ANOTHER PROJECT IN THE MAKING?

PRIME Minister Tun Dr Mahathir Mohamad’s recent announcement that the government may embark on a quest to build another Malaysian car stirred up quite a storm on social media.

For many, the subject of Malaysian-made cars is an emotive one, based on their own experiences with our first car manufacturer, Proton. Many voiced out against the idea, while a few supported it.

There are mixed opinions about Proton today, and not all look back with nostalgia to the days when their cars formed the bulk of new car sales. Judging by the diversity of voices online, many appreciate the choices available in the market which are affordable as a result of the gradual liberalisation of the industry today.

This latest idea of embarking on a car-building venture no doubt sparked some debate among experts in the industry as well.

Building cars that are well accepted by the market is a difficult task even for companies that are well funded and have decades or even a century of experience.

In fact, Automotive News had this to say about a car startup in this age and time:

“Doing it while building a company from scratch — an effort that can require investing hundreds of millions of dollars against zero revenue and wooing experts from more secure, high-paying positions at established companies — is virtually impossible”.

So, it seems that some think it’s a daunting task at the very least. But why is it so difficult to build good cars that sell well anyway?

For one thing, there are so many established manufacturers in the world that have gotten really good at what they do, and have a great deal of experience doing it. There are even more than a handful of global car manufacturers that are at least 100 years old.

Decades of experience and brandbuilding have given them an edge that makes it hard to compete with. Even Proton, with years of experience in the industry, might be considered a sapling in the global automotive landscape.

Then there are the sheer economies of scale that are involved in making car manufacturing profitable. Simply put, Malaysia may not really be big enough to sustain a costeffective car manufacturing industry in today’s competitive car manufacturing world.

The top five car manufacturers in the world are China (25 million), United States (11 million), Japan (9.7 million) and Germany (5.6 million). Malaysia is not even in the list of top 20 carmakers, although Thailand (1.988 million) and Indonesia (1.216 million) are, according to last year’s OICA (Organisation Internationale des Constructeurs d’Automobiles) figures.

These countries have domestic markets that can function as springboards to nurture the young car manufacturers until they reach economic viability. Even then, some of their manufacturers still play in their domestic playgrounds, and never really exploring into the bigger global market in strength.

For a Malaysian car manufacturer to really be profitable and reach economies of scale, it would have to exist with an export-first mindset.

There have been mixed results with this, and lately, our car companies have not been very successful.

There are of course other reasons why building a new car company is a difficult venture today.

In an article published by PwC’s Strategy, the auto industry was described as “more challenged than many people realise”.

“On the surface, performance is strong. Worldwide sales reached a record 88 million autos in 2016, up 4.8 per cent from a year earlier, and profit margins for suppliers and carmakers (also known as original equipment manufacturers, or OEMs) are at a 10-year high. Nonetheless, viewed through the lens of two critical performance indicators, the industry is in serious trouble,” said the article.

Firstly, total shareholder return (TSR) isn’t that high. Car manufacturers’ TSRs are at 5.5 per cent, compared to 14.8 per cent and 10.1 per cent annual rates of return for the S&P 500 and Dow Jones Industrial Average during the last five years.

Secondly, top OEMs returned just four per cent on invested capital in 2016 — half of the industry’s cost of capital.

So, in summary, making cars is not all that profitable, and to add insult to injury, it’s hard because it has become extremely competitive.

But due to the nature of the auto industry, which is large and visible, there is no shortage of aspirants.

Flamboyant industrialists are attracted to it because of its glamour and visibility.

Governments like it because it involves a lot of jobs, and sometimes it becomes a matter of national pride.

So, cars are hard to make, but would this proposed company have a chance?

There is a window of hope at the leading edge of innovation.

It is of course new energy vehicles, and electric cars in particular.

Bloomberg New Energy Finance offered this forecast in their Electric Vehicle Outlook 2018.

“Our latest forecast shows sales of electric vehicles (EVs) increasing from a record 1.1 million worldwide in 2017 to 11 million in 2025 and surging to 30 million in 2030 as they become cheaper to make than internal combustion engine (ICE) cars. China will lead this transition, with sales there accounting for almost 50 per cent of the global EV market in 2025.”

Of course making electric cars is even more challenging than ordinary gas-guzzling ones.

Car companies are notorious for guzzling through obscene amount of cash before even the shadow of a profit. An electric car manufacturer, with its intensive need for research and development, would be even more so.

To date, Tesla, the bastion of American innovation, and the leading edge of innovation in electric cars worldwide, hasn’t turned in a profit yet.

But, there is a possibility that it will in the near future.

Car profitability is complex and tied in with wider economic trends and variables. The list includes cost of raw materials, labour, manufacturing as well as financing costs, just to name a few.

Another key factor is innovation. Bernama reported that Malaysia ranked 8th in Asia and 37th worldwide in the Global Innovation Index (GII) 2017 report released by Cornell University, INSEAD, and the World Intellectual Property Organisation.

The level of innovation needed on a project like this would be extreme.

So, are there Malaysian talents out there ready to take on this challenge?

There might be. One thing for sure, it’s an extremely thrilling idea that would entice a lot of people in the industry.

If you want to do something, why not shoot for the stars?ec