeking

Comparing the economic developmentstrategies of Malaysia and Thailand showsboth economic and political differences. Forsome developing countries, stateinvolvement in industrial policy is based onpolitical considerations, and thus industrialpolicy is an important tool forimplementing nationalism. As mentionedearlier, due to specific factors related tocertain domestic groups, the automotiveindustry in Malaysia was not fullyestablished based on economicconsiderations, and political factors becamean obstacle to its reform.

During development of Malaysia’sautomotive industry, Prime MinisterMahathir proposed a “domestic carproduction project” with the aim ofpromoting the businesses of local Malaygroups. Malay firms were thus a beneficiaryof this project, from which emerged the newrich class. This consolidated Mahathir’sleadership of both the United MalaysNational Organization (UMNO, Malaygroup’s ruling party) and Barisan Nasional(Malaysia's ruling coalition), andsuppressed Chinese-based oppositionforces. The state’s industrial policy becamea vehicle for arbitrary political andeconomic decision-making in Mahathir’s 22-year reign.

In brief, the automotive industrybecame an important means of maintainingsovereignty for the Malay community. This


is consistent with the criticism ofneoclassical economics of state interventionin industry. Further analysis of the Protonownership structure found that theshareholders were mostly the state orenterprises from the Malay community.This proves that in Malaysia's domestic car

protection plan, social outcomes were farmore important than profit. Therefore, eventhough the project was not economicallysuccessful, the state continued to support it,and reform was difficult to achieve.

Table 8: Proton ownership structure in 2005

Ranking ShareholderNumber of

shares％

Political andeconomic

background

1 KHAZANAH NASIONAL BERHAD210,484,69

338.32

%State-controlled

2EMPLOYEES PROVIDENT FUND

BOARD60,017,000

10.93%

Governmentcontrolled fund

3RHB NOMINEES (TEMPATAN) SDN.

BHD.PERTROLIAM NASIONAL BERHAD

35,676,680 6.50%National

PetroleumHoldings

4CIMSEC NOMINEES (TEMPATAN)

SDN. BHD.SECURITY TRUSTEE (KCW ISSUE 2)

24,250,000 4.42%Indigenous

government-ledinvestment bank

5 LEMBAGA TABUNG HAJI 16,820,427 3.06%Islamic funds,

based on a vastrubber plantation

6

CARTABAN NOMINEES (ASING)SDN. BHD. GOVERNMENT OF

SINGAPORE INVESTMENTCORPORATION PTE.LTD. FOR

GOVERMENT OF SINGAPORE (C)

14,185,300 2.58%

Singapore's state-controlled fund(foreign capital)

7 PERMODALAN NASIONAL BERHAD 8,838,000 1.61%

IndigenousEducation

DevelopmentFund

8

CARTABAN NOMINEES(TEMPATAN) SDN. BHD. AMANAH

SSCM NOMINEES (TEMPATAN) SDN.BHD. FOR EMPLOYEES PROVIDENT

FUND BOARD (JF404)

8,094,900 1.47%

MalaysiaEmployment

Fund

9 PERECOM INDUSTRIES SDN. BHD. 7,444,000 1.36%Malaysia

TechnologyGroup

10HSBC NOMINEES (ASING) SDN.

BHD. TNTC FOR SAUDI ARABIANMONETARY AGENCY

6,835,998 1.24%HSBC, Foreign

Capital

Source: Proton Holdings Berhad, Annual Report 2006.


As for the protection of the automotiveindustry, in addition to state regulation ofthe ownership structure and industrialsupply chain, the Malaysian policy that wasmost criticized by other ASEAN countrieswas the use of Approved Permits (AP) toprotect domestic assembly plants, and offermore opportunities for Malay enterprises toparticipate in the sales of imported cars. Asthe country's economy developed, thedemand for imported cars also increased,and those who had an AP could controlimport quotas, leading to politicalcompetition. Malaysia's industrial policyeventually evolved into chips-distributingpolitical favouritism, which weakened thecompetitiveness of external competitors(foreign car manufacturers) when they triedto enter the domestic market.

In contrast to Malaysia, by followingeconomic development policies and openpolitics, public and private sectors inThailand have transformed from arelationship of “Clientism” to “Partnership”since the 1980s. The industrial sectorimproved the effect of state policy, andindustrial policy accordingly adjusted toregime change. Before the 1980s, Thailandhad an authoritarian military regime, andpreferred the policies of state capitalism andeconomic nationalism. After the 1980s,Thailand adopted the industrial policy of aself-adjusting market, and supervision frompublic opinion and interest groups helpedthe automotive industry make adjustmentsin the direction of market liberalization andtransformation (Shen, 2004).

Differing from Thailand’s frequentcoups and lack of effective stateintervention, Malaysia has a strong stateand the ethnic Malay community hascontinued to dominate the political system,and lead the industrial policy formulated bythe State. The automotive industry appearsto have adopted “rent-seeking” behavior,the political effect of market intervention,

with political factors being the majorobstacles to industry transformation.Because of the political and economicstructure, the State (controlled by ethnicMalay communities), domestic capital(controlled by Chinese enterprises), andforeign capital could not build a cooperativerelationship and was not able to followThailand’s dependency developmentexample and form a triple alliance. Thecountry's economic policy and heavyindustry policy have deterred Chinesecapital from investing in the automotiveindustry, and thus impeded the capitalinvestment required for industrialtransformation (Lubeck, 1992). When non-economic goals became more importantthan economic ones, the lack of anadjustment to Malaysia's developmentstrategy in the face of the challenge ofopening up to international marketseventually leads to significant problemswith industrial development.

Conclusion

Comparing the automotive industries intwo newly industrialized Southeast Asiancountries, Malaysia and Thailand, thisresearch examines how, during the processof economic development, the State chose tointervene in industrial development, andhow it influenced the political andeconomic situation. As in many otherdeveloping countries, Malaysia has a strongstate and was able to use the New EconomicPlan and the National Plan of HeavyIndustry as policy tools to establish adomestic industry. Establishment of theautomotive industry in Malaysia was thusthe result of protectionist policies based onpolitical and economic reasons, consistentwith the ideology of “indigenous priority.”

Differing from Malaysia, the earlyautomotive industry in Thailand also chose


to employ market protection, and useimport-substitution as the developmentalstrategy. This research found twosignificant differences between Malaysiaand Thailand in how the State conducted itsindustrial policy. First, two differentindustrial strategies were chosen, namelyindependent development in Malaysia anddependency development in Thailand.Second, the political nature of the Malaysiaautomotive industry hindered itssubsequent industrial policy, and made itdifficult to adopt a policy of following themarket. In short, industrial development,particularly the automotive industry, hasbeen closely related to Malaysian politicaland economic characteristics.

In contrast, as the Thai governmentstated in its “Automotive Industry inThailand,” the country was able to have the

largest car assembly market among ASEANcountries and produce the highest qualityvehicles because it opened its domesticmarket and attempted global integration.The country has also had greater potentialfor market growth and a stable politicalclimate, and a state that supports free tradeand open investment policies. Thailandpossesses no ethnic conflict or national carprogram. With a more open attitude,Thailand has attracted more investmentsinto its automotive industry. However, thelack of ethnic problems does not necessarilymean that there is no political interferencein the industry, while the lack of a nationalcar program and greater liberalization donot necessarily mean that rent-seeking isnot a problem.

Table 9: Political and economic comparison of different developmental strategies used inMalaysia and Thailand

CriteriaAutomotive industry in

MalaysiaIndependent Mode

Automotive industry inThailand

Dependency Development

Key important dates in thedevelopment of the ofindustry

In 1962, the domesticautomotive industrywas first established

In 1982, the domesticcar production projectwas implemented.

In 1985, the firstdomestic car wasintroduced, to becomethe only domestic carbrand in Southeast Asia

In 1961, Thailand’sAutomotive IndustryCorporation wasestablished

In 1980, the importsubstitution industrialpolicy was implemented

In 1985, cooperation withJapanese capitalgradually relaxedindustrial restrictions

After the 1990s,industrial policy wasrevised to become moreexport-oriented

The Role of the State

A strong statedominated industrialpolicy and consideredthe automotiveindustry as a national

Industrial policy changedbecause of politicalchanges

After the 1980s, politicsbecame open and the


industry. Domestic carmanufacturers wereprotected by thispolicy.

The political regimeremained unchanged,and no major revisionsto the industrial policywere made

State adjusted theindustrial policy

With or without nationalbrand and specific models

Yes Proton and Perodua

No Focus on the

development of specificvehicles—, such as pick-up trucks

The relationship betweenthe industry and politics

The automotiveindustry protected thedistribution andemploymentopportunities of ethnicMalay individuals, andplaced restrictions onother ethnic groups.

Import licenses becamethe privilege of Malayindividuals

The industry relied onthe State and was notmarket-oriented

Industrial policy wasmore independent ofpolitical influence

The relationship withinternational carmanufacturers(multinational enterprises)

The New EconomicPolicy and HeavyIndustry Policydeterred domesticChinese investors fromentering theautomotive industry

Limited cooperation inthe internationalmarket, and the Statedominated industrydevelopment

State, domestic, andforeign capital formed atriple alliance

Cooperated withmultinational enterprisesand employed industrialdivision of labour

Sales market

A high proportion ofdomestic sales, andthus the problem of asaturated domesticmarket

A high proportion ofexports, up to one thirdof production

The attitude toward Implemented tariff Tariff reduction since


ASEAN IndustrialCooperation and FreeTrade agreements

protection until 2008 Non-tariff protection of

import licenses wascontinued until 2010

2000 Support for industrial

cooperation and freetrade

Source: Organized by the author

Jenkin (1995) compared the automotiveindustry in Taiwan and South Korea andbelieved that the reason why the lattercould build up an independent automotiveindustry was because the State couldovercome pressure from the private sectorand multinational companies and gaincontrol of the industry. In contrast, the Statein Taiwan could not handle the conflictarising from integration of the domesticprivate sector and multinational companies,and it became difficult for the governmentto lead the industry, and thus it lost theopportunity to establish an independentautomotive industry. In short, the reasonsfor the success of South Korea's automotiveindustry are as follows: a strong state,highly distorted market mechanisms, andthe cooperation with a large consortia.

However, this research finds that theopposite situation holds in the countriesexamined. Specifically, although Malaysiahas a strong state, the projects conducted bystate-led enterprises have not helpedindustrial development, while Thailand,which followed an open market model,allowed multinational auto groups to enterthe domestic market, which resulted ingood industrial development. Why are theresults between this study and the earlierone so different? Jomo stated that thedevelopmental modes of newlyindustrialized countries in East Asia andSoutheast Asia differ. However, is thisrelated to a country’s relative position in thestructure of the global system? This remainsa question for future Southeast Asianpolitical and economic research.

Returning to the first discussion aboutthe relationship between the State and theglobal automotive industry, as global andregional supply chains were formed, theautomotive industry in developingcountries was increasingly affected by freetrade agreements, and it became necessaryfor them to choose between the strategies ofdependency development and theindependent mode. Intel's former CEO,Andrew Grove, in his letter to the WallStreet Journal stated: “What can Detroitlearn from Silicon Valley?” In the letter, hestated that when one of a country’sindustries encounters difficulties, they mustfigure out whether it is because of a fall incompetitiveness, or global industrialrestructuring. If the former, then nationalintervention would prove helpful, while itwould prove harmful in the latter condition,and even eventually cause the whole nationto lose its competitiveness (Grove, 2009).Grove further stated that the future of theautomotive industry, just as the division oflabor in the technology industry, isundergoing an ongoing restructuring froma vertical to horizontal mode. Therefore,future vehicles would thus be produced bythe assembly of standardized components.In this context, although many Asianmanufacturers might not be able to producea whole car, the ability to control keycomponents would gain them futureindustry opportunities in these countries.Grove’s point of view could serve as theanswer to these questions, that is, the statecould follow the market and find a newbusiness model and new competitiveadvantage, all of which are important


strategies to maintain national industrialdevelopment.

About Author

Dr. Wan-Ping Tai（戴萬平）is currently anassociate professor and director at theDepartment of International Businessthe Cheng Shiu University, Kaohsiung.

Samuel C Y KU is Professor at the Instituteof China and Asia-Pacific Studies, NationalSun Yat-sen University, Kaohsiung, Taiwan.

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