Introduction
Perusahaan Otomobil Nasional, or Proton, was established by the former deputy prime minister Tun Mahathir Mohamad in 1983, also known as the national car company, Proton has catalysed Malaysia's industrialisation capabilities to match those of developed nations (Proton, 2016a). Proton was started as a 70:30 venture between Mitsubishi Motors and the state-owned Heavy Industries Corp. of Malaysia (Hicom) (Fletcher and Poh, 1997). In 1996, Proton had already produced a million cars and made acquisitions with the Group Lotus the same year (Lotus, 2016; Malaysian Business, 2010). The company had also set up a transmission assembly plant in Shah Alam to carry on in-house engine operations in 1989, and as a means to upgrade their technological competencies (Proton, 2016a). 2012 marked a new phase in the company’s structure as the takeover by DRB-HICOM Berhad shifted the company’s government-linked structure to a private entity (Proton, 2016a). both Proton and Lotus have now transformed as globally-recognised automotive players thanks to DRB-HICOM's experience as Malaysia's largest manufacturer of automobiles (Proton, 2016a). Proton acquired all engine technologies and knowledge developed by Petronas in 2012, that enabled the organisation to acquire new technology and engineering related advancements, including development of more fuel-efficient engines and gasoline sprayed injection technology (Proton, 2016a).
Proton’s Vision is to have a very strong presence in the domestic market by becoming a regionally competitive automotive company, creating value by earning customers' trust through the innovation and quality of their talented people and products (Proton Annual Report, 2010). To realise this vision, Proton is aligned to engage with more and more technology partners and innovative people who are ready to produce fresh ideas (Proton, 2016a). Proton’s Mission statement is to drive Malaysia’s transformation into a leader in quality and technology. Proton possesses passionate group of people who work together to create exhilarating products and services for global markets, that is a reflection of great styling of leading technology and innovation (Proton Annual Report, 2010). As of 2015-2016, the refreshed product line of cars include: (1) Proton Persona 1.6 (standard, executive and premium) (2) Proton Perdana (2.0L and 2.4L) (3) Proton Saga Plus (MT and CTV) (4) Proton Exora 1.6 (standard, executive, premium, and super premium) (5) Proton Suprima S Standard (6) Proton Iriz 1.3 (standard, executive, and premium) (7) Proton Preve (executive and premium), all cars with manual, automatic (semi or fully automatic) variants (CarBase, 2016). 2010 was a good year for Proton (Malaysian Business, 2010). However, since then, the company’s sales were declining, particularly in the home market of Malaysia. Proton management had to revamp their strategic direction not only for short-term improvement, but for long-term business sustainability as well (Malaysian Business, 2010). There are some key reasons for this. The creation of the ASEAN Free Trade Area (AFTA) in 1992 reduced taxes and barriers to trade in the ASEAN region, however, Malaysia was late in relaxing its trade barriers (in 2005) (Worldbank, 2001). For Malaysia, this meant liberalisation of import duties and attracting FDIs. Unfortunately, Proton did take quite some hit due to the increased open competition. The Malaysian government used protectionist policy before and had set import duties in the range of
140% to 300% whereby Proton was given a preferential treatment to cover it from the real-world foreign competition (Gabilaia, 2001). This led to many foreign automotive companies coming in to Malaysia and other ASEAN regions. Competitors like Toyota, Honda and Hyundai were providing better quality cars and at very competitive prices. The competitor’s technology was also rapidly improving. Therefore, Proton’s overall sales were declining because customers had better substitutes in terms of quality, price, design and technology to choose in the market. Although Proton acquired Lotus, a British company best known for its high-end sports cars, for $81.9 million in 1996 (Lotus, 2016) as a means to acquire design know-how, and also to reduce Proton’s reliance on Mitsubishi, another reason behind the acquisition was Proton imported Japanese parts, which amounted to a third of the cost of the Proton car and was highly exposed to the fluctuating Yen (Shari, 2003). But before Proton could reap the fruit of the acquisition, the export market faced a slump due to the South East Asian financial crisis in 1998 (Shari, 2003). The financial crisis halved Proton’s overall sales to 87,500 cars in 1998 and the profits plummeted by 80% to $25 million in 1999 (Shari, 2003). Proton had less than five years to recover financially since Malaysia was opening up to free trade in 2005. Therefore, heavy competition and declining sales in the local market changed Proton’s strategic intention to expand in the ASEAN markets. This strategic decision has enabled Proton not only to regain the declining profits, but to achieve economies of scale too because they are highgrowth markets for Proton (Malaysian Business, 2010).
However, in order to regain its home market share and for successful global expansion, Proton management had to undergo a massive revamp structuring (Malaysian Business, 2010). This included a new refreshed product line to satisfy consumer needs. The short-term objectives under this structuring helped achieve a more efficient decision making, while the long-term objectives helped achieve flexibility in forming strategic alliances (foreign companies for market expansion) without direct involvement (Figure 1). This overall restructuring will improve Proton’s cars and attract foreign company investments such as forming alliances, and other type
of partnerships (Malaysian Business, 2010). In terms of improving quality management and R&D (which falls under this new restructuring), the management aims to improve after-sales services, reduce material costs, and build higher quality products (Malaysian Business, 2010). This improved the company subsequently and boosted forming foreign partnerships where Proton intends to expand (Malaysian Business, 2010). Proton’s strategy for market development has led to collaborating with global OEMs as well as local partners. This had reaped fruitful deals including joint production development, leveraging local distribution partners to sell cars, building regional production hubs (using existing capacity and resources), and joint sourcing and implementing local plans (Malaysian Business, 2010).
Figure 1: Proton’s short-term and long-term strategic plans to boost competitiveness Source: Malaysian Business, 2010, p.25
The External Environment This section will use the PEST and 5 forces analysis to analyse Proton’s overall external environment. The home market of Malaysia along with the different regions Proton serves, will be taken into the analyses.
The PEST Environment
The PEST framework (cited in Johnson et al., 2014) will enable analysis of the external environment at a macro level. These inter-connected macro factors are the Political, Environment, Social, and Technological environment. These key environmental drivers help to understand the changes in the industry structure (Johnson et al., 2014). According to Wheelen and Hunger (2010), The main variables for political are foreign trade regulations, tax laws, stability of government, government ideology, foreign policies, legal systems, foreign assets ownership regulations, and protectionist sentiments. Similarly, economic variables are GDP trends, inflation rates, unemployment rate, currency strength, money supply, per-capita income, economic development, monetary policies, and membership in WTO, EU, NAFTA, AFTA, etc. The social variables are lifestyle changes, population growth, age distribution, population shifts, various demographics, social classes, culture and attitudes towards foreigners. Finally, the technological variables includes industry/government expenditure in R&D, focus on technology efforts, technology property rights and patent protection, IT infrastructure, resource availability, transport network, skilled capital (both HR and system) and regulations on technology transfers.
Political The political environment in different regions effect’s protons strategic choices and overall functioning. Firstly, looking at the home market of Malaysia, there is no political hindrance in Proton’s functioning. The Malaysian legal system is a mixed legal system of English common law, Islamic law, and customary law, while the government is a federal constitutional monarchy and constitutes a mixed market economy (CIA Factbook, 2016). Malaysia has now relaxed its taxations through the AFTA and is now a member of the WTO (CIA Factbook, 2016). Unfortunately, the government can no longer protect Proton and Perodua’s interests. With high production, labour and land costs and lack of good standard local vendors, there is a high possibility that the local market may still be dominated by imported cars. However, to tackle this issue, Proton has bought Lotus company since 1996, which has excellent expertise regarding engineering and R&D (Lotus, 2016). This along-with acquiring engine technologies from Petronas in 2012 (Proton, 2016a) has enabled Proton to outperform both local and foreign competition in the home market. Proton had also struck deals with international automobile parts suppliers like TRW, Lucas, and Clarion to set up shops in Malaysia after AFTA came into effect, and since 2004, these suppliers have been supplying around 70% of the Proton’s components (Clarion, 2016; TRW, 2016; Lucas, 2016). Furthermore, the introduction of National Automotive Policy (NAP) in 2006 meant favourable sustainability of national car manufacturers in Malaysia, particularly for Proton and Perodua (MITI, 2015; MAA, 2014). However, the NAP was reviewed in 2009 to enhance the competitiveness and capability of the domestic automotive industry (MAA, 2014). Some advantages Proton has attained include certain tax exemptions, promoting hybrid and electric vehicles and development of related infrastructure (as part of government’s R&D technology initiatives), providing soft loans/grants to enhance competitiveness of parts/components manufacturers and development of global standard value chain (MITI, 2015; MAA, 2014). However, in spite of preference given to Proton by the Malaysian government under this new policy, it has opened many opportunities for foreign MNCs to come in, particularly for hybrid cars such as Toyota where hybrid cars are exempted from import duty to encourage R&D infrastructure (MITI, 2015).
Looking outside the home country in the ASEAN region, a similar political stance can be observed. Particularly in countries like Singapore, Indonesia, Vietnam, Thailand, and the Philippines where proton can freely export their cars within the ASEAN region due to the advantage gained from the AFTA policy (ASEAN Market Research, 2016). However, Philippines have the left-hand-drive system (as opposed to right-hand-drive system in other ASEAN countries) to which Proton must adhere to the little difference in product standard (Ellison, 2016). The political aspect in the ASEAN region may not directly influence Proton. This is because Proton’s collaborations with foreign partners for strategic alliances, or simply to export without physical operations in every country means indirect presence which is advantageous for the company. Looking at the types of horizontal and vertical collaborations Proton uses, the advantages and disadvantages can be evaluated, as described in table 3 in the internal analysis section.
Economic
The economic factors of any country effects both Proton’s operations, as well as the consumers’ purchasing power. The commonly used tools to measure a country’s economic power is through analysing its various resources, GDP, unemployment rate, labour force, inflation rate, citizen taxation, and exchange rate fluctuations (Wheelen and Hunger, 2010).
Table 1: ASEAN countries’ ranking based on economy Source: ASEAN Market Research, 2016
Starting with the home country of Malaysia, it is a middle-income country where 80% of the export revenue is achieved through exports of rubber, oil and gas, electronics, and palm oil, whilst the Bank Negara Malaysia (central bank) maintains healthy foreign exchange reserves (CIA Factbook, 2016). People’s per capita income is RM 36,675 (Malaysia department of statistics, 2016). 36% of labour force falls under industrial sector, while unemployment rate is 2.7%, and inflation is 2.1% (CIA Factbook, 2016). Corporate tax of 25% and GST of 6% has
been already set for a while (ASEANTax, 2016). These factors along-with 80% export earnings (CIA Factbook, 2016), Proton still has a very good opportunity in the home market (although Malaysian market is quite saturated), as well as exporting opportunities to ASEAN markets. However, the increasing labour costs and raw material prices have made it difficult for Proton to maintain a balance between quality and price of vehicles. Singapore has the highest per capita income compared to any other country (60,410), with Brunei, Malaysia, and Thailand coming in number 2, 3 and 4 respectively (Table 1). For Proton, this means that people of Singapore, Brunei and Thailand have high purchasing power, and these countries have been growing rapidly in terms of economy, which can serve as a high growth market for Proton to increase sales there (Table 1). On the contrary, The Philippines, Indonesia and Thailand have the lowest per capita income where its citizens have very low purchasing power (Table 1). Indonesian labours, for example, usually migrate to Malaysia in search of better jobs. This brings in new skills to the Malaysian market. Therefore, Proton may introduce fuelefficient cheap affordable cars for Philippines, Indonesia and Thailand, and provide high quality latest design (with latest functions) to high markets of Singapore and Malaysia. Vietnam is also currently the fastest growing economy in the ASEAN region and it is predicted that Vietnam’s automotive industry will enjoy the fastest growth in Southeast Asia in the next 20 years because of rising demand and support from the government within a few coming years (Tuoi Tre News, 2015).
Social This part of environmental factor could affect Proton’s sales because this section analyses customers’ social perspective, and how Proton can provide customised products depending on the demands pertaining to the different countries.
Table 2: ASEAN countries’ ranking based on population demographics Source: ASEAN Market Research, 2016
Starting with the local Malaysian market, it comprises of a mostly collectivistic society, meaning that loyalty, family and group influences their purchasing decisions (Hofstede, 2016). Young individuals prefer their peers, friends and family members as reference groups (Hofstede, 2016). This means that the individuals are usually self-conscious, trendy and have a high self-esteem. Therefore, they choose to own cars that has a strong brand image and premium quality. Although the Malaysian market is quite saturated, the number of car ownerships have been increased because of increasing transport needs and also the increased purchasing power of customers (Table 1). More customers have been increasingly switching to owning vehicles (in exchange of motorcycles and other transport) to accommodate their both individual and family needs. Many people’s perception to be environmental friendly have led to buying eco-friendly and/or fuelefficient cars. There is a similar pattern observed in countries of the ASEAN region regarding the social attitudes of the country people. However, some differences arise, for example, Singapore consumers may prefer spacious large cars and don’t want to compromise on quality, drive and functions. That is the reason those people like Toyota and General Motors as their preferred car choice, for both brand image and premium vehicle. On the contrary, Indonesia, Malaysia and Philippines people are still opting for compact and fuel-efficient cars. One reason is increased
petrol prices and traffic where people are still purchasing compact fuel-efficient cars to save both time and petrol costs. Also, the population growth of Indonesia, Philippines and Vietnam (Table 2) along-with the increasing of per-capita income, purchasing power and country economies have created a great window of opportunity for Proton to look for increased sales in those countries, apart from its home market. There has also been an increasing concern towards the environment, particularly by the Malaysians and Singaporeans. This has led to an opportunity for eco-friendly cars and Toyota has succeeded so far with increase in sales of their hybrid eco-friendly cars.
Technological
Proton’s decision to acquire Lotus company (Proton, 2016a) is paying off because the UK company has the latest R&D and engineering solutions for the ever-changing technological environment. Lotus’ technology and innovations are also being protected under the UK government through intellectual rights and patent protection (Lotus, 2016). The technological expertise Proton absorbs from Lotus can be easily transferred to its automobiles without any issues as Malaysia is also rapidly developing technology-wise to keep up with the global standard (CIA Factbook, 2016). Proton’s strategic choice of acquiring Lotus, engine technology from Petronas and selecting suppliers worldwide are bringing in new technological and R&D ideas from everywhere, and at the same time, minimising technology related risks and sharing with other markets through Lotus and trusted suppliers. Therefore, the technologies of Proton are a competitive advantage in order to sustain in the stiff competitive global stage. However, new technology trends that are disrupting the automotive industry must be taken into consideration by Proton. Gao et al., (2016) have predicted that “within a more complex and diversified mobility-industry landscape, incumbent players will be forced to compete simultaneously on multiple fronts and cooperate with competitors; City type will replace country
or region as the most relevant segmentation dimension that determines mobility behaviour and, thus, the speed and scope of the automotive revolution; and most importantly, electrified vehicles are becoming viable and competitive; however, the speed of their adoption will vary strongly at the local level”. Toyota, for example, have introduced their ‘hybrid technology’ cars and are quickly working towards introducing concept electric cars in order to stay with the current trend and competition (Toyota Annual Report, 2014). For Proton, this could mean to increase investments in R&D, update themselves and their suppliers with the newest technology, and bring-in new technologies from the global marketplace to keep up with the trend. For example, one of the Proton’s global supplier Clarion has made new innovations like smart software cloud-based security systems, dash cams, car play android music system and sensor technologies whom they are already been supplying to global giants such as GM (Clarion, 2016). Proton needs to “update” their cars technologically to accommodate these new technologies from their current suppliers.
Porter’s 5 forces analysis
Porter’s 5 forces analysis (cited in Wheelen and Hunger, 2010) will enable Proton to assess the market’s environment and situation and analyse industry attractiveness (Johnson et al., 2014). Also, it will help determine the profit potential in the industry, where long-term ROI is the preferred profit potential (Wheelen and Hunger, 2010). Therefore, the 5 forces are threats of new entrant, intra-industry/constant rivalry among existing businesses, threats of substitutes, bargaining power of buyers, and bargaining power of suppliers, and the more these forces get stronger, the less the ability to raise prices and/or profits (Wheelen and Hunger, 2010). These forces may present themselves as constraints in the short-term, however the long-term strategy is reducing these forces to the company’s advantage (Wheelen and Hunger, 2010).
Threat of new entrant
The threats of new entrants in Proton’s home market is highly unlikely because of Market saturation, however, in other markets particularly in the Asian region, there can be threat of new entrants. The newest international entrant to the ASEAN region is the Volkswagen group, “Volkswagen Group has ambitious plans to strengthen its presence, dealerships and offerings in Asean.” (South China Morning Post, 2016). Volkswagen is aiming to strengthen its presence in the ASEAN region (including Taiwan) by having a target market size of four million cars by 2020 (South China Morning Post, 2016). This is because these emerging markets provide a greater chance of scale economies (Johnson et al., 2014). Those companies who have cost advantage may outperform their competition. The capital need to invest in these countries is cheaper as compared to other markets (Johnson et al., 2014). For example, availability of cheap land, labour and capital and AFTA policies have attracted FDIs and businesses to establish there (Worldbank, 2001). Easy access to various distribution channels, suppliers and transportation is another advantageous factor for the ASEAN markets. For Proton’s home market, Proton still holds major competitive advantage. This is because the “barriers” to entry in terms of product differentiation, achieving economies of scale, etc. will make it almost impossible for new comers to the home market.
Constant rivalry among existing businesses
Mercedes Benz, BMW, TRW Automotive, DENSO, Automotive Lighting, NWB and Honda Malaysia Sdn. Bhd. (joint venture: 51% Honda, 34% Hicom, and 15% Oriental Holdings Berhad) are some of the successful foreign automotive and component companies already in Malaysia (MIDA, 2010). As of the 2015 Malaysian market share, Perodua dominates by 36.1% of market share, whereas, no. 2 is proton with 17.3% share and third rank is Honda’s not far behind with 16% market share (Chin, 2016).
In terms of the ASEAN market competitors, the Japanese automakers (Toyota, Honda, Isuzu, Mitsubishi and Suzuki) have dominated almost 90% of the market share, particularly in Thailand and Indonesia (ASEAN Market Research, 2016). Although these statistics may suggest market saturation in passenger car sales in both home market and ASEAN region, there is still a good opportunity for other car types. For example, General Motors have changed their strategy that focuses on selling two of its midsize truck/SUV models, the Colorado and Trailblazer which is a source of 70% overall sales in the ASEAN region, particularly in Thailand (Ellison, 2016). This new successful strategy can motivate Proton to offer similar SUVs to the ASEAN region as GM’s competition because Proton still has the edge to produce cheaper cars than expensive American cars of GM. The increase in buying of bigger cars can be linked back to people’s increasing purchasing power and population growth that is creating a demand for different vehicle types (Table 1; Table 2).
A competitive move by any competitor may have a noticeable effect on the overall automotive industry’s competition. Some factors (cited in Wheelen and Hunger, 2010, p.160) may affect intense rivalry. Since both local and global competitors are few (in numbers), the competitors watch each other closely so as to match a new move with a countermove against the competitor(s) (Johnson et al., 2014). The rate of industry growth is another factor where slowing down of any competitor will eventually increase sales for other firm. Another factor is capacity, where Proton has enough manufacturing plants to run at full capacity to keep unit costs as low as possible (Proton Annual Report, 2010). The exit barrier is also low for competitors because manufacturing and selling of cars is a specialised business and very few companies voluntarily leave the industry (Johnson et al., 2014). Finally, diversity of rivals isn’t that unique because they provide the same automobiles in terms of standardisation, technology, etc. with some noticeable design changes. Proton’s home market is quite saturated with slower growth rate, although ASEAN markets still have potential for increasing market share.
Threat of substitute
Substitutes may limit the ROI for firms by placing a “price ceiling” on the profits charged (Wheelen and Hunger, 2010). The threats of substitutes for Proton can be alternate modes of transport, such as motorbikes, railways, taxis, etc. for both home and global markets. Currently, the major threat of “substitute” in the home market is The Land Public Transport Commission’s (SPAD) proposal to allow any foreign and local car models to be used as taxis (Kumar, 2016). This will further side-line national car Proton’s sales. The total sales of substitutes like motorcycles and scooters in 2012 in the ASEAN region suggest that most sales were made in Indonesia (7,141,586 units) then Thailand (2,130,067 units) whereas the least sales were made in Singapore (9,923 units) against vehicle sales (ASEAN Market Research, 2016). Therefore, both threat of substitutes and declining sales lies mostly in Indonesia and Thailand.
Bargaining power of buyers
Buyers and customers are one of the biggest driving bargaining force for any industry (Johnson et al., 2014). Usual bargaining chips are higher quality with low prices. This customer demand made Proton to refresh its product line in the first place and now, Proton management is listening closely to its customers to continuously improve quality, design, technology and reduce price (Malaysian Business, 2010). Since the direct buyers are not the customers, common bargaining power is influenced by distributor and retail showrooms who in-turn sell cars to customers (Proton Annual Report, 2010). Since these buyers purchase large proportion of Proton cars (especially in terms of import quotas to ASEAN markets as per demand), they have considerable amount of influence to Proton sales. The major risk is that these purchasers have very little profit margins, there is little incentive or loyalty to repeat purchase as it is easy to terminate or change to different competitor if the demand isn’t high, or other substitutes are more profitable (Johnson
et al., 2014). Proton must work closely with both buyers and suppliers to sustain a smooth bargaining.
Bargaining power of suppliers
Various suppliers of Proton may affect the company by their ability to raise prices or reduce quality (Wheelen and Hunger, 2010). For example, TRW, Lucas, Mitsubishi, Honda, and Clarion are international automobile parts suppliers that supply to both Proton and other competitors simultaneously (MIDA, 2010; Lucas, 2016; TRW, 2016; Clarion, 2016). Since there are limited number of dominating global and local suppliers in the automotive industry, the bargaining power is really high and influences Proton’s manufacturing. For example, Proton’s declining sales along-with high demands from suppliers has led Proton to borrow additional RM 1.5 Billon from the government as a bail-out package to pay to its suppliers and vendors for components (Harman, 2016). However, to reduce dependence and decrease bargaining power of suppliers, Proton is forming strategic alliances, collaborations and partnerships with both local and international suppliers, which falls under their transformation strategic plans for success and expansion in global markets (Harman, 2016).
The Internal Environment
Value chain analysis
The value chain (cited in Wheelen and Hunger, 2010) will enable Proton to analyse its internal competencies and formulate new strategies based on internal strengths and weaknesses. A strong and sustained value chain will be a source of competitive advantage (Wheelen and Hunger, 2010). Also, possible opportunities for vertical integration and/or outsourcing may be identified (Johnson et al., 2014).
Figure 2: Value Chain Model for Proton Source: Adapted from Wheelen and Hunger, 2010, p.194
The core competence lies in the primary activities which includes inbound and outbound logistics, operations, marketing and sales, and services (Wheelen and Hunger, 2010; Figure 2).
Primary Activities
Inbound Logistics: This part of value chain involves activities related to raw materials, handling, warehousing, stock control and transporting whilst also receiving, storing, and distributing inputs internally (Wheelen and Hunger, 2010). Analysis form Proton’s annual report (2010) reveals that Proton has 280+ suppliers, vendors and sub-suppliers and Proton assembles more than 5,000 individual components. However, improper inbound control has resulted in some defects thus effecting quality standards. This has led to Proton terminating Ingress supplier and collaborating with global suppliers such as TRW, Lucas, and Clarion who maintain global standard and provide new technological advancements to Proton. Proton can reduce the number of suppliers by condensing them in forming strategic alliances with various groups. This will enable Proton to obtain/learn new technology related capabilities, reduce overall costs, reduce both financial and political risks, and possibly obtain access to specific/new markets (Wheelen and Hunger, 2010). Another tactic which can reduce dependence of suppliers is by creating joint ventures with them. This strategy helps allocate ownership, financial risks/rewards, and operation responsibilities, whilst preserving distinct identity and autonomy between both parties (Lynch, 1989, cited in Wheelen and Hunger, 2010). For critical and heavy suppliers, however, it is recommended for Proton to form a value-chain partnership. This strong and close partnership will enable long-term partnership with key suppliers and distributors for mutual advantage (Wheelen and Hunger, 2010). Although all these activities of forming suitable partnership with the right supplier(s) takes time and involves heavy investment costs in the short-term, this will reduce dependence, reduce overall costs and risks, and improve quality and technology of suppliers and their parts, also, suppliers who form longer term partnerships are more mutually profitable than multiple short-term contracts (Andrews, 1995, cited in Wheelen and Hunger, 2010).
There are different types of partnership alliances Proton can adopt, reflecting to their long-term objectives. Each partnership type comes with their advantage and disadvantage. These are summarised in table 3 below.
Table 3: Different types of horizontal and vertical collaboration, its duration, advantages, and disadvantages Source: adapted from Tidd and Bessant, 2013, p. 486
However, in the practical world, in order to successfully execute strategic partnerships, some key success factors must be considered. It is usually challenging for both the parties’ interests to be mutually aligned (Johnson et al., 2014). For example, if Proton were to make some sort of alliance with Lucas to establish repair service and diagnostic centres in Malaysia as after-sales services to customers, Lucas can also extend its services to Proton’s competitors that will intensify competition even further as opposed to reducing it. Forming alliances is also quite challenging when it comes to sharing technology. The decision of Proton to acquire Lotus has enabled both parties to share technologies to smoothly share strategic know-hows and technology without any clashes (Proton, 2016a; Lorange, 1997, cited in Wheelen and Hunger).
Therefore, there is a need to articulate strategic alliances objectives and success factors, some of them are highlighted in figure 3.
Figure 3: Strategic Alliance Success Factors Source: cited in Wheelen and Hunger, 2010, p.247
Operations: Value activities like engineering, manufacturing, and quality control come under Proton’s operations as these transformation activities change inputs into outputs (Wheelen and Hunger, 2010). Engineering process includes styling and technology development, product development, and process improvements (Wheelen and Hunger, 2010). All operations of engineering are undertaken by Lotus group (UK, China and USA plants) and Proton Engineering Research
Technology Sdn. Bhd. (Proton Annual Report, 2010). Both the product development and styling and technology development ensures high quality cars (and continuously improving every consecutive model), whereas the process improvement involves reducing overall vehicle cost by minimising effect of material cost increase to the car price and considering cost improving activities even at designing stage (Proton Annual Report, 2010; Malaysian Business, 2010). The manufacturing process is done mostly by Proton (Malaysia, Indonesia and China plants) and Lotus (UK plant), and partly by Miyazu (Malaysia) and Goldstar (China) (Proton Annual Report, 2010). The main manufacturing plants in Malaysia producing Proton cars are Shah Alam Plant (for manufacturing Saga, Waja and Arena models with capacity of 200,000 units per year), Tanjung Malim Plant (for manufacturing engine & transmissions, stamping, trim, final assembly, body assembly and painting with annual capacity of 150,000 units), and the Glenmarie Component Plant (for Casting, EMT, and Stamping) (Proton Annual Report, 2010). Also in 2009, Proton was awarded the SIRIM QAS International and VCA awards (along with 14001:2004 certifications) for the Tanjung Malim Plant for best manufacturing process in passenger cars, engines and parts supply (Proton Annual Report, 2010). Another notable award was given by Frost and Sullivan in manufacturing excellence in April 2009 (Proton Annual Report, 2010). Since then, Proton’s management continually strives to maintain smooth manufacturing processes. The quality control, although to reduce cost, has different functions. They are categorised into 4 sections of innovative-driven quality, quality culture, customer focus, and total quality ownership (TQO) (Proton Annual Report, 2010). The customer focus function dealt with problems stated by customers that helped Proton improve any reported issues. The quality culture initiative structured routine meetings by all operating units/divisions in which issues were resolved and discussed to achieve company values. The innovation-driven quality function deals with all innovation related activities and also provide employees a chance to bring in ideas and suggestions for innovation and/or improvement. Finally, the TQO involves various programs rolled out that targets to improve the overall quality (including supplier quality performance evaluation) performance (Proton Annual Report, 2010).
Outbound Logistics: This part of value chain includes various activities such as collection, storage, distribution, and transportation of assembly and/or finished vehicles to the customers (Wheelen and Hunger, 2010). Introduced in 2012, the CLASS (the Centre for Logistics, Allocation, Storage, and Services) initiative helped Proton management to deal with issues including, reduced inventory time and faster transport times (Proton Annual Report, 2010).
Marketing and Sales: The marketing, sales and distribution activities are mostly undertaken by Proton Marketing Sdn. Bhd. in Malaysia area, other division includes Proton Singapore Pte Ltd, Proton Motors (Thailand) Limited, Proton Parts Centre Sdn. Bhd., and PT Proton Edar Indonesia (for spare parts sales and distribution, for during both manufacturing and after-sales maintenance services for customers). (Proton Annual Report, 2010). General marketing includes advertising by, broadcast media such as TV, print media such as magazines and direct mail, display media such as posters and billboards, and online or social media (Johnson et al., 2014). Sales include direct selling to customers (by showrooms) and authorised dealers, and furthermore, Proton has made some special deals for locals that enable local customers to purchase a brand new car through loans or instalments (Proton Annual Report, 2010).
Service: Proton has exceptional after-sale services for its customers (Proton, 2016c). Proton’s customer care 24-hour Mobile Assist provides customers roadside assistance in any unexpected accident. Other services include online booking for servicing or buying new car and pick up & delivery services for customer convenience (Proton, 2016c). Furthermore, the Product Improvement Initiative (PII) is a voluntary programme in which Proton offers free inspection and if necessary, parts replacement for new and existing customers (Proton Annual Report, 2010). There are also more than 30 service centres, branches, test-drive centres and showrooms strategically placed nation-wide for customer convenience (Proton, 2016d).
Support Activities
Firm Infrastructure: Accounting, legal, administrative, and general management activities constitute a firm’s infrastructure (Wheelen and Hunger, 2010). Like any other organisation, Proton management has a centralised hierarchy and a top-down management system approach (Proton Annual Report, 2010). Although R&D and engineering activities are communicated between Proton and Lotus, the R&D is kept centralised as much as possible. The IT systems such as HPE technology helps Proton management optimise high performance, availability, reliability, and disaster tolerance (HPE, 2015). HR management: Having the right talented people at the right position and at the right time is key for any business’ performance (Tyson, 2006). The foundational values of Proton’s management are to keep employee motivated enough to be dedicated to the long-term success of Proton and operate under employee group’s shared values to help foster respect, trust and sharing of knowledge as effective teamwork policy, all while promoting and protecting the health and safety of employees (Proton Annual Report, 2010). Proton is also collaborating with universities to find a pool of talented staff, rolling out overseas training and development programs and also setting up events like Proton Innovation and Invention Competition (PIIC) that enables Proton staff to generate new ideas for next generation cars (Proton Annual Report, 2010).
Technology Development: This part of value chain includes design engineering, testing, and R&D practices (Wheelen and Hunger, 2010). The core value of Proton’s R&D is to maintain technical assistance and staying current with technological advances (Proton Annual Report, 2010). The R&D activities are further sub-divided into stages of safety technology, styling technology development, homologation testing, vehicle platform, and powertrain development (Proton, 2016e). The vehicle platform stage includes programs involving engineering design, styling, product strategic planning, and supplier development programs. Proton management uses the ALIAS software and CATIA 3D modelling software to stay in the automotive industry standards (Proton, 2016e). The powertrain development division develops internal combustion engines (ICE) and also working on hybrid and electric cars to cope up with the future trend of the
automotive industry (Proton, 2016e). The main objective to set-up homologation testing is for safety testing. The safety testing is done in areas of Component, Material, Strength & Safety (CMSS) Laboratories, Emission Development Laboratory (Euro 5 carbon dioxide emission standard), Noise Laboratory (testing exterior noise, interior noise, cabin noise and vibrations), and Test Track [semi-high speed test track for testing durability, fuel efficiency, durability, squeak and rattle, simulation tests (various road surfaces), shower testing (flood and rain simulation) and hand-brake testing (of different gradients)] (Proton, 2016e). The styling technology development includes four primary units of design and Computer Aided Styling (CAS), colour design, model design and advance design (Proton, 2016e). The digital designing process involves sketching, rendering and surfacing, as well as rapid prototyping that further enhances the design process (Proton, 2016e). The safety technology initiative, called as 360 degree safety, is done through both simulation and real crash testing to test the car to its limits in terms of safety (Proton Interactive, 2016). As such, Proton cars are using high quality HPF carbon reinforced steel to make it both lightweight 5 times stronger than any other steel alloy. There are also both curtain and driving wheel airbags for increased safety (Proton Interactive, 2016).
Procurement: This part of value chain includes purchasing activities and what Proton does to get the resources it needs to operate, this includes finding vendors and negotiating best prices (Wheelen and Hunger, 2010). Proton purchases raw materials, parts and components from both local and foreign manufacturing as an effective supply chain management. Some of Proton’s global suppliers are Clarion, Lucas and TRW, while the list of local suppliers are summarised in table 4 below.
Table 4: List of local Proton suppliers and vendors Source: Abdullah, Lall and Tatsuo, 2008, p.52
The value chain of Proton provides insights in the strengths and weaknesses of different sectors. It is quite clear that the competitive advantage of Proton is in providing high quality global standard cars at low cost (as compared to competitors) while its internal strength lies in the R&D sector. To further improve their R&D and sustain a competitive advantage, it all comes to low cost versus differentiation strategies (Johnson et al., 2014). Since the competitive advantage of Proton is towards the low cost at a broader target market, the management should peruse a cost leadership strategy (Johnson et al., 2014). By this, Proton can use large economies of scale from both Malaysia and the ASEAN region with tight cost discipline to serve the larger market at a very competitive price (Johnson et al., 2014). However, Johnson et al. (2014) argue that there are key cost drivers that can help deliver the cost leadership strategy: Firstly, the input costs such as raw materials, labour, etc. must be low. Proton still has low production costs but it may reduce it even further by opening additional plant in Vietnam for example. Secondly, economies of scale need to be achieved to reduce overall costs by spreading the fixed costs of R&D and engineering towards the number of vehicles produced. Finally, there are two main requirements for Proton to achieve this strategy. The first one is the cost being lower than that of its competitors. The second one is a balance between quality and price. Therefore, Proton cars are quite cheap (as compared to its competitors) and at the same time, they are high quality vehicles. Perhaps Proton can avoid further R&D costs through “imitating” from its competitors (Wheelen and Hunger, 2010). However, they must consider listening loosely to customers and meet those needs in lieu of “imitating” competitors in which they are better at. Proton management can also consider outsourcing activities of marketing and sales and after-sale services to local companies in every country of ASEAN region to not only reduce costs, but to increase efficiency as well. The outsourcing can be done by “purchasing” independent companies with long-term contracts (Wheelen and Hunger, 2010). This will relieve Proton off some operations so that they can have a core focus on its internal strengths to sustain their competitive advantage. Although the outsourcing procedure may seem time-consuming and costly, it will help to reduce costs and expand operations in the long-run. Using Dunning’s (1988) Eclectic Paradigm, Proton can find its benefits in terms of ownership, location and internalisation advantages. Proton’s home country of Malaysia already has location specific advantage. This is because its main manufacturing plants are in Malaysia, so are the
resources, talented employees and majority of local suppliers (Table 4). Proton also benefits from low taxations thanks to the AFTA around the ASEAN region and imports/exports without any observable issues. This has enabled the firm to produce and sell high quality and cheaper cars than competitors who cannot possibly fully exploit the ASEAN opportunities. If Proton looks for FDIs in foreign countries, whether directly or through some type of partnership, it must have a greater competitive advantage if it decides to have more presence in foreign markets. Currently, in its operations throughout the ASEAN region, it benefits from ownership advantage because the firm has major control of its operations where its trademarks, secrets, technology, R&D, intellectual properties, etc. are well protected and usually not shared with partners. Finally, since Proton benefits from their own in-house production and relies mostly on its own core competencies, Proton has internalisation advantage. From all this OLI advantages, Proton needs to use export strategy, since both of its ownership and location advantages are strong (Dunning, 1988).
Strategy Alternatives and Recommendations
TOWS Matrix
Internal Strengths
Internal Weaknesses
S1. Strong engineering &
W1. Marketing and sales
R&D through Lotus
W2. Too many suppliers
S2. Strong local after-sales
W3. Still no true global
services network
expansion
S3. Efficient
W4. Lack of strategic
manufacturing/production
alliances, especially with
capabilities
global partners
S4. Access to local suppliers (location-specific advantage) S5. Talented staff S6. Providing high qualitylow price vehicles S7. AFTA advantage in ASEAN region operations S8. Long experience of more
External Opportunities
than 30 years in local market SO
WO
O1. Vietnam fastest growing
SO1. Further establish
WO1. Look for global
economy in ASEAN region
manufacturing plants in
partners to build concept
O2. Economies of scale in
Vietnam to increase sales in
electric and/or driverless cars
Vietnam and ASEAN region
ASEAN region (O1, O2, S3,
(O5, W3, W4)
O3. Indonesia’s growing
S4, S7)
population
SO2. Increase sales to
O4. Growing per-capita
accommodate growing
income in Singapore, Brunei,
population and purchasing
Malaysia, and Thailand
power in the ASEAN region
O5. Changing trends in
(O3, O4, S6)
automotive industry in
SO3. Increase R&D support
technology (electric and
to embrace with new
driverless cars)
technology trends that will disrupt automotive industry
External Threats
soon (O5, S1, S5) ST
WT
T1. Volkswagen as new
ST1. Meet competition by
WT1. Reduce threat of
entrant in ASEAN region
providing new improved
competition by looking for
T2. Local market saturation
models as new product
more strategic alliance
T3. Intensifying competition
offering, i.e., product
partnerships to build a
in ASEAN region
development strategy (T1,
broader network (T1, T3,
T4. SPAD decision will
T2, T3, S1, S2, S6, S8)
W4)
sideline taxi sales
ST2. Improve brand image
WT2. Improve marketing (or
T5. Increase in substitute
and look for reducing further
outsource activity) and brand
buying
vehicle prices (T4, T5, S6,
image of Proton, and provide
S8)
same cheaper cars to reduce threat of substitutes (T4, T5, W1) WT3. Reduce supplier dependence by increasing inhouse production or buying/partnering up with ASEAN region suppliers (T3, W2)
Table 5: TOWS analysis of Proton Source: self-analysis of external and internal environment
Recommended Strategies
After analysis of the TOWS matrix, it is quite clear that Proton needs to provide more new and improved models as new product offering to the existing market in order to meet the intensifying competition and market saturation. This is known as a product development strategy from Ansoff’s model (Johnson et al., 2014). To achieve this, however Proton must use its both new and existing technological capabilities in order to restructure their marketing capabilities thereby managing consumer perception successfully. To reduce supplier dependence, it is highly recommended for Proton management to vertically backward integrate (Johnson et al., 2014). The backward vertical integration strategy will allow Proton to bring in activities within its value chain for in-house operation leading to not only ‘capturing’ more profits in value chain, but to expand in size and reduce overall expenses as well (Johnson et al., 2014). Although it requires investments to integrate, it becomes cheaper in the long-run. An alternate recommendation for growth (especially in local home market) is the growth-based diversification strategy (related) to which Proton can expand using its strengths because it will lead to increase of revenue from current customers, strengthens relationship with current valuechain players, current competencies can be used to leverage market growth (Wheelen and Hunger, 2010). Examples include dispersing car products such as engine oil, radiator water, battery, etc. to various outlets under the Proton brand. Finally, to expand in the global markets, Proton can use export strategy as entry mode, where risks are minimised, vehicle is still produced under Proton, and Proton will only rely on foreign partners for marketing and selling of its vehicles (Wheelen and Hunger).
Conclusion
The new strategies outlined above will result in boosting of Proton’s competitiveness, however in the long-term. Going through Proton’s current plan to boost competitiveness (Figure 1), most of its intended strategies are still viable, which may however, need some modifications. For example, Proton should use export strategy for global market expansion in the long term. This is because collaborating with global OEMs or product development in new markets may prove to be risky, and operations should be under Proton and also the firm can use its extensive R&D and Lotus engineering to come up with better cars to export globally. Proton can also use the suggestion of growth-based (related) diversification strategy to capture short-term profits.
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