60 State and Industrial Policy

State and Industrial Policy: Comparative Political Economic Analysis of Automotive Industrial Policies in Malaysia and Thailand

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

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

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

Introduction sectors and industries as diverse as iron, oil, manufacturing, sales, the stock market, In the wake of the 2008 economic crash, credit, and insurance. Because of the huge whether the U.S. government should knock-on effects that a collapse of this financially support the domestic automotive industry might have on the wider economy, industry has become a matter of debate. The the possibility of government intervention automotive industry has been one of the in the U.S. automotive industry remains an three main industries in the U.S. for the past option (Yun-Han Chu, 2008: 20). hundred years, and is involved in other

Journal of ASEAN Studies, Vol. 1, No. 1 (2013), pp. 55–82 © 2013 by CBDS Bina Nusantara University and Indonesian Association for International Relations ISSN 2338-1361 print / ISSN 2338-1353 electronic 56 State and Industrial Policy

This debate has touched on issues car sector (Rasiah, 1999). However, despite related to developmental economics such sharing a number of similarities in their as, when a new industry is launched or developmental backgrounds and with faces crises, should the state intervene and governmental organizations taking a help the industry, or should they follow the leading role in the industry, they have also selective policy to help only certain firms? diverged and chosen relatively different In what type of situation should paths to further development. Malaysia has governments intervene? Will state resources adopted its automotive industry as a devoted to the industry be used efficiently national industry, with an “independent to reach the development goal? These topics development” strategy applied to establish have been the focus of debates that have a national brand, whereas Thailand has never reached a consensus. chosen to cooperate with international car Most scholars of developmental manufacturers and adopted the “dependent economics feel that because of lacking development” strategy, which has made its market mechanisms and limited resources domestic automotive industry part of the in developing nations, policy intervention worldwide supply chain. The results of in industry is necessary to accelerate these two strategies show that the industrialization. However, although “independent development” of Malaysia industries in developing countries need has yielded fewer benefits (Fuangkajonsak, state intervention, not all such interventions 2006: 1-3). yield expected results. Could such Examining the development of the supported industries survive when the automotive industry with the development government withdraws its protection? What of politics and economics in countries can are the costs and benefits for the obtain a clearer picture of the relationship government under these policy between the state and industrial interventions? How can international development. This article does not focus on pressure to remove such protection be the theoretical study of specific issues handled? To protect vested interests, related to developing countries, but manufacturers might use non-financial analyzes how different historical systems resources to raise barriers to entry, thus result in different strategic choices and weakening their own market developmental effects by integrating competitiveness, which lead to poor results international and domestic political and in the long term. All of these issues are economic factors ( Abbott, 2003). Although important for studies of economic policies industrial development in developing adopted in developing countries (Wan-Wen countries relies on government Chu, 2001: 67). intervention, the economic and political Differing from the diverse studies of background of each country affects their East Asian countries such as Taiwan, Japan, selection of specific strategies: namely, the and South Korea, on official organization strategic choice between the “independent and industry development, relevant issues development” of Malaysia and the between the state and industrial policies in “dependent development” of Thailand; Southeast Asian countries are seldom then the “politicality” of the automotive focused. This study discusses the policies industry in Malaysia intervened with the for the automotive industry in Malaysia and “follow-the-market” policy. The results of Thailand because both of these developing “strategic selection” and “political countries have been eager to upgrade their intervention” are the two main reasons this domestic industrial base by developing the article concludes that the development of Journal of ASEAN Studies 57 the automotive industry in Malaysia has developing countries, particularly East been inferior to that in Thailand. Asian countries, should ascribe to governments remaining neutral, and they also criticize the World Bank report for Theoretical Study: The state, industrial neglecting the importance of the state in development, and automotive industry industrial development. policies. These scholars offer an extremely different explanation from neoclassical The State and Industrial Development economics (Jomo, 1994): 461-508). For Scholars typically discuss the example, Johnson introduced a concept of developmental patterns of a national “developing-type country” for Japanese industry from two perspectives. Under a industrial research in 1982, which stated good economic environment, scholars that industrialization in the so-called New following neo-classical economics believe Nations is related to the great promotion of that industry grows spontaneously with a economic development by the state comparative advantage. In their view, (Johnson, 1982; Shumpei Kumon and Henry competition should be free and open at the Rosovsky, 1972: 109-141). Taking South start of an industry to allow private Korea as an example, Hasan claimed that its investors to allot resources based on successful economy was based on economic rationality because this is best government intervention. Hasan also stated, able to raise competitiveness (Balassa, 1988: “The economy in South Korea relies on the 27-57; Bhagwati, 1988: 27-57). Scholars of operation of private enterprises that are in liberalism accept this view (Kruegert, 1993). fact directed by the central government. The The East Asian Miracle: Economic Growth and state not only establishes policies and rules, Public Policy, published in 1993 by the but also dominates the economy by World Bank, is a typical work from this controlling market mechanisms, and thus school (Stiglitz and Shahid, 1994). Its main has a critical impact on all entrepreneurial conclusion was that giving up market price decisions (Hasan, 1976). control is essential when hoping to develop Those scholars who support industrial competitiveness in transforming “Developmental State Theory” think that agriculture in developing countries. industrial development in developing However, scholars from the school of countries relies on intervention and development economics have raised protection from the state. This authorizes numerous doubts of the neoclassical the government to control the production, approach (Fishlow, 1994; Lindauder, 1994: allotment, and price of goods to reach the 12). Some make a case for the so-called best arrangement of resources (Kuckiki, “Dependency Theory,” which proposes that 2007: 3-6). They believe that despite international factors, particularly the liberalism aiding industrialization, the lack political and economic power from of a market mechanism might lead to an hegemonic countries, such as the United environment that increases the risk to States, play an active economic role in industry and adversely influence developing countries. This type of production. With insufficient private development is known as “invited investment and limited resources, selective development.” Other scholars state that government intervention becomes economic progress is not mainly caused by necessary for rapid industrialization (Wan- “market” and “internationality.” They do Wen Chu, 1997: 99-100). These ideas not believe that economic development in highlight the following two phenomena for 58 State and Industrial Policy the relationship between the state and 316; Humphrey, 2000: 245-271). The industrial policies: automotive industry belongs to a high value-added industry, which is also a 1. The state provides necessary capital-intensive and technology-intensive production factors: To facilitate industry. The production process involves economic development, the upstream industries such as steel, government commands the financial electronics, and plastic industries, and has system to finance industries for great influence on downstream industries upgrading or expansion. These such as marketing, service, maintenance, funds are typically preferential loans insurance, and finance industries with interest rates that are (Konosuke, 1993). Therefore, based on the substantially lower than the market goal of industrial development and political rate, and are helpful for industrial and economic backgrounds, many countries growth. employ various policies, such as “Limited 2. The state launches policy local content rate,” “Energy consumption intervention to protect industries: At standards,” “Limited auto import tax,” the initial stages of development, “Limited import quantity,” “Import industries are typically unable to quotas,” and “Import Substituting compete with foreign firms; Industrialization Strategy,” to fulfill the therefore, to encourage industrial purpose of policy intervention in the auto development and expand export industry Rasiah, 1997). Scholars normally trade, the state provides support divide automotive industry development with preferential tax policies and into four stages: work to limit competition (Freeman, 1982: 90-112). 1. Importing Completely Built up vehicles (hereafter referred to as Industrial policy and automotive industry policy CBU) Automotive industry has been an 2. Semi-Knocked Down (SKD) and important issue for scholars involved in Completely Knocked-Down research on “the State” and “industrial (hereafter referred to as CKD) policy” in developing countries (Jenkins, 3. Full Assembly 1987; Jenkins, 1995: 625-645; Doner, 1991). 4. Manufacturing Many developing countries, such as Brazil, Mexico, South Korea, and previously National intervention has three goals in Taiwan, have attempted to make the these stages (Fitzgerald eds, 1995): First, to automotive industry the motivator of establish the industrial scale. The state industrialization. However, for some normally assists local enterprises to countries (such as Taiwan), such establish an industrial supply chain to intervention has proved unsuccessful in the promote local production of key car industry and needs further research components through an “import (Jenkins, 1995: 642). The application of substitution” policy. Second, to help the automotive industry technology often automotive industry transform through the expands to other industries, thus “assembly,” “semi-assembly,” “fully contributing greatly to the national assembled,” to “manufacturing” stages, economy by promoting technological which requires that the rate of locally made abilities, increasing employment parts must reach certain percentages. Third, opportunities, and revenue (Dicken, 1998: the state becomes the driver of industrial Journal of ASEAN Studies 59 internationalization. When the local These two approaches have both automotive industry has the capacity to advantages and disadvantages (See Table manufacture a whole car, the state can help 1). them export products to other countries Based on this discussion, this research through consolidation, production control, makes the following analysis: Because of the and a unified development model. The final lack of market mechanisms and limited goal is for local firms to be able to set up resources, to accelerate industrialization, production plants in other countries and developing countries rely on state form transnational automotive groups. intervention as a protection measure; During the transformation process from therefore, selective intervention is “assembly” to “manufacturing,” the state necessary. Furthermore, the automotive normally has two choices, “dependency industry plays a major role in promoting development” and “independent industrialization in developing countries. development”. First, the dependency National intervention has the following development mode is a way to increase three targets: first, to establish the industrial competitiveness that relies on foundation of the industry; second, foreign technology and fund of funds. transform the industry from “component Therefore, it is necessary to open domestic assembly” to “manufacturing;” third, the markets to attract foreign investment-led state becomes the driver of industrial industrial development. This typically internationalization. Moreover, industrial means that after Transnational Automotive interventions do not necessarily reach the Corporations (TNCs) obtain a license, they goal of nurturing the automotive industry. set up local assembly plants and help Considering whether the industry could be domestic enterprises establish an industrial self-reliant after receiving protection, and if scale of component manufacturing. For the benefits outweigh the social costs example, local firms in Mexico, Brazil, and produced in the protectionist period, is Spain were all aided by multinational necessary In addition, how will a protected corporations and thus able to develop industry eventually adapt to a more open highly efficient supply chains to then build international market? an internationalized automotive industry with some areas of comparative advantage (such as market, location, and labor force). Second, the independent development mode is a policy that can raise competitiveness of the local automotive industry by relying on the development of a monopolistic market, with the supply chain formed by local investors and enterprises. For example, South Korea relied on its own strength to develop an automotive industry, gradually building up R&D capabilities and a local brand.1

1 Taking South Korea as an example, the Automotive Industry Promotion Law was passed in 1962. Auto imports were prohibited and large-scale enterprises were chosen as the main participants of the world’s key auto production base and the fourth automotive industry. South Korea thus became the largest auto production country in a short period.

60 State and Industrial Policy

Table 1: Analysis of Different Automotive industry Development Approaches Approach Advantages Disadvantages • The automotive industry is • Smaller financial dominated by foreign capital burden on the • More difficult to develop the Dependency government economic scale of mass development • Less pressure on the production open market • Cannot bring about the growth of related industries • Protection brings mass production • Greater financial burden on the • More likely to support government Independent the growth of related • Over-protection cannot respond development industries to pressure from trade • Can use the home liberalization country’s resources Source: Organized and rewritten by the author, based on Rashid, 2006.

Establishment of Malaysia’s automotive In 1967, the Malaysian government industry approved the establishment of six auto assembly plants. In the same year, it passed Establishment of the automotive industry the Investment Incentive Act to encourage Malaysia’s automotive industry was more assembly cars to use locally made established in 1963. Under the Colombo auto parts. At this early stage, assembly Plan, the Malaysian government formulated plants were established by joint ventures a localized production policy for the between European manufacturers and local automotive industry. In 1964, the Malaysian enterprises, and the assembled vehicles government set out a policy of promoting were mainly European and Japanese cars, vehicle assembly and localized component with the latter coming to dominate the production, and thus prohibited the import Malaysian car-assembly market in the of completely built vehicles and 1970s. implemented localized production. The Although Malaysia hoped to promote Ministry of Trade and Industry founded the the growth of the local component Motor Vehicle Assemblers Committee production industry by increasing the level (MVAC), responsible for reviews of related of local manufacturing, because of investment. Consequently, companies numerous assembly manufacturers and engaged in the import of CBU had to different vehicles needing various manage complex import processes and pay components, it was impossible to conduct high import taxes, and thus the import of mass production, and thus the products assembly cars grew very rapidly (Torii, produced did not have any price advantage. 1991). Certain restrictions were employed, To elevate the quality of locally made such as an import duty on CBU or control of components, the Malaysian government the auto dealer by license renewal twice a proposed the Mandatory Deletion Program year. in 1979, to weed out unqualified manufacturers, simplify production, and

Journal of ASEAN Studies, Vol. 1, No. 1 (2013), pp. 55–82 © 2013 by CBDS Bina Nusantara University and Indonesian Association for International Relations ISSN 2338-1361 print / ISSN 2338-1353 electronic Journal of ASEAN Studies 61 increase industrial competitiveness. conflicts among ethnic groups are closely However, the Japanese-based group of related to industrial policy (Soong, 1996). In foreign car manufacturers and Chinese- 1969, because of economic inequality, the Malaysian investors still controlled so-called “513 race riots” broke out and automotive assembly, component became an important turning point in the production, and marketing. Therefore, the economic development of Malaysia.2 Malaysian government began to consider Afterwards, the Malaysian government transforming its assembly-oriented industry proposed its New Economic Policy (NEP) in into a car manufacturing one. 1971, developed a technocrat bureaucrat authoritarian regime, and directly intervened in economic development Homemade vehicle plans and through the “Kuota” (quota) system to internationalization of the automotive industry reduce economic inequality between ethnic The transformation of Malaysia’s groups. automotive industry began in 1982, when The new economic policy was based on Prime Minister Mahathir announced the the concept of “National Capitalism,” and homemade vehicle production plan, which tried to raise the proportion of the indigenous was controlled by The Heavy Industries Malay Group” (or Bumiputra), an ethnic Corporation of Malaysia Berhad (HICOM), group that participated in the economy,3 the group responsible for implementing the thus promoting the ethnic redistribution of country's National Heavy Industries Plan wealth, and relieving conflict. The and Industrial Master Plan Project (IMP). development mode of national capitalism in These actions were taken in hopes of Malaysia in this period was state-driven, leading the automotive industry into the with the government directly intervening in self-development mode. the market (Soong, 1996). To reach this goal, HICOM chose to The state during this period primarily cooperate with Japan's Mitsubishi Motors to focused on the automotive industry and establish PROTON Motors (perusahaan considered it the national industry of otomotif). HICOM held 70% of the shares in this company, and Mitsubishi Motors had the remaining 30%. At first, PROTON was 2 Malaysia's three main ethnic groups are Malays, only responsible for vehicle assembly, but Chinese, and Indians, and the respective proportions with government support, it gradually are approximately 62%, 30%, and 8%. Most scholars began to take charge of design, mechanics, think “Racial communitarianism” is the main logistics, and marketing. In 1985, PROTON characteristics of Malaysia. See Samuel C.Y. Ku, SAGA launched its own brand car, SAGA. Government and Politics in Southeast Asia, (Taipei: Wunan, 1995), p.71. In the election of May, 1969, In the mid-80s, Malaysia underwent an Malaysia's ruling coalition suffered defeat, which economic crisis caused by the oil market caused a series of racial conflicts, claimed 196 lives, collapse, existing markets re-shuffled, and and wounded 439. The Malay ruling elite believed the PROTON became the leading brand in the fundamental reason was long-term conflicts, unequal policy, mistrust, opposition, and ethnocentrism Malaysia auto market (Wad, 1999). between Malay and Chinese. See B. T. Khoo, The Paradoxes of Mahathirism (New York: Oxford The state of Malaysia and Automotive industry University Press, 1995), pp. 52-54. The form of the state, its structure, and 3 Bumiputra originates from Sanskrit, which means developmental strategy have an obvious sons of the soil. According to the constitution of Malaysia, it refers to the Malay community in connection to its interaction with civil Malaysia and the minority groups in Sabah and society. In the social structure of Malaysia, Sarawak. 62 State and Industrial Policy

Malaysia.4 Malaysia’s automotive industry export channels of technical development started with car assembly cooperation plants to sell them to (1963-1982), and then Mahathir promoted other Asian countries. the Homemade cars Plan in 1982 and 6. Offered civil service low-interest encouraged the local automotive industry to loans to purchase domestic cars. work on exports. The aim of this plan was to improve the low domestic rate and alter With the Homemade Cars Plan to build the industrial structure, which was up the brand PROTON, Malaysia employed dominated by ethnic Chinese investors. In the independent development strategy in an an attempt to lead private sector attempt to build the industry through state investment, the state of Malaysia used protection, which was initially effective. In various strategic industrial policy tools, 1989, PROTON began to export vehicles to such as tax incentives and subsidies, other countries. From the latter 1980s to the preferential bank loans, market protection, early 1990s, the domestic market share of government orders, and technology PROTON SAGA models was nearly 45%. development to develop a strategic PROTON merged with Lotus, a leading industrial policy (Camilleri, 2000). British brand, in 1997, and became the focus To ensure smooth development of its of the international automotive market. In domestic vehicle plan, the state of Malaysia addition to PROTON, the second domestic instituted a series of industrial policy car, PERODUA, was also developed with interventions, including the following state support in October 1992, with the aim actions (Gustafsson, 2006): to provide a large-scale supplier for the 1. Increased import tariffs on spare parts market. In its heyday, because completely built vehicles and of the automotive group formed by components; PROTON and PERODUA, the supply chain 2. Implemented quotas for imported had 350 chain-related companies, with a cars; total investment of RM 4.6 billion, 3. Encouraged foreign capital to employing more than three million people, participate in domestic car programs and producing 6,000 auto parts, nearly RM 4. Offered production subsidies to 20 billion worth. PROTON has not only domestic auto parts manufacturers, become the largest brand in the Malaysia lowered the price of components car market, but also the only domestically from 10% to 12%, increased tariff on manufactured car brand in an ASEAN imported components, and country. prolonged items tax relief, so that the price of homemade vehicles Establishment of Thailand’s automotive would be lower than that of industry imported cars of the same standard Contrasted to Malaysia, the industrial 5. Encouraged domestic car development of Thailand was led by foreign manufacturers to export vehicles capital and the private sector, and the state and auto parts (especial OEM parts) did not participate as an active leader. In to ASEAN countries, and used the the case of the automotive industry, the Thai government mainly cooperated with multinational corporations (MNCs), 4 Automotive Federation of Malaysia (AFM), offering various incentives to encourage “Submission of AFM on the Industrial Master Plan,” in The ASEAN Motor Industry in Economist Intelligence them to build production bases in Thailand. Unit (KL: EIU, 1984), p. 1. Journal of ASEAN Studies 63

Local enterprises produced spare parts and and planning Thailand's state-led industrial became peripheral industries. development. At that time, Thailand lacked The development of Thailand’s industrial experience and local personnel automotive industry is divided into four who were good at management, and thus stages: first, the establishment stage (1961- needed help from foreign investors and 1970), focusing on creating production firms. Therefore, during the early days of capacity; second, the national regulatory the automotive industry, the state allowed period (1971-1989), focusing on multinational automotive groups to strengthening production and further cooperate with local investors to form joint localization; third, and fourth: liberalization ventures. (1990-now), focusing on full liberalization Those assembly plants that were and export promotion, in response to the granted privileges from the state enjoyed liberalization trend of world trade. lower tariffs for whole vehicle components. However, importing large quantities of The establishment period (1960-1980): import components led to serious payment deficits substitution policy in Thailand. This problem became more The automotive industry in Thailand apparent in the late 1960s, and thus in 1969, began in the 1960s, following the period in the state ceased establishing auto which all cars were imported. The first auto manufacturing companies under the advice company, Thai Motor Industry Company, of the Parliament Automotive Industry was established in 1961. The next year, The Development Committee, reexamined the Office of the Board Investment was set up developmental direction of the industrial and offered many preferential terms for the sector, and changed to nurturing the automotive assembly industry. Industrial domestic industry by “import-substitution development can bring economic industrialization.” To ensure industrial development; therefore, the state began to autonomy, the Ministry of Industry (MOI) nurture the domestic automotive industry, announced a comprehensive reform hoping to cooperate with European and program for the auto industry in 1971, Japanese manufacturers to establish an which required that local assembly vehicles industrial base. In this stage, the state of use at least 25% locally made components. Thailand offered foreign investors the The policy of economic nationalism following preferential terms (Fujita, 1998): upheld by Prime Minister Thanom 1. Fifty percent reduction in import Kittikchorn was the main reason for this tariffs on completely knocked-down change. Thanom tried to implement vehicles (CKD) for five years; national capitalism to revitalize industry, 2. Five-year joint venture income tax avoid economic exploitation of foreign relief; capital, and achieve the modernization of 3. Free remittance of foreign exchange; Thailand. He believed the state should lead 4. Free flow of capital and technology in the development of the automotive in Thailand industry through working with domestic investors and The Federation of Thai After implementing these preferential Industries, and help local producers terms for industrial development, the compete against imports through numbers of car assembly plants rapidly protectionist policies. increased. In 1967, the state of Thailand To strengthen the development of local established The Federation of Thai industry and reach an enhanced economic Industries, which took charge of integrating scale of production, in the 1970s, the state of 64 State and Industrial Policy

Thailand restricted the number of domestic Manufacturing Project (Kesavatana, 1989). assembly car models and further promoted The plan projected that 95% of Thai car localization, which aided the development components were to be locally produced. of the component sector (Fujita, 1998). The However, because this might have caused a Thai Auto-Parts Manufacturers Association significant loss of tariffs for imported (TAPMA) was established in 1978 and components, several interest groups and served as a mechanism for industrial government agencies opposed this plan, integration and development of the which ultimately suspended the domestic component manufacturing industry. In the car project. same year, the state of Thailand announced After 1985, Thailand's automotive the prohibition of whole vehicle import industry underwent several significant (CBU) and increased tariffs on import changes. The “Plaza Accord” forced the assembly (CKD) as the first step to protect appreciation of the yen,5 and Japanese the domestic automotive industry. Under enterprises needed to move overseas to these measures, the state ceased granting lower-cost locations, causing Thailand to production privileges and increased the become the first overseas investment choice required proportion of domestic production for the Japanese automotive industry.6 parts, gradually increasing the number of Taking this opportunity, the state of local component manufacturers. Thailand offered increasing tax concessions to Japanese-based multinational The relaxation period (1980-1989) corporations, and created an environment Following the second oil crisis in 1979, that was more conducive for their the prices of agricultural products in investments. These industrial liberalization Thailand fell and caused heavy economic measures caused foreign investment (FDI) losses. In the hope of obtaining loans from to rise. Increased foreign capital maintained the World Bank, and facing pressure from Thailand’s economic growth rate at 9% on multiple forces in society and multinational average, causing the rise of a middle class, corporations, civil society groups, led by the which increased demand in the domestic Joint Public Private Consultative Committee automotive market. The rising middle class (JPPCC, established in 1981), required a and the development of a partially change in economic policies in Thailand liberalized automotive industry forced the from import substitution to export-oriented. This change had a significant influence on the development of the automotive industry 5 September 22, 1985, United States, Japan, Britain, (Abdulsomad, 2003). In 1982, Thailand froze France, and West Germany, the five industrial the 1978 “Ratio of Origin” requirement. In countries, gathered at the Plaza Hotel, New York, for a secret meeting. Their finance ministers and central addition to policy transformation, the state bank presidents signed the famous “Plaza Accord” to of Thailand also hoped that the automotive undertake joint intervention in the foreign exchange industry could develop a key competitive market, forcing the U.S. dollar down against the advantage, and thus focused on pick-up Japanese yen, German mark, and other major currencies in an orderly manner, to resolve the trucks as the main product, and worked to massive U.S. trade deficit, which led to significant position the nation as the global production appreciation of the Japanese yen. center for such vehicles. 6Thailand particularly welcomed Japanese capital, To increase the use of local components, mainly because Japanese investment was labor- in 1984, the government announced a joint intensive and could create more job opportunities. Moving the major market to a foreign country (i.e. re- project between Peugeot France and local exports) could reduce the exploitation potential by the enterprises, known as the Domestic Car Japanese market. Journal of ASEAN Studies 65 state to consider reopening the market for to 1994, resulting in 20% annual growth of import cars. the domestic market. The Thai government relaxed controls The export-oriented period (1990-2000) on the automotive industry because the Under the ruling of reformist Prime state sensed the necessity to closely follow Minister Anand Punyarachun, the state of the trends of technological development in Thailand gradually abolished the major producing countries, such as Japan restrictions on the automotive industry in and Europe, to reach its internationalization the 1990s by partially reopening the market goal. In view of this, it implemented an for imported vehicles, and substantially open industry policy, and chose the lowering tariffs on imported cars and development mode of cooperation with components. In 1993, the Thai government foreign investors. The Thai government announced the Export Promotion Project of thus developed a series of measures the Automotive industry, and abolished including reduced tariffs, eight years of restrictions on setting up auto assembly corporate income tax exemption, offsetting plants by foreign firms, transformed the import taxes on machinery and equipment, domestic market-oriented industrial policy material import duty rebates, and further to an export-oriented one, and boosted relaxations of trade restrictions. exports to deal with increasing import competition. These changes led the growth rate of automotive manufacturing to become the highest in the world from 1990

Table 2: Comparison of Thailand’s import tariffs on CBU and CKD (1986-2000) Mode Sedan under Sedan over One-ton Pick- Big truck Year 2300cc 2300cc up truck CB CK CB CK CBU CKD CBU CKD U D U D 1986 180 112 300 112 120 30 40 10 1991 60 20 100 20 60 20 40 10 1992 42 20 68.5 20 60 20 40 10 1994 42 20 68.5 20 60 20 40 10 1997 80 20 80 20 60 20 40 10 1999 80 20 80 20 60 20 40 10 2000 80 33 80 33 60 33 40 10 Source: Based on data obtained from the Board of Investment, Thailand, and the Thai Embassy in Japan,

adopted deregulation to allow foreign The Period of Embracing Free Trade (2000-now) investors to own 100% of their Thai The internationalization of Thailand’s subsidiaries. This policy could solve the automotive industry began in the 1990s. overcapacity problem caused by a shrinking After the financial crisis of 1988, Thailand continued an active policy of opening its economy and caused great damage to the automotive 7 economy. To mitigate liquidity problems, it industry, causing a sharp fall in the domestic and regional market demand, and thus shrinking car 7 The Asian financial crisis of 1997 hit the Thai production by 40%. 66 State and Industrial Policy domestic market by increasing exports. set out in this free trade agreement. However, it was a response to globalization Therefore, since 2003, Thailand has reduced and the need for greater regional economic tariffs on imported cars to 5% (Hsu, 2002). integration. The dependent development mode of After joining the World Trade Thailand’s automotive industry led to the Organization (WTO) in 2000, Thailand following results: its automotive industry abolished its rules of origin on vehicle and ranks as the fifth largest export industry; as components, and allowed multinational a car exporter, Thailand ranks the first companies to set up wholly owned among ASEAN countries and the third in enterprises. Consequently, foreign investors Asia after Japan and South Korea; and dominated the auto assembly industry, Thailand made cars are sold in the United while local firms were engaged in the Kingdom, Canada, and Australia. Thailand supply chain related to spare parts. also has the largest automotive assembly In addition to the WTO norms, regional base in Southeast Asia, and has become one integration in the ASEAN Free Trade Area of the top ten auto manufacturers; it has 16 (AFTA) accelerated the liberalization of the domestic car assembly plants and 1,800 Thai automotive industry. The AFTA norms component production plants; and after lowered import tariffs and non-tariff 2005, it has produced more pick-up trucks measures to between 0% and 5% in 2003 for than any other country worldwide (Zhao, old member states of the ASEAN (Brunei, 2006). Indonesia, Malaysia, Philippines, Singapore, and Thailand). The automotive industry in Thailand was included in the list of five Thailand’s auto industry policy main industries by the Board of Investment (BOI) that the government used to attract In view of Thailand’s auto industry more multinational manufacturers to build policy, the Ministry of Industry has been plants in Thailand. The ASEAN Industrial responsible for its control and adjustment Cooperation Scheme (AICO) states that and the secondary Automotive Industry when the auto parts manufacturing Association has been in charge of setting up industry of a country meets the standard of specific industrial policies and development using parts that are 40% locally made, it can plans. The following chart shows the then enjoy a 0% to 5% special tariff within industrial policies implemented from 1962 ASEAN. Thailand implemented a to 2000 to nurture the Thai automotive liberalization policy and its tariff reduction industry. projects met the time frame and standards

Table 3: Thailand's auto industry policies Year Industrial Policy Implemented an automotive assembly industry-promotion 1962 system (five-year reduction in import tariff on CKD to 50%, five-year reduction of corporate tax). Increased the import tariff on whole vehicles to 60%; lowered the 1967 import tariff on CKD for sedans by 30%, special trucks 20%, and trucks 10%. 1975 Implemented 25% localization. 1978 Prohibited auto imports, reexamined import tariff rates, and Journal of ASEAN Studies 67

prohibited the establishment of car assembly plants. Began domestic car parts design (achieving the goal of 50% in 1980 1983). 1982 Froze the ratio of automotive localization at 45%. Proposed a new auto industry development policy, the goal of localization, with sedans at 54% in 1987, special trucks at 62% in 1983 1988, and included the norms for new models, that imported body or engine parts and gearboxes only have one selection. Allowed vehicle importation with over 2.3 L displacement, 1985 although the import tariff was 300%. 1986 Small commercial vehicles must use domestic engines. 1989 Implemented the use of 20% domestic engines. Allowed the import of vehicles with under 2.3 L displacement, reduced import tariff rate for sedans with over 2.3 L displacement 1991 from 300% to 100%, that for under 2.3 L displacement from 180% to 60%, for bulk-type sedans from 112% to 20%, and bulk-type trucks from 30% to 20%. Changed import tariffs on whole cars, with sedan under 2.4 L displacement falling from 60% to 42%, sedans with over 2.4 L 1992 displacement from 100% to 68.5%, special trucks from 120% to 60%, including Value-Added Tax and the repeal business tax. Abolished the restriction of setting up auto assembly plants, 1993 allowed vehicles less than two years old to be used as taxis. 1994 Implemented preferential tariffs on whole car exports. Abolished a unified price system for vehicles with under 1.6 L displacement; repealed consumption tax on vehicles for less than ten passengers and priced below 100 million baht. The Value-Added tax 1997 rate was increased from 7% to 10%, all import tariffs on vehicles were raised to 80%. Excise tax on sedans and special trucks was raised to 5%. Relaxed the restriction on auto financing payment caps, which 1998 were relaxed from 48 months to 72 months, and lowered the down payment ratio of the total selling price from 25%-30% to 10%-20%. 2000 Repealed all requirements for auto parts localization.

Thailand chose the dependent formed in the context of having a “UK-core” development mode based on its attitude and “Thailand-frontier.” Since 1950, the toward foreign capital. Thailand has state has acted to gradually improve the adopted an open-door policy since 1885, position of Thailand in the international particularly under the effect of British economic structure. Therefore, its continued colonial policy development, and thus the cooperation with foreign investors and long relationship between Thailand and multinational corporations has enhanced its transnational corporations has been very domestic industrialization, dependent close. Because of this, the early stage of development has become the key policy for economic development in Thailand relied industrialization, and the relationship and on dependency and economic interaction, interaction between the state and 68 State and Industrial Policy multinational corporations has also become firms acquired the ability to integrate with more important (Soong, 1996). the international market. In the 1970s, during the early Similar to Malaysia, Thailand attempted developmental stage of Thailand’s to develop a domestic car in the 1980s. automotive industry, high tariffs and However, because high import tariffs restrictions of origin were used to protect resulted in substantial revenues for the the domestic industry, while a limited state, this plan was cancelled under the number of car models were produced to pressure of domestic tax units. The gain the economic benefits of scale. evolution of Thailand's automotive industry However, these protectionist measures did policy has shown that the State not lead to the rapid development of the implemented import tariffs and localization local automotive industry, because high car as protection measures and set up major prices limited domestic demand, which was development models, limiting car not conducive to industrial development. production to assist main products in After the 1980s, the middle-class had grown reaching market size. considerably in Thailand, the state gradually lost its ability to lead industrial Comparison of the development of the policy, and the government bureaucracy automotive industry in Malaysia and lacked effective tools to undertake this. Thailand Therefore, in the developmental mode, opening and renewing cooperation with Sales, production efficiency, and technology foreign investors, particularly Japanese Malaysia also began to develop its auto multinational corporations, became industry in the 1960s; however, the different necessary (Heggard, 1998). Economic development mode adopted achieved growth in the 1990s caused considerable different results to those in Thailand. In the domestic demand for automotive, which initial stages of their industries, vehicle forced the government to open the market production volume and sales in Thailand to car imports and relax restrictions on car were both less than those of Malaysia, with models. Hence, the automotive industry- the former implementing protectionist investment promotion policy in Thailand policies. However, since the adoption of an attracted multinational auto manufacturers open market policy in Thailand in 1990, to set up plants in the country, expand the both its production and volume not only scale of the industry, and establish a surpassed Malaysia, but also entered the regional production centre. After the international auto market. In 2000, auto financial crisis in the 1990s, the state turned exports in Thailand exceeded sales in the its industrial policy objectives toward the domestic market, and since 2004, international market. Because joint ventures approximately one third of all vehicles produced most of the cars and components, produced in Thailand have been for export. through the market channels and In contrast, the auto industry in Malaysia international operating experience of their has been substantially more limited and international cooperation partners, Thai with far fewer exports, shown in Table 4. Journal of ASEAN Studies 69

Table 4: Comparison of auto production and sales in Malaysia and Thailand Year Thailand Malaysia Homem Homema Domesti Domesti ade car de car c sales c sales production production 1985 83,105 85,222 107,030 94,999 1990 304,843 304,062 191,580 165,861 1995 525,680 571,580 288,838 285,792 2000 411,721 262,189 360,105 343,173 2003 750,512 533,176 426,646 405,745 2004 928,081 625,435 471,975 487,605 Source: Fuangkajonsak, 2006, p. 24.

Table 5: JAMA manufacturing capacity ratings for Thailand and Malaysia Item Thailand Malaysi a Engine High Low Engine parts High Low Electronic High Standard systems Braking system Standard High Interior High Low Source: Fuangkajonsak, 2006, p. 45

Table 6: Price comparison of the same vehicle in Malaysia and Thailand Model Price in Price in Remarks Thailand Malaysia NISSAN X Trail 120,909 136,030 RM units TOYOTA Camry 105,000 149,149 calculated on the 2.0E Thai baht 1:11(Price HONDA Civic 2.0E 92,727 127,465 in 2006) Source: Organized from brand websites in both countries.

At the technical level, research by the Thailand for industrial technology, export Japanese Automotive Manufacturers capabilities, product cost, manufacturing Association (JAMA), indicates that the auto capacity, and other measures of industrial industry in Malaysia performs worse than competitiveness, shown in Table 5. When comparing the same models, the Thailand has earned the reputation of being prices of imported cars in Malaysia are the Asian Detroit. Compared with more than 10% higher than in neighbouring Thailand's “dependent development,” countries, shown in Table 6. In contrast, Malaysia’s “independent development” has driven by the State and foreign capital, led to a lack of industrial competitiveness. From an economic point of view, investment of foreign capital; emphasis on researchers believe that the competitive technology transfer from foreign advantage of the automotive industry in enterprises, and training local technical staff Thailand lies in the following elements: the to build up the industrial development 70 State and Industrial Policy base; and support from the State encourages operations, and managers lacked the power car exports.8 In contrast, the literature to seek cost minimization, which led to low provides six main reasons for the decline of production efficiency. Compared with the Malaysian auto industry: (1) Increased Malaysia, the Thailand automotive industry competition in global markets, making it courted multinational corporations, which difficult for domestic companies to enter not only brought capital, but also advanced into direct competition with multinational technology and management methods. This corporations (MNCs)9; (2) Increasingly is why a more open attitude is considered stringent new vehicle standards in the the main reason for the positive international automotive market, of which development of Thailand's automotive most small factories cannot afford the industry. related R&D costs; (3) A new era of high oil prices, which has reduced Page: 70 Response to free trade consumer demand; (4) A globalization In addition to technology and sales trend, which has led to the concept of a issues, the bigger challenge for the “World Car,” of which small regional firms automotive industry in Southeast Asian cannot compete with such approaches; (5) countries comes from international pressure Improved economy in Malaysia, resulting in related to removing market protection. consumer desire to buy foreign cars10; and Besides the World Trade Organization, the (6) An already saturated domestic market in cooperation of automotive industries in Malaysia. Although Malaysia has promoted ASEAN countries, under the concept of its domestic cars as an export brand, the economic cooperation, has become a key country's limited market cannot achieve the element in the region's industrial economies of scale needed to reduce costs. cooperation plan. ASEAN countries thus The financial crisis of 1997 shrank the believe that technical cooperation and trade domestic market, and hurt the industrial liberalization can help auto part and vehicle environment for the development of production companies achieve economies of Malaysia's domestic auto industry scale, and thus reduce production costs. If (Holland, 2001). the automotive industry in ASEAN Although Malaysia built up the countries is unable to cooperate actively to industrial scale of its automotive industry, reach greater market size, it will be unable and the government continued its to increase its industrial competitiveness. intervention and protection, it never The cooperation of regional industries can considered the issue of industrial self- reduce the development costs of shared reliance. State protection caused laziness components, and help expand overseas and complacency in production and markets. However, under economic cooperation, 8 Jing Liu, “The Development Status and Prospects of the removal of trade barriers would cause Thailand's Automotive Industry,” Auto Industry the automotive industry in ASEAN Research, No. 6, 2005, pp. 1-3. countries to face challenges related to 9 International auto plants brought the following production modes and technologies, such as: “Just In greater international competition, the Time” (JIT), global logistics, better component supply liberalization of production and sale, and relationships with upstream and downstream industrial repositioning and efficiency secondary and tertiary level plants, and outsourcing, improvement. The auto industry in which depends on a great market size. Malaysia had enjoyed protection in many 10 To date, Proton's production has still not reached economies of scale, and only a limited range of car areas, and was thus adversely affected by models is offered. ASEAN’s cooperation plan, which lowered Journal of ASEAN Studies 71

tariffs on vehicle imports and removed the proved to be a more flexible approach to “approved permit” of non-tariff barriers, avoid much of the effects of the ASEAN increasing the pressures related to free trade open market policy and did not consider (Abdullah, 2006). To protect its automotive abolishing import licensing until the end of industry, the Malaysian government has 2010. These practices all violated the terms persistently entered it in the list of sectors of the ASEAN economic cooperation temporarily excluded from tariffs, and thus agreement specification, and have been delayed tariff reductions from 20% in 2005, criticized by other member states. to 0%-5% in 2008. The government replaced import tariffs with excise duties, which

Table 7: ASEAN countries’ tariff reduction schedule for imports of fully assembled cars Country 2002 2003 2004 2005 2 2 2 2 2 006 007 008 009 010 Thailand 15% 5% → → → → → → 0% Philippines 20% 5% → → → → → → 0% Indonesia 5% → → → → → → → 0% No No No Malaysia 15% 5% → → → 0% reduction reduction reduction No No No No 20 Vietnam → 20% 5% → reduction reduction reduction reduction % Source: ASEAN Automotive Integration: Private Sector Perspective, reference paper in the 8th APEC Automotive Dialogue, Bali, Indonesia, 15-18 May 2006.

In contrast to the situation in Malaysia, development plan, following the successful the ASEAN Industrial Cooperation (AICO) experience of the plan focused on pick-up agreement offers tax incentives to trucks. Given these preferential terms, some automotive factories in this region, and one important international manufacturers of the conditions for receiving this aid is chose Thailand as their production base. that over 50% of the products must be Thailand also allows transnational exported (Jing, 2001). Thailand has the automotive groups to fully own their largest automotive market and production factories, thus reducing the problem of in Southeast Asia, and thus is the biggest patent violations. The ultimate goal of potential beneficiary of this policy. Based on Thailand’s national industrial policy has the concept of free trade, Thailand also been to make it the global production center included auto parts as the main tariff for pick-up trucks and eco-cars (Jian, 2008). reduction item in its free trade agreements The developmental scholar R. H. Wade with Australia, New Zealand, and India. In (2003), has noted that economic addition to having export advantages, the globalization has changed the global Thai government also announced that, since industrial environment and forced 2009, for small vehicles worth less than developing countries to face diverse US$15,300, the excise tax would fall from situations. When the ability to engage in 30% to 17%. The main purpose for this protectionism and state intervention policy was to develop an eco-car model as becomes limited, the state must face trade the country's second industrial liberalization issues by adopting different 72 State and Industrial Policy strategies to obtain further economic countries not only consider the domestic development. The threshold for a country’s market, but also aim to incorporate the automotive industry to enter the industrial base of developing countries into international market is rather high, and their global production and supply chains. when facing the challenges of globalization, The automotive industry in Thailand was Thailand has been more flexible and built on the following basis: the state’s forward-looking, while Malaysia, due to its "interactional voluntarism” was combined protectionist policies and the lack of with international and domestic capital to multinational strategic alliances, has lost the form a “triple-alliance,” and this created the opportunity to enhance competitiveness. mechanisms needed for independent development. The developmental experience of Response and Reflection: the Political Thailand’s automotive industry Economy of the State and Industrial Policy demonstrates how the government of developmental states can remain The Choice of Industrial Strategies: independent and make the industry self- “independent development” and “dependence reliant after it has first been established and mode” for the automotive industry built up. Scholars of developmental states The preceding discussion of the propose that even though state intervention different industrial development strategies or protection might cause rent-seeking and adopted by Thailand and Malaysia shows laziness, a period of protectionism might that the State played an important role in benefit industrial development in the long the automotive industries of both countries, run. When facing pressure from a more and that both economic development open market, and finding that national modes are state-led. Both countries hoped intervention and other strategies could not to develop an automotive industry with the prevail, Thailand amended its industrial aid of state intervention, and both achieved strategy to one of following the market, and rapid establishment of industrial scale, with thus was able to continue to maintain the goal of industrial internationalization to industrial competitiveness. This approach is export their production to other countries. similar to a more recent idea in national The main difference between the development theory, the State-market industrial policies of Thailand and Malaysia condominium approach, which does not see is the specific developmental strategy the state and the market as opposed to each adopted: the former chose the “dependence other. mode,” while the latter, “independent Professor Wan-Wen Chu noted that development.” While Thailand’s although national intervention might help, dependence mode went through an it will not necessarily promote industrial industrial protection stage involving development. An examination of how national intervention, the purpose of this different countries developed their was not to replace, but rather promote, local automotive industries revealed that South enterprises and investment. The State then Korea as one of the few successful cases that chose to form a relationship of production undertook an independent development and technological cooperation with strategy. Thus the question must be asked transnational automotive companies. This as to why this is so rarely successful. The situation is similar to what Wade answer is because the automotive industry mentioned: transnational (automotive) in developing countries must rely on the groups that wish to invest in developing local market to establish the production Journal of ASEAN Studies 73 scale. However, the domestic market is In the world system, 95% of countries still limited by the country's economic maintain their original structure. Therefore, development, and manufacturers must thus even though a triple alliance can be fight in a highly competitive and rather transformative, whether the automotive small market. To achieve greater success, industry in Thailand can break the most domestic manufacturers choose to structural relationship of the international introduce transnational capital, technology, political and economic system, and move and brands. Hence, most automotive toward complete self-reliance in the manufacturers in developing countries have industrial development, remains doubtful. cooperated with major firms from the U.S. and Japan, and have become part of the Political nature of the Industry: National global network of large, transnational political and economic structure and rent- automotive groups. In contrast to Thailand, seeking after the 1970s, Malaysia developed a more Comparing the economic development active form of national capitalism based on strategies of Malaysia and Thailand shows the New Economic Policy and Economic both economic and political differences. For Nationalism, which considered the some developing countries, state automotive industry as a national industry, involvement in industrial policy is based on and one that should follow the mode of political considerations, and thus industrial independent development. However, the policy is an important tool for policy of protecting a national brand, in this implementing nationalism. As mentioned case Proton, meant that the industry lost the earlier, due to specific factors related to opportunity to integrate with the global certain domestic groups, the automotive market. The small domestic market could industry in Malaysia was not fully not create economies of scale, the state did established based on economic not change its policy from one of market- considerations, and political factors became leading to following the market, and thus, an obstacle to its reform. the Proton project gradually declined. This During development of Malaysia’s shows that within the global system automotive industry, Prime Minister structure, it is difficult for industries in Mahathir proposed a “domestic car developing countries to undertake self- production project” with the aim of reliant development. promoting the businesses of local Malay Finally, research in the field of political groups. Malay firms were thus a beneficiary economics shows that so-called triple of this project, from which emerged the new alliances, the combination of international rich class. This consolidated Mahathir’s and domestic capital, and the State, can be leadership of both the United Malays both dynamic and transformative. The National Organization (UMNO, Malay external structure (competition among group’s ruling party) and Barisan Nasional transnational corporations) and the internal (Malaysia's ruling coalition), and structure (national and local business suppressed Chinese-based opposition alliances) change over time and allow the forces. The state’s industrial policy became fluctuation of forces, which affects the form a vehicle for arbitrary political and of such alliances. However, although there economic decision-making in Mahathir’s 22- may be changes, as the studies of Arrighi year reign. and Drangel and Gereffi (1992) have shown, In brief, the automotive industry it is rare to maintain their status of a became an important means of maintaining consistent upward or downward structure. sovereignty for the Malay community. This 74 State and Industrial Policy is consistent with the criticism of protection plan, social outcomes were far neoclassical economics of state intervention more important than profit. Therefore, even in industry. Further analysis of the Proton though the project was not economically ownership structure found that the successful, the state continued to support it, shareholders were mostly the state or and reform was difficult to achieve. enterprises from the Malay community. This proves that in Malaysia's domestic car

Table 8: Proton ownership structure in 2005 Political and Number of Ranking Shareholder ％ economic shares background 210,484,69 38.32 State-controlled 1 KHAZANAH NASIONAL BERHAD 3 % EMPLOYEES PROVIDENT FUND 10.93 Government 2 60,017,000 BOARD % controlled fund RHB NOMINEES (TEMPATAN) SDN. National 3 BHD. 35,676,680 6.50% Petroleum PERTROLIAM NASIONAL BERHAD Holdings CIMSEC NOMINEES (TEMPATAN) Indigenous 4 SDN. BHD. 24,250,000 4.42% government-led SECURITY TRUSTEE (KCW ISSUE 2) investment bank Islamic funds, 5 LEMBAGA TABUNG HAJI 16,820,427 3.06% based on a vast rubber plantation CARTABAN NOMINEES (ASING) Singapore's state- SDN. BHD. GOVERNMENT OF controlled fund 6 SINGAPORE INVESTMENT 14,185,300 2.58% (foreign capital) CORPORATION PTE.LTD. FOR GOVERMENT OF SINGAPORE (C) Indigenous Education 7 PERMODALAN NASIONAL BERHAD 8,838,000 1.61% Development Fund CARTABAN NOMINEES Malaysia (TEMPATAN) SDN. BHD. AMANAH Employment 8 SSCM NOMINEES (TEMPATAN) SDN. 8,094,900 1.47% Fund BHD. FOR EMPLOYEES PROVIDENT FUND BOARD (JF404) Malaysia 9 PERECOM INDUSTRIES SDN. BHD. 7,444,000 1.36% Technology Group HSBC NOMINEES (ASING) SDN. HSBC, Foreign 10 BHD. TNTC FOR SAUDI ARABIAN 6,835,998 1.24% Capital MONETARY AGENCY Source: Proton Holdings Berhad, Annual Report 2006. Journal of ASEAN Studies 75

As for the protection of the automotive with political factors being the major industry, in addition to state regulation of obstacles to industry transformation. the ownership structure and industrial Because of the political and economic supply chain, the Malaysian policy that was structure, the State (controlled by ethnic most criticized by other ASEAN countries Malay communities), domestic capital was the use of Approved Permits (AP) to (controlled by Chinese enterprises), and protect domestic assembly plants, and offer foreign capital could not build a cooperative more opportunities for Malay enterprises to relationship and was not able to follow participate in the sales of imported cars. As Thailand’s dependency development the country's economy developed, the example and form a triple alliance. The demand for imported cars also increased, country's economic policy and heavy and those who had an AP could control industry policy have deterred Chinese import quotas, leading to political capital from investing in the automotive competition. Malaysia's industrial policy industry, and thus impeded the capital eventually evolved into chips-distributing investment required for industrial political favouritism, which weakened the transformation (Lubeck, 1992). When non- competitiveness of external competitors economic goals became more important (foreign car manufacturers) when they tried than economic ones, the lack of an to enter the domestic market. adjustment to Malaysia's development In contrast to Malaysia, by following strategy in the face of the challenge of economic development policies and open opening up to international markets politics, public and private sectors in eventually leads to significant problems Thailand have transformed from a with industrial development. relationship of “Clientism” to “Partnership” since the 1980s. The industrial sector improved the effect of state policy, and Conclusion industrial policy accordingly adjusted to regime change. Before the 1980s, Thailand Comparing the automotive industries in had an authoritarian military regime, and two newly industrialized Southeast Asian preferred the policies of state capitalism and countries, Malaysia and Thailand, this economic nationalism. After the 1980s, research examines how, during the process Thailand adopted the industrial policy of a of economic development, the State chose to self-adjusting market, and supervision from intervene in industrial development, and public opinion and interest groups helped how it influenced the political and the automotive industry make adjustments economic situation. As in many other in the direction of market liberalization and developing countries, Malaysia has a strong transformation (Shen, 2004). state and was able to use the New Economic Differing from Thailand’s frequent Plan and the National Plan of Heavy coups and lack of effective state Industry as policy tools to establish a intervention, Malaysia has a strong state domestic industry. Establishment of the and the ethnic Malay community has automotive industry in Malaysia was thus continued to dominate the political system, the result of protectionist policies based on and lead the industrial policy formulated by political and economic reasons, consistent the State. The automotive industry appears with the ideology of “indigenous priority.” to have adopted “rent-seeking” behavior, Differing from Malaysia, the early the political effect of market intervention, automotive industry in Thailand also chose 76 State and Industrial Policy to employ market protection, and use largest car assembly market among ASEAN import-substitution as the developmental countries and produce the highest quality strategy. This research found two vehicles because it opened its domestic significant differences between Malaysia market and attempted global integration. and Thailand in how the State conducted its The country has also had greater potential industrial policy. First, two different for market growth and a stable political industrial strategies were chosen, namely climate, and a state that supports free trade independent development in Malaysia and and open investment policies. Thailand dependency development in Thailand. possesses no ethnic conflict or national car Second, the political nature of the Malaysia program. With a more open attitude, automotive industry hindered its Thailand has attracted more investments subsequent industrial policy, and made it into its automotive industry. However, the difficult to adopt a policy of following the lack of ethnic problems does not necessarily market. In short, industrial development, mean that there is no political interference particularly the automotive industry, has in the industry, while the lack of a national been closely related to Malaysian political car program and greater liberalization do and economic characteristics. not necessarily mean that rent-seeking is In contrast, as the Thai government not a problem. stated in its “Automotive Industry in Thailand,” the country was able to have the

Table 9: Political and economic comparison of different developmental strategies used in Malaysia and Thailand Automotive industry in Automotive industry in Criteria Malaysia Thailand Independent Mode Dependency Development • In 1961, Thailand’s Automotive Industry • In 1962, the domestic Corporation was automotive industry established was first established • In 1980, the import • In 1982, the domestic substitution industrial Key important dates in the car production project policy was implemented development of the of was implemented. • In 1985, cooperation with industry • In 1985, the first Japanese capital domestic car was gradually relaxed introduced, to become industrial restrictions the only domestic car • After the 1990s, brand in Southeast Asia industrial policy was revised to become more export-oriented • A strong state • Industrial policy changed dominated industrial because of political The Role of the State policy and considered changes the automotive • After the 1980s, politics industry as a national became open and the Journal of ASEAN Studies 77

industry. Domestic car State adjusted the manufacturers were industrial policy protected by this policy. • The political regime remained unchanged, and no major revisions to the industrial policy were made • No • Focus on the With or without national • Yes development of specific brand and specific models • Proton and Perodua vehicles—, such as pick- up trucks • The automotive industry protected the distribution and employment opportunities of ethnic Malay individuals, and • Industrial policy was The relationship between placed restrictions on more independent of the industry and politics other ethnic groups. political influence • Import licenses became the privilege of Malay individuals • The industry relied on the State and was not market-oriented • The New Economic Policy and Heavy Industry Policy • State, domestic, and deterred domestic foreign capital formed a The relationship with Chinese investors from triple alliance international car entering the • Cooperated with manufacturers automotive industry multinational enterprises (multinational enterprises) • Limited cooperation in and employed industrial the international division of labour market, and the State dominated industry development • A high proportion of domestic sales, and • A high proportion of Sales market thus the problem of a exports, up to one third saturated domestic of production market The attitude toward • Implemented tariff • Tariff reduction since 78 State and Industrial Policy

ASEAN Industrial protection until 2008 2000 Cooperation and Free • Non-tariff protection of • Support for industrial Trade agreements import licenses was cooperation and free continued until 2010 trade Source: Organized by the author

Returning to the first discussion about Jenkin (1995) compared the automotive the relationship between the State and the industry in Taiwan and South Korea and global automotive industry, as global and believed that the reason why the latter regional supply chains were formed, the could build up an independent automotive automotive industry in developing industry was because the State could countries was increasingly affected by free overcome pressure from the private sector trade agreements, and it became necessary and multinational companies and gain for them to choose between the strategies of control of the industry. In contrast, the State dependency development and the in Taiwan could not handle the conflict independent mode. Intel's former CEO, arising from integration of the domestic Andrew Grove, in his letter to the Wall private sector and multinational companies, Street Journal stated: “What can Detroit and it became difficult for the government learn from Silicon Valley?” In the letter, he to lead the industry, and thus it lost the stated that when one of a country’s opportunity to establish an independent industries encounters difficulties, they must automotive industry. In short, the reasons figure out whether it is because of a fall in for the success of South Korea's automotive competitiveness, or global industrial industry are as follows: a strong state, restructuring. If the former, then national highly distorted market mechanisms, and intervention would prove helpful, while it the cooperation with a large consortia. would prove harmful in the latter condition, However, this research finds that the and even eventually cause the whole nation opposite situation holds in the countries to lose its competitiveness (Grove, 2009). examined. Specifically, although Malaysia Grove further stated that the future of the has a strong state, the projects conducted by automotive industry, just as the division of state-led enterprises have not helped labor in the technology industry, is industrial development, while Thailand, undergoing an ongoing restructuring from which followed an open market model, a vertical to horizontal mode. Therefore, allowed multinational auto groups to enter future vehicles would thus be produced by the domestic market, which resulted in the assembly of standardized components. good industrial development. Why are the In this context, although many Asian results between this study and the earlier manufacturers might not be able to produce one so different? Jomo stated that the a whole car, the ability to control key developmental modes of newly components would gain them future industrialized countries in East Asia and industry opportunities in these countries. Southeast Asia differ. However, is this Grove’s point of view could serve as the related to a country’s relative position in the answer to these questions, that is, the state structure of the global system? This remains could follow the market and find a new a question for future Southeast Asian business model and new competitive political and economic research. advantage, all of which are important Journal of ASEAN Studies 79 strategies to maintain national industrial “Malaysia: In an Uncertain Mode,” in James development. W. Morely (ed.) Driven by Growth: Political Change in the Asia-Pacific Region. Singapore: Studies of the East Asian Institute. About Author Amsden, Alice and Wan-Wen Chu, 2003. Beyond Late Development: Taiwan’s Dr. Wan-Ping Tai（戴萬平） is currently an Upgrading Policies. Cambridge: MIT Press. associate professor and director at the Amsden, Alice, 1989. Asia’s Next Giant: Department of International Business South Korea and Late Industrialization. NY: the Cheng Shiu University, Kaohsiung. Oxford University Press. Audet, D. and C. Van Grasstek, 1997. Samuel C Y KU is Professor at the Institute “Market Access Issues in the Automotive of China and Asia-Pacific Studies, National Sector,” in OECD, Organization for Economic Sun Yat-sen University, Kaohsiung, Taiwan. Cooperation and Development, Market Access Issues in the Automotive Sector. Paris: OECD. Automotive Federation of Malaysia References: (AFM), 1984. “Submission of AFM on the Industrial Master Plan,” in The ASEAN Geoffrey, R., D. Underhill and Xiaoke Motor Industry in Economist Intelligence Unit. Zhan, 2005. “The State-Market KL: EIU. Condominium Approach,”in Richard Boyd Balassa, Bela, 1982. Development & Tak Wing Ngo (eds.), Asian States: Beyond Strategies in Semi-industrial Economics. the Developmental Perspective. London: Baltimore: Johns Hopkins University press. Rutledge. Bhagwati, Jagdish N., 1988. “Export- Abbott, J., 2003. Developmentalism and Promoting Trade Strategy: Issues and Dependency in Southeast Asia: the Case of the Evidence,” World Bank Research Observer, Automotive Industry. New York: Taylor & Vol. 3, No. 1, 1988, pp. 27-57. Francis. Buchanan, J. M., 1980. “Rent Seeking Abdullah, Rashid, 2006/12/13-15. and Profit Seeking” in J. M. Buchanan, R. D. “Business Response to the Regional Tollison and G. Tullock (eds.), Toward a Demands and Opportunity: A Study of Theory of the Rent-Seeking Society. College Malaysian Automotive industry,” paper Station, Texas A&M University Press. presented at the Global Issues and Camilleri, J., 2000. States, Markets, and Challenges in Business and Economics Civil Society in Asia Pacific. New York: Conference organized by the Department of Edward Elgar. Management and Marketing at Corus China Auto News, 2002/5/6. What kind of Paradise Resort, Port Dickson. automotive industry is it in Malaysia? China Abdulsomad, 2003. “Building Auto News. Technological Capabilities of Local Auto Chu, Wan-Wen, 1997. “Demonstration Parts Firms Under Contrasting Industrial Effects and Industrial Policy: The Birth of Policies: A Comparative Study of Malaysia Taiwan's Petrochemical Industry,” Taiwan: and Thailand 1960-2000,” in K. S. Jomo, A Radical Quarterly in Social Studies, No. 27, Greg Felker, and Rajah Rasiah (eds.), pp.97-138. Industrial Technology Development In Chu, Wan-wen, 2001. “The Effects of Malaysia. London: Almqvist & Wiksell Taiwan's Industrial Policy: A Preliminary Internat. Evaluation,” Taiwan: A Radical Quarterly in Ahmad, Z. H. and S. M. Alatas, 2005. Social Studies, No. 42, pp. 67-117. 80 State and Industrial Policy

Chu, Yun-han, 2008. “American political 1990. “Industrial Policy in East Asia: Does it elites re-embrace Government,” Business Lead or Follow the Market?” in Gary Gereffi Weekly, No. 1080, p. 20. and Donald L. Wyman (eds.), Manufacturing Crouch, H., 1993. “Malaysia: Neither Miracles: Path of Industrialization in Latin Authoritarian nor Democratic” in K. American and East Asia. New Jersey: Hewison, R. Robison and G. Rodan (eds.), Princeton Press. Southeast Asia in the 1990`s: Authoritarianism Gereffi, Gary, 1992. “Global commodity ,Democracy and Capitalism. St. Leonards: chains and footwear exports of semi- Allen and Unwin. periphery (Chinese edition),” Thought and Dicken, P., 1998. Global Shift: Words: Journal of the Humanities and Social Transforming the World Economy. London: Science, Vol. 30, No. 3, pp. 107-139. Paul Chapman Publishing Ltd. Grove, Andrew S., 2009. “What Detroit Doner, Richard F., 1991. Driving a Can Learn From Silicon Valley: Vertically Bargain: Automotive Industrialization and integrated production is a thing of the past. Japanese Firms in Southeast Asia. Berkeley: Will the auto industry's new overseers catch University of California Press. on?” The Wall Street Journal, p. A13. Ee, Tan Liok, 1992. “Dongjiaozong and Gustafsson, F., 2006. The Greasy Palm: the Challenge to Cultural Hegemony,” in Malaysian Industrial Policy and the Palm Oil Joel S. Kahn and Francis Loh Kok Wah Industry, Master Thesis, Lund University, (eds.), Fragmented Vision: Culture and Politics Sweden. in Contemporary Malaysia. Australia: Allen Hasan, P., 1976. Korea: Problems and and Unwin. Issues in a Rapidly Growing Economy. Evans, P., 1979. Dependent Development: Baltimore: The Johns Hopkins University The Alliance of Multinational, State, and Local Press. Capital in Brazil. New York: Princeton Heggard, S. M., 1998. “Business, Politics University Press. and Policy in East and Southeast Asia,” in Fishlow, A., 1994. Miracle or Design? Henry S. Rowen (ed.), Behind East Asian Lesson from the East Asian Experience. Growth: The Political and Social Foundations of Washington D. C.: Overseas Development Prosperity. London: Taylor & Francis. Council. Hewison, Kevin, 1988. “The State and Freeman, J. R.,1982. “State Capitalist Development in Thailand,” in Entrepreneurship and Dependence John G. Taylor and Andrew Turton (eds.), Development,” American Journal of Political Sociology of Development Societies: Southeast Science, Vol. 26, No. 1, pp. 90-112. Asia. London: Macmillan. Fuangkajonsak, W., 2006. Industrial Holland, Lorien, 2001. “Proton's Positive Policy Options for Developing Countries: the Spin,” Far Eastern Economic Review, No. 164, Case of the Automotive Sector in Thailand & pp. 55-56. Malaysia, Tufts University, Master of Arts in Hsu, Fu-Tim, 2002. “The effects of the Law and Diplomacy Thesis. East Asian financial crisis on the Fujita, M., 1998. “Industrial Policies and development of the ASEAN Free Trade Trade Liberalization: The Automotive Area,” Investment in Southeast Asia Industry in Thailand and Malaysia,” in Keiji (bimonthly), No. 10, 2002, pp. 3-4. Omura (ed.), The Deepening Economic Humphrey, J., 2000. “Assembler- Interndependence in the APEC Region, APEC Supplier Relations in the Auto Industry: Study Center, Institute of Developing Globalization and National Development,” Economies. Competition & Change, No. 4, pp. 245-271. Gereffi, Gary and Donald L. Wyman, Jenkins, Rhys, 1987. Transnational Journal of ASEAN Studies 81

Corporations and Uneven Development- Politics in Southeast Asia. Taipei: Wunan. Development & Underdevelopment. London: Kuckiki, Akifumi, 2007. “Industrial Rutledge. Policy in Asia,” Japan IDE Discussion Jenkins, Rhys, 1995. “The Political Paper, No. 128. economy of industrial policy: Automotive Kumon, Shumpei and Henry Rosovsky, Manufacture in the Newly Industrializing 1972. The Political Economy of Japan: Cultural Countries,” Cambridge Journal Economics, and Social Dynamics. Stanford, California: No. 15, pp. 625-645. Stanford University Press. Jian, Ai-Qun, 2008. “Thailand’s auto Lindauder, David L. and M. Roemer, market overview,” in ITIS. 1994. Development in Asia and Africa: Legacies http://www.itis.org.tw/rptDetail.screen?rpti and Opportunities. New York: ICE Press. dno=442296803. Liu, Jing, 2005. “The Development Jing, Xin-Ci, 2001. “ASEAN Industrial Status and Prospects of Thailand's Cooperation and Development,” Major Automotive Industry,” Auto Industry National Industrial Economic Policy Quarterly, Research, No. 6, pp.1-3. No. 1, 2001, p. 14-16. Lubeck, Paul M., 1992. “Malaysia Johnson, C., 1982. MITI and the Japanese Industrialization, Ethnic Divisions, and the Miracle. Stanford: Stanford University Press. NIC Model: the Limits to Replication,” in Jomo K. S., 2002/3/15. “State and Market Appelbaum and Henderson, In States and in Economic Development: Southeast Asian Deployment in the Asian Pacific Rim. London: Industrial Policy in Comparative East Asian Sage. Perspective,” paper present at Asia-Latin Machado, K. G., 1989. “Japanese America Cooperation-ALAC an ECLAC- Transnational Corporations in Malaysia's UN, IDE/JETRO-Japan and IE/UFRJ-Brazil State Sponsored Heavy Industrialization initiative. Drive: The HICOM Automotive and Steel Jomo, K. S., 1994. “Rethinking the Role Projects,” Pacific Affairs, Vol. 62, No. 4, p. of Government Policy in Southeast Asia,” in 504-531. Joseph E. Stiglitz and Shahid Yusuf (eds.), Nenham, Lim, 2006/5/15-18. “ASEAN The East Asian Miracle: Economic Growth and Automotive Integration- Private Sector public Policy – A World Bank Policy Research Perspective,” paper presented at The 8th Report. New York: Oxford University Press, APEC Automotive Dialogue, Bali Indonesia. pp.461-508. Office of Industrial Economics, 2006. Kesavatana, W., 1989. Political Economy Automotive Industry in Thailand. Bangkok: of Direct Foreign Investment in Thailand: A Office of Industrial Economics. Case Study of the Automotive industry, Ph.D. Proton Holdings Berhad, 2007. Annual diss., University of Michigan. Report 2006. KL: Proton Holdings. Khoo, B. T., 1995. The Paradoxes of Rasiah, R. and I. Shari, 2001. “Market, Mahathirism. New York: Oxford University Government and Malaysia’s New Economic Press, 1995. Policy,” Cambridge Journal of Economics, Vol. Konosuke, O., 1993. The Motor vehicle 25, No. 1, 2001, pp. 57-78. industry in Asia: A Study of Firms and States Rasiah, R., 1999. Liberalization and the in Modern Capitalism. Singapore: Asian automotive industry in Southeast Asia, Manpower Studies by Singapore University. Occasional Paper #99, Department of Kruegert, Anne O., 1993. The Political Intercultural Communication and Economy of Public Policy Reform in Developing Management, Copenhagen Business School. Countries. Cambridge, MA: MIT Press. Rasiah, R., 2001. “Market, Government Ku, Samuel C.Y., 1995. Government and and Malaysia's New Economic Policy,” 82 State and Industrial Policy

Cambridge Journal of Economics, No. 25, pp. Copenhagen: Copenhagen Business School. 57-78. Wad, P., 2001. Transforming Industrial Shen, Yo-Zhong, 2004. “Book Review: Relations: the Case of the Malaysian Auto Beyond Late Development: Taiwan's Industry, IIAS/IISGCLARA Working Paper, industrial upgrading strategy”, Political No. 12, Amsterdam. Science Quarterly Book Review, pp. 1-4. Wade, R. H., 2003. “What Strategies Are Sin Chew Daily, “2005 Top 10 list of AP Viable for Developing Countries Today? holders,” http://www.sinchew- The World Trade Organization and the i.com/special/aplist/index.phtml?sec=723&a Shrinking of Development Space,” Review of rtid=200507190274. International Political Economy, Vol. 10, No. 4, Soong, Jenn-Jaw, 1996. The Economic pp. 621-644. Political Development of ASEAN countries. Wah, Tan Kock and K. S. Jomo, 1995. Taipei: Wunan. “Economic Theory and Industrial Policy in Stiglitz, Joseph E. and Shahid Yusuf East Asia” in Robert Fitzgerald (ed.), The (eds.), 1994. The East Asian Miracle: Economic State and Economic Development-Lessons from Growth and public Policy - A World Bank Far East. London: Frank Cass. Policy Research Report. New York: Oxford White, G., 1988. Developmental States in University Press. East Asia. London: Macmillan. Torii, T., 1991. “Changing the Zhao, Meng-Yi, 2006. “Taiwan Investment Manufacturing Sector, Reorganizing Industry Analysis Report-Thai auto parts Automotive Assemblers, and Developing industry,” in ITIS. the Auto Component Industry under the http://www.itis.org.tw/pubinfo- New Economic Policy,” The Developing detail.screen?industry=4&ctgy=15&pubid=4 Economies, No. XXIX, pp. 387-413. 1501527. Wad, P., 1999. Business relations in crisis? Zysman, John and Eileen Doherty, 1995. The case of the national auto manufacturers in The Evolving Role of the State in Asian South Korea and Malaysia during the East Industrialization, BRIE Work Paper 84. Asian crisis: Part III: The Malaysian auto industrial networks in a netholder perspective.