Platform sharing ,economies of scale and Daihatsu Boon?

THE Inspira is supposed to inspire Proton lovers.
However, the rebadged Mitsubishi Lancer has drawn both brickbats and praises from Malaysian motorists.
The new Proton Inspira, which is due to be launched this week, has aroused many emotions - from Kinabatangan MP Datuk Bung Mokhtar Radin’s outburst in Parliament to our reader, Dominic Pillai, from Penang (see letter below).
Bung Mokhtar, also the backbenchers club's deputy chairman, said that Proton’s use of the Mitsubishi Lancer platform had embarrassed the nation.
“Proton said it would cost RM700 million to produce a new car. If it cannot afford (to design a new model), then just close down,” he said while debating Budget 2011.
Pillai contended that the Proton Inspira, with 26 per cent local content, should cost less than the fully imported CBU (completely built-up) Mitsubishi Lancer as sold in duty-free Langkawi at RM72,000.
The problem is not that Proton can’t develop its own car or that the Inspira is more expensive than its mechanical twin, the Mitsubishi Lancer.
Proton can and has developed its own cars and it knows its own costs. Reportedly, its R&D (research and development) costs for a new car would run to RM700 million, which is about the industry standard. The costs would be prohibitive due to our fragmented market of about 500,000 units a year.
For instance, the New Straits Times-Maybank Car of the Year awards are surveying 65 plus models of vehicles launched this year by 22 brands (23, if Ferrari is included).
The C-segment market, where the Inspira will compete, is too small for Proton to justify spending RM700 million in R&D and build a car from scratch.

Small market segment

With this small market segment, Proton is doing precisely what Perodua has done in 1998 – license a platform from its shareholder, Daihatsu, and build on it. Yet, no one questions why the Viva and the Myvi cost more than their mechanical twins in Japan.
Platform sharing is sound business sense and the French and the Japanese do it, ala Renault and Nissan.
China and the United States do it via Shanghai Automotive Industry Corporation (SAIC) and General Motors (GM) China. And those are huge markets by our standards.
China’s car market alone should hit 13 million units this year. Japan’s TIV (total industry volume) for 2009 was 4.6 million units while Western Europe’s TIV is estimated at 12.7 million units this year.
This is a good time for the politicians to study the case for Proton and the Malaysian car industry to be freed of the tariff walls that work both ways – it keeps out imports and it imprisons the Malaysian car industry within the tariff barriers.
If we believe that the Malaysian car industry is competitive enough, and there’s good reason to believe that companies like Tan Chong, Perodua, Proton, Naza and Nasim, just to name a few, are good enough, then the bigger volume of a regional market will bring costs down.
The higher price of the Inspira versus the Lancer in the free port of Langkawi is due to the cost of local content. Local assembly and local content means higher cost in the case of the small Malaysian market.
In terms of economies of scale, it is imperative that high capital costs in the automotive industry have to be tied to large volumes of production, as locally assembled vehicles using locally made parts will cost more than fully imported finished products.
The cost of the locally assembled car will increase in proportion to the percentage of local components, as the local market's small volume works against the economies of scale. It should be noted that conservatively, at least 200,000 units of a particular model are required to be produced annually to attain economies of scale.
An examination of the national car project should lead us to ask why Proton did not do more platform sharing earlier and reap lucrative profits as Perodua did. Why did it do so much national duty and at such costs to taxpayers?

Electric hybrid

And the answer was given by the founder of Proton himself. Last week, former prime minister Tun Dr Mahathir Mohamad announced that Proton would soon launch a hybrid electric car in co-operation with its subsidiary, Lotus, and another distinguished English car builder of noted racing heritage, Fraser Nash.
This is a marvellous leapfrog as Proton did not invest much in the traditional internal combustion engine. The signals are quite clear that the way ahead in the automotive industry is electrification.
One step that makes it more credible for Malaysia as a maker of new energy cars is that the government has cut all taxes on hybrid cars below 2,000cc this year. The Honda Civic Hybrid at the tax free price of RM108,000 compares well with the recommended retail price of about US$24,000 (about RM74,000) in the United States.
The way ahead is for the government to guarantee the permanent tax free status for new energy cars.
Starting with Proton, the easy entry of new energy cars will gradually make Malaysia a hub of new alternative energy vehicles.
This will eventually integrate Proton into the chain of world class vendors specialising in extended range electric vehicles.
Hopefully, the lesson is learnt that protection of a domestic market is not a tenable option when the ambition is to tap into regional and world markets.