Welfare Effects of Trade Barriers on Malaysian Car Industry: an Alternative Approach
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WELFARE EFFECTS OF TRADE BARRIERS ON MALAYSIAN CAR INDUSTRY: AN ALTERNATIVE APPROACH Wai Kun C Lau (1718460) A Dissertation Submitted In Fulfilment Of The Requirements For The Degree of DOCTOR OF PHILOSOPHY FACULTY OF BUSINESS & LAW SWINBURNE UNIVERSITY OF TECHNOLOGY April 2020 i Abstract Malaysian car industry has been heavily protected by tariff and non-tariff tools since it was founded in 1983. Despite excessive tariffs imposed on foreign cars, the demand for foreign cars increases after the Asian financial crisis 1997 while the demand for domestic cars declines. Partial equilibrium framework is applied in this research because the car industry’s contribution to GDP is very small and the focus of this research is specifically on the car industry. Since cars are durable and differentiated, changes due to technological advancement may influence car demand. This research applies Discrete Choice model to account for car characteristics in addition to socio-economic factors for analysis of car demand in Malaysia. Logistic regression analysis results show factors that influence car demand are: horsepower, fuel consumption, and car size that is measured by number of passengers. Results suggest that non-tariff barriers and government incentives given to the civil servants have significant influence on Proton cars’ demand, and foreign car makers that have been operating in Malaysia before the founding of Proton enjoy their reputation from their historical experience and performance. While it is often believed that European cars have ostentatious value in Malaysia, the results show otherwise. Price elasticity of demand for major car makes is estimated based on the average horsepower, car size and fuel consumption. Results show that in general, the demand for car is elastic in Malaysia with Proton cars’ demand having the lowest price elasticity of demand. Price elasticity range from -1.73 to -4.79 for domestic cars and -3.1 to -8.2 for foreign cars in Malaysia compared to -3.9 to -24.3 for domestic cars and -3.1 to -27.5 for foreign cars in the United States. The differences in the range of price elasticity in the two countries imply that there are less variety of choices available in Malaysia than in the United States. Relatively low price elasticity of demand in Malaysia may also reflect relatively lower income level’s effect on highly differentiated cars. The cost of protectionism is approximately 16.7 per cent of real GDP and 73.6 per cent of manufacturing sector’s GDP contribution in 2014. Finally, assessment on efficiency using Data Envelopment Analysis and ratio analysis show that protectionism has led to high inefficiency of domestic car makers. Although the cost of inefficiency cannot be completely identified and measured, the results show ii that there is serious excess capacity problem associated with protectionism. The research also highlights other social costs highly likely to be associated with protectionism but, not easily traced and measured due to missing data. iii ACKNOWLEDGEMENT To GOD be the glory. Thanks be to the Lord, my Saviour who is loving and knows my heart desire to pursue PhD with an Australian university. Without HIM, nothing is possible. My heartfelt gratitude goes to my supervisors, Dr. Omar Bashar and Assoc. Professor Malcolm Abbott for their invaluable comments and suggestions, for being very understanding and helpful. Many thanks to the panel members namely: Dr Chee Jin Yap, Dr Jeremy Nguyen and Dr Mark Bowden for their time and constructive comments over the years. The 2nd Adelaide PhD Summer Institute in International Trade has benefited me greatly during which I presented my dissertation. Many thanks to Dr. Frank Staehler, Dr. Martin Richardson, and Dr. Benedikt Heid for their invaluable comments and suggestions that helped improve my dissertation. Thanks to Dr. Calvin Lee, an ex-colleague from South Korea for his questions and suggestions that led me to case study of Thailand and South Korean car industries. I am grateful to the late Mr. Raymond Lim, an ex-general manager of UMW Toyota Sdn. Bhd. (Kuching), Mr. Edmond Lim, the then administrative and sales manager of UMW Toyota Sdn. Bhd. head office in Kuala Lumpur, Mr. Anthony Goh of Toyota Boulevard (Kuching) for their time, published information and unpublished information. Many thanks to Mr. Jonathan Teng, then with Road and Transport Department, Kuching for data. I would like to thank managers of several car service centres from different states of Malaysia, heads of some government offices, principals of schools and higher learning institutions and, department heads of some business organizations for their approvals and assistance to distribute questionnaires in their offices. I also would like to thank Mr. Ambrose Tai of St. Joseph Private School for proof reading the dissertation. Many thanks to anonymous external examiner and Associate Professor Kenneth Jackson for their comments and words of encouragement in their Examiner’s report. iv I deeply appreciate Reverend and Mrs. George Tay, brothers and sisters in Christ for their prayers, and Mr. Chan Kok Poh, my A level Economics teacher in Singapore, who has been encouraging me since the first day I was in his class until today. I would like to thank my mother and my sister who stood in when I was busy writing my dissertation and work, and my children, Scarlett and Perseus for putting up with my long work hours and made me laugh at home. v Praise the LORD for YOUR love endures forever My LORD, You provide so that I have; My GOD, You protect me and strengthen me; My FATHER, You love me and comfort me. I was searching, I found You waiting; I tried to prove myself, I found Your grace; I tried to quench my thirst, I found Your water flows. I know I have everything because You are with me. You have never forsaken me. Thank You LORD. In Jesus’ name. Amen. vi Declaration I hereby declare that this dissertation contains no material which has been accepted for the award to candidature of any other degree or diploma, except where due reference is made in the text of the examinable outcome. It is to the best of my knowledge that this dissertation does not contain material previously published or written by another person except where due references are made in the text of the examinable outcome. Wai Kun Callie Lau vii LIST OF TABLES Table 2.1 Comparison of import duties (%) for CBU and CKD cars as in 20 2003 and 2011 Table 2.2 Comparisons of selected car made and their efficiency 29 Table 2.3 Price comparison across different car makes of 1.6 litre engine 34 Table 2.4 Production, domestic sales and exports: Year 2017 39 Table 3.1 Top 10 car manufacturers: Year 2017 66 Table 3.2 Summary of literature survey in car market: Models and 79-80 estimation of elasticities Table 4.1 Summary of selected literature on car market: Logistic 121 regression models and sample sizes (in chronological order), and comparison with studies in related areas Table 4.2 High range car makes - Quantity and relative market shares: 123 Year 2012 Table 4.3 Sample size determination: Low and medium range 124 Table 4.4 Ratio of civil servant to population: Selected countries 128 Table 4.5 Composition of civil servant: Ethnic groups 128 Table 4.6 Sample size by states 139 Table 4.7 Samples: Mean price, power and sizes 141 Table 4.8 Car types: Characteristics by size 142 Table 4.9a Demographic of car owners’ characteristics: Number and 143 percentage Table 4.9b Demographic of car owners’ income by range and group: 145 Number and percentage Table 5.1 Comparisons of prices of selected car makes - by segments 163 Table 5.2 Market shares in year 2012, 2015 and sample shares 165 Table 5.3 Light trucks: First or second choice 167 Table 5.4a Summary: Number of passengers (NS) and Income group 169 (YGRP) Table 5.4b Tests of association: Income group and car size (NS) 170 Table 5.5 Test of correlation: Car size and number of dependents 171 Table 5.6a Interaction of number of car in households (NOC) with car 172 buyers characteristics: Correlation, p-value, and covariance Table 5.6b Interaction of number of car in households (NOC) with car 174 characteristics of first and second choice: Correlation, p-value, and covariance Table 5.7 Characteristics of first (1st) and second (2nd) choice: 175 Correlation, p-value, and covariance Table 5.8 Estimation of β major car makes 178-9 Table 5.9 Comparison of price elasticity of demand (h) for selected car 184 makes: by horsepower (cc) Table 5.10 Cost of protectionism: Current tariff rates and 50 per cent 187 reduction viii Table 5.11 Estimation of interaction term bo: car characteristics and car 188 buyer attributes Table 5.12 Income elasticity of demand: Domestic and foreign cars below 191 1800cc Table 5.13 Estimation of interaction term bu: unobservable car 192 characteristics by car makes Table 5.14 Estimation of interaction term bu: unobservable car buyer 194 characteristics Table 5.15 Accounting data and statistical data: Major car makes 196 Table 5.16 Ratio analysis 196 Table 5.17 Data Envelopment Analysis - Efficiency index 198 Table 5.18 Comparison of efficiency index - UMW Toyota: Before and 200 after 30 per cent tariff reduction Table 5.19 Production input multiples - Capital and labour: Japan and 201 Malaysia Table 6.1 Summary of elasticity findings in a priori studies and this 221 research and comparisons across studies LIST OF FIGURES Figure 2.1 Number of new cars registered - Proton and others: 1980 - 2017 26 Figure 2.2 Malaysia GDP growth: Years 1984 - 2017 32 Figure 2.3 Growth