UNITAR E-JOURNAL Vol. 6, No. 2, June 2010 78 THE 2008 FINANCIAL CRISIS AND THE STRATEGIES OF CAR MANUFACTURERS IN MALAYSIA : AN EXPLORATORY STUDY Syed Anas AlHabshi [email protected]Syed Omar Syed Agil Universiti Tun Abdul Razak [email protected]ABSTRACT The 2008 financial crisis has been an extremely challenging one for many businesses worldwide. Malaysia has not been spared from the difficulties posed by this economic disaster even though we were supposed to be somewhat isolated from being hit very hard. This paper examines the challenges faced by the Malaysian companies, in particular Automobile manufacturers or sometimes known as the Automotive Original Equipment Manufacturers (OEMs). This paper will also try and single out the least affected companies in Malaysia and try to understand what are the best practices in having a sustainable competitive advantage. The study has shown that car sales in Malaysia have seen a sharp decline especially between in the 2 nd half of 2007 and the 1 st half of 2008. This is mainly attributed to the global economic condition which has also had an affect on Malaysia. Nevertheless, some companies have been harder hit than others and this is what the author has tried to study. It is been found that while short term strategies may have had some influence on the performance of automotive companies in Malaysia, the long term strategies have a more profound influence over the performance of companies even during the more difficult times. Companies which have been steadfast in their long term strategies and have not been swayed by the different conditions have been less affected than those which have chosen to adopt short term strategies which are not well coordinated. The paper will also share some possible lessons that can be learnt from other OEMs in trying to become competitive players in the Malaysian automotive Industry. KEYWORDS: Car Manufacturers, Financial Crisis INTRODUCTION The economic crisis facing the world today may be attributed to the sub-prime lending in the USA. Quite simply put, subprime lending is when a financial institution lends out money to a borrower who does not have a good credit rating, and charging higher interest rates due to the higher risk of defaulting.
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UNITAR E-JOURNAL Vol. 6, No. 2, June 2010 78
THE 2008 FINANCIAL CRISIS AND THE STRATEGIES OF CAR MANUFACTURERS IN MALAYSIA :
The 2008 financial crisis has been an extremely challenging one for many businesses worldwide. Malaysia has not been spared from the difficulties posed by this economic disaster even though we were supposed to be somewhat isolated from being hit very hard. This paper examines the challenges faced by the Malaysian companies, in particular Automobile manufacturers or sometimes known as the Automotive Original Equipment Manufacturers (OEMs). This paper will also try and single out the least affected companies in Malaysia and try to understand what are the best practices in having a sustainable competitive advantage. The study has shown that car sales in Malaysia have seen a sharp decline especially between in the 2
nd half of 2007 and the 1
st half of 2008. This is mainly attributed to the global
economic condition which has also had an affect on Malaysia. Nevertheless, some companies have been harder hit than others and this is what the author has tried to study. It is been found that while short term strategies may have had some influence on the performance of automotive companies in Malaysia, the long term strategies have a more profound influence over the performance of companies even during the more difficult times. Companies which have been steadfast in their long term strategies and have not been swayed by the different conditions have been less affected than those which have chosen to adopt short term strategies which are not well coordinated. The paper will also share some possible lessons that can be learnt from other OEMs in trying to become competitive players in the Malaysian automotive Industry.
KEYWORDS: Car Manufacturers, Financial Crisis
INTRODUCTION
The economic crisis facing the world today may be attributed to the sub-prime lending in the USA. Quite simply put, subprime lending is when a financial institution lends out money to a borrower who does not have a good credit rating, and charging higher interest rates due to the higher risk of defaulting.
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Unfortunately when the prices of houses began to fall, home owners were forced to hold on to their loans which by 2008 had already reached the point where the interest payments had become exceedingly high. It was at this point that the number of defaulters drastically grew. The average American, especially sub-prime borrowers, succumbed to their debts and could hold on no longer. And finally the bubble burst.
This marked the beginning of the global financial crisis in 2008. The economy in the USA had contracted significantly and analysts predicted that it would be worse than the one during the Great Depression of the 1930‟s. Consumer spending suddenly crashed and imports to the USA almost came to a grinding halt. Many of America‟s trading partners, such as Japan, Great Britain, Korea and even Malaysia saw exports shrinking. This resulted in a chain reaction and before long many countries which relied on exports to the USA to sustain the GDP growth would see a contraction in their GDP‟s. Several countries which relied on the financial services sector such as Singapore, the United Kingdom and Switzerland were also badly hit due to exposures to the US sub-prime mortgages and securitizations. By the end of 2008, the global economy got from bad to worse.
The automotive industry is of great importance to a nation‟s economy. Due to the automotive industry‟s comprehensive and highly intricate eco-system, a nation‟s economy benefits from a wide range of avenues. Among them is the job creation that it brings about. This comes from the automotive manufacturers themselves as well as the extended network of suppliers, sales network, dealerships, after sales outfits and the list goes on. In addition, the auto industry also has one of the largest economic multipliers of any sector of the U.S. economy, and is sufficiently large that its growth or contraction can be detected in changes in the U.S. Gross Domestic Product. In many states, employment in automotive and automotive parts manufacturing, ranks among the top three manufacturing industries (Cole D, McAlinden S, Dziczek K, Menk, D.M, 2008)
The automotive industry also contributes in terms of the Gross Domestic Product (GDP) due to the volume of trade that takes place. This can be seen from the fact that cars are the second largest purchase by a household after a house. In the USA, the sharp decline of the automotive sector leading to huge layoffs had caused a spiral effect which contributed to the Great Depression of the 1930‟s. The current bailout of the Detroit Big Three (GM, Ford and Chrysler) is to ensure this does not happen again.
The current global automotive industry is in dire straits. Many car manufacturers across all continents are feeling the pinch. Declining sales, contracting revenues, shrinking profits and rising inventories are a common trend everywhere. Since the automotive industry is very competitive and severely capital intensive, altering the business course could be likened to a huge barge in the middle of the ocean trying to manoeuvre around ice-bergs. Once a course has been set, changing it abruptly is not possible as was the case with the “unsinkable” ship the „Titanic‟ in its maiden voyage in 1912.
When automotive OEMs are in trouble, they not only pose a threat to themselves but also to the whole eco-system. Suppliers are not spared and so are the dealers, distributors and even those in peripheral businesses such as logistics, after sales and financiers.
Measures to Cushion the 2008 Crisis
The Malaysian government has taken some drastic measures over the last few months in the forms of stimulus packages. The first stimulus package of RM7 billion was announced on November 4, 2008. Based on a letter from Datuk Seri Najib Tun Razak that was published in the Wall Street Journal on November 26, Najib stated the following. “On November 4, I introduced a 7 billion ringgit ($1.93 billion) pro-growth stimulus package to implement projects with high multiplier effects, building on the previously announced 5 billion ringgit allocation of existing investment capital to ValueCap, Malaysia's asset management company.
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The stimulus package as a whole is designed to enhance domestic growth and improve market confidence. This package ensures that a larger segment of the population will realize the benefit of productive expenditure from the government.
An article in the Business Times published on March 11, 2009 carrying the title “‟Unprecedented move' to avert recession” reported that on March 10 2009, Najib announced another stimulus package, only this time with a much larger quantum. The second stimulus package dubbed the mini budget totalled RM60 billion. Najib said that the large stimulus package was "unprecedented in the nation's economic history" and necessary given the worsening global economy. Following the unveiling of the first stimulus package in November 2008, Najib said that “…without these efforts, the economy faces the prospect of a deep recession”. The second stimulus package has four major thrusts which are to reduce unemployment and increase employment opportunities; ease the burden on the rakyat; help the private sector; and build capacity. Najib also announced the automotive scrapping policy where a customer wishing to buy a Proton or a Perodua may opt to scrap their old cars (10 years or older) and receive a rebate of RM5,000 for it.
Global Automotive Industry Scenario
The global automotive industry has never seen a worse condition than the one it is currently in today. Currently, the primary news headlines in the automotive industry has been about shrinking demands; planned plant shutdowns, plant closures, and job cuts. Among the top news so far has been the announcement that Toyota has forecast lower profits for 2010 by more than 80%. This is primarily attributed to the rising Yen and the weak global car sales. In Europe, BMW had announced that it had posted a fourth-quarter loss before interest and taxes of 718 million Euros or a 78% decline, primarily attributed to weaker car markets, “risk provisions” and personnel costs.
RESEARCH PROBLEM
The situation in Malaysia, though not as bad, is still relatively poor. When the economy slows down, consumer spending also reduces drastically, more so on the big ticket items such as the purchase of property, leisure holidays and cars. Due to this correlation, it would be safe to say that the automotive industry is one of a few key indicators to predict the economic health of a country. The number of new vehicles registered is one of the lagging indicators prescribed by the Malaysian Department of Statistics.
1
On this note, it was a clear signal that the Malaysian economy was on a slight decline when the Malaysian Automotive Association (MAA) announced that the Total Industry Volume (TIV) for 2009 would contract by approximately 12.2%. Passenger car TIV (new registered vehicles) in 2008 was 497,459 units, but in 2009, the figure is only 436,800 units. This was compounded when the car sales for the month of January 2009 was significantly lower as compared to the corresponding period the year before. Total passenger car sales for January 2008 was 36,396 units while it was only 30,189 units in January 2009, corresponding to a 17% drop in sales.
1 Lagging indicators tell us what had happened to the economy. It measures the performance of cyclical
movements of the leading and coincidental indices – “Malaysia Economic Indicators – Leading,
Coincident and Lagging Indices”; Department of Statistics, Malaysia; December 2008
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The primary reason why this paper has been initiated was to examine the impact of the 2008 financial crisis on the automotive industry in Malaysia and to understand how some car manufacturers have been able to sustain profitability or at least limit losses in these trying times. The paper will try to single out car manufacturers in Malaysia which have been the least affected by the financial crisis and also to identify what the strategies are in trying to address the challenges brought about by the crisis. The paper will also try to identify the factors which have influenced the performance of these companies and their abilities to sustain profitability during these tough times.
LITERATURE REVIEW
Significance of the Automotive Industry to the Economy
The automotive industry can be considered to be the single largest manufacturing sector in the world. At least 10% of the Japanese and American Gross Domestic Product and employment are generated from this industry. By 1988 the European Union‟s 12 member states produced a total output value of 80 billion Euros and employed a total of 1 million workers. The largest producing nations are the United States of America, Germany, France, Italy, Spain and the United Kingdom.
Rosli (2004) wrote: “Efforts to develop the automobile industry would have significant impact on resource-based industries, such as iron and steel, chemical, nonferrous metal, rubber and plastic-related industries as well as petroleum based industries; and on non-resource-based industries, namely electrical and electronics-related parts. In the tertiary sector, it provides service-related activities, such as stamping, repairing, designing and engineering, banking, shipping, storing, insurance and distributing and marketing channels. Of significance, the automobile industry requires a set of production systems linking a wide range of industrial organizations and technologies with great variations in size and sophistication. Over the span of 23 years, (1980 – 2003), it was only during six years, that the proportion of the passenger vehicles to the total vehicle production was less than 70%; the rest were either over 70% and sometimes even exceeding 80%. On average about 76% of the TIV were passenger cars and the rest commercial vehicles. This is in contrast with Thailand, Indonesia and the Philippines where the production is dominated mainly by commercial vehicles over passenger vehicles.”
Factors affecting the Performance of the Automotive Industry
There are several factors that can significantly affect the performance of the automotive industry in a given market. Since the purchase of a vehicle can be considered a big ticket item and therefore account for a significant portion of the household income, the purchase of a vehicle is a very serious consideration for most people. In Malaysia, car loan tenures have grown considerably longer. Loan tenures of up to nine years are very normal in most cases and in some special cases such as the Government Servant Scheme, tenure of 10 years is also available for selected models. However, this is just the tip of the iceberg. The more important consideration is the approval of the loan when an individual applies for one to buy a car. This is probably the biggest lever in determining the success or failure of the automotive market in any given country.
Armin Baniaz, acting head of Proton Edar Dealers Association (PEDA) was quoted as saying “... banking facilities and hire-purchase loans are the main factors that will determine the sustainability of the automotive industry. On top of that, over 90% of car dealers and vendors operate with banking facilities while over 90% of customers buy using hire purchase loans.
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Currently, the approval rate for car loan applications in Malaysia is at 40% but it could go even lower this year”. This means that only 40% of customers who book a car at a Proton dealership will get a loan approval. In other words, the loan rejection is a staggering 60%. It is not really a matter of getting buyers for the cars, it is about getting buyers who qualify to get a loan to buy the car in the first place that matters.
The other main factor affecting the automotive industry is the availability of the scrapping policy. The following section will dwell into this area and uncover some of the truths and myths of the scrapping policy. There are several countries which have already successfully implemented the policy and there are some others which are still coming to grips with the idea. In the recently announced second stimulus package by the Malaysian government, a scrapping policy was introduced. During the announcement of the “Second Stimulus Package” on 10 March 2009, Datuk Seri Najib Tun Razak, at the time Malaysia‟s Deputy Prime Minister, who also holds the portfolio of Malaysia‟s Finance Minister, disclosed that the automotive sector also got a shot in the arm, with a rebate of RM5,000 given to owners who trade in their cars of at least 10 years old for the purchase of a new Proton or Perodua vehicle. It is still unclear how this will affect the market as it is only applicable to Proton and Perodua cars.
When the International Trade and Industry Minister, Tan Sri Muhyiddin Yassin was asked to elaborate on the package, he disclosed that “…the government will finance part of the discount borne by Proton and Perodua. This incentive will, to a certain extent, give the opportunity to defend the number of cars sold this year. …there were more than one million cars aged 15 years and above while 10-year-old cars were less but the number is still big… With this offer, I hope 100,000 cars can be sold and this is a big number. "I believe though the government has to forgo RM5,000 income for a car, the returns to the industry and economic activities are even better,".
Getting the right car to the right market requires some degree of market intelligence. Ishak, N. K., Mutum D., Ghazali, E. and Fan C. K. (2006) suggested that the current era of relationship marketing, is to ensure business success through an in-depth understanding of the customer‟s needs and wants. This should cover current as well as potential customers alike. This is because when customers are highly satisfied, they are more likely to be loyal. Giving customers what they want is a key strategy to improve profits. To do this, car manufacturers have opted to build cars using the „modular assembly concept‟. Using common platforms, interchangeable front end and back end architectures and sub assembly modules, cars can now be built more efficiently, and with added flexibility to customize specific requests(C. Benko and W. McFarlen, 2003) Although CRM is relatively new in Malaysia, it has been found to be useful to automotive distributors and dealers to identify and reach target customers, reach specific customer segments and to identify various customer needs. This is where Toyota has mastered the art. With its vast array of models, each specific country can build a market and sell the products that best suit their needs.
Strategies of the Big Five Car Manufacturers
Upon close examination of the recent data, it was found that almost every model of vehicle analyzed had a decline in sales for 2008 from the same month in the previous year. The only models which did not have a decrease in sales for the period was the Honda Jazz, Proton Saga, the Honda Accord and the Toyota Vios. A tabulation of registered sales by OEM indicates clearly that the top 5 manufacturers are Perodua, Proton, Toyota, Honda and Nissan. It is only fair to take a closer look at the least affected automotive OEMs, namely Toyota, Honda, Proton, Perodua and Nissan. The strategies of each company will be discussed in the following sections.
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Strategies Employed by Toyota
The success of Toyota is not something that was initiated overnight. Instead, Toyota has long been working on its durability. Today, Toyota is renowned for its performance, endurance and above all, its durability. Until very recently, Toyota has always been very conservative in its designs. Shapes and styles which were deemed to have any negative impact on the durability or impacted the manufacturing processes were discounted earlier on in the development process. This managed to create the level of assurance that the Toyota is a very reliable car. However, Toyota has realized that the discerning customer has begun to demand more from their cars and in recent years, Toyota designers have managed to overcome the barriers they had before and have come up with bolder and more revolutionary designs such as in the new Toyota Camry and Vios.
In terms of after sales, Toyota has managed to top the list in the JD Powers Customer Satisfaction Index (CSI) Ratings
2. (CSI measures the satisfaction of vehicle owners who
visited the dealer service department for maintenance or repair work during the first three years of vehicle ownership. The study, now in its 6
th year in Malaysia, provides an overall
customer satisfaction index score based on six measures: service initiation, service advisor, in-dealership experience, service delivery, service quality, and user-friendly service). Toyota is usually in the top 5 positions ever since the study was conducted in Malaysia. But for the first time, Toyota has not only topped the list, but done so at an amazing 767 points, with Honda and Nissan trailing at 755 and 746 points respectively. This means that Toyota has gone well beyond business as usual to try and delight customers as they go for the routine or scheduled maintenance. Customers always wish to have a trouble free ownership experience. With the level of reliability of the cars produced coupled with the level of service that is unsurpassed, Toyota is well on its way to a promising future in Malaysia.
Among the many promotions Toyota is working on is the Toyota financing packages. With a range of packages available from “Toyota Drive” which is a basic loan package offered by UMW Toyota for its customers, “Al-Ijra‟ Thumma Al-Bai” or AITAB which is an Islamic financial service for its discerning Muslim customers, Flexi Plan, which is a financial service where the interest is charged on reducing balance and finally conventional Hire Purchase packages at competitive rates.
Strategies Employed by Honda
Recently, Honda Malaysia launched a promotional campaign offering free maintenance on selected Honda cars for a period of 2 years. On the Honda website and also at the showrooms, customers can easily obtain the periodical service prices which the customers will have to pay for during the life of the vehicle. This price indication will serve as very good guide to the customers especially those who have the perception that the price to maintain a Honda vehicle is exorbitant. By giving out this guide, Honda Malaysia is able to squash the misperception that the maintenance on a Honda vehicle is expensive. In fact, it may even support the claim that Honda vehicles are actually cheaper than its competitors. Given that the Honda brand value is high among Malaysians, having a reasonably low cost of maintenance and thus low total cost of ownership will increase the brand value even further. Having a good product with a lower total cost of ownership is definitely a Unique Value Proposition (UVP).
Honda has also been adopting a strategy of branding the vehicle as a status symbol especially in Malaysia. This is the reason why the sales figures of Honda vehicles are not as
2 CSI is a nameplate study, which means that performance is reported at the manufacturer level (i.e.,
Proton, Perodua, Toyota, etc.), rather than at the model level (i.e., Saga, Myvi, Vios, etc.).
large as Toyota, which has a volume strategy. Thus far, Honda has been quite successful in elevating the brand value of its vehicles. But none of these measures would give a boost to the brand if the product did not meet the tastes and needs of the customers in the first place. Among the relevant aspects are styling, quality and performance. But product quality is by far a winning criterion. Customers do not appreciate having to go to the service centres to complain about problems. Given a choice, customers would prefer not to have to visit the service centre at all after the purchase of their cars. In Malaysia, Honda and Toyota vehicles are perceived to have the least number of defects per vehicle. In the 2008 JD Power Initial Quality Study
3, Honda City & Honda Civic both came out top of the list in the entry midsize
segment and midsize segments respectively. This is the kind of achievement that allows Honda to command an even higher premium to its brand.
Strategies Employed by Perodua
Perodua has had phenomenal success with the Myvi model which was launched in 2005. Since then nearly 300,000 units have been sold. And recently, the Viva has also enjoyed a decent degree of success, albeit not as good as the Myvi. Unfortunately the Kenari and the Nautica have not been as largely accepted. With the Myvi and Viva, Perodua‟s success was hinged on the fact that Perodua knew exactly what the customer was looking for. The main issues were size, fuel consumption and ease of ownership. It was here that Perodua managed to get a grasp of the customer‟s wants, needs and desires. The Myvi has several key unique selling propositions (USP), mainly space, ease of use and ease of maintenance. The Viva‟s USP was primarily fuel consumption and since the price of fuel shot up from RM1.92 to RM2.70 shortly after the Viva was launched, it literally clinched the deal to the point where Perodua had to increase its plant capacity just to cater for the surge in demand.
Strategies Employed by Proton
Proton has not had significant success with some of its models especially since the Gen2, Juara, Savvy and Satria Neo. At the time these models were launched, Proton was under the impression that customers should be exposed to these futuristic models. In other words, Proton was adopting a push-strategy. Unfortunately, for several years Proton was faced with a dismal sales figure with these models. One of the fundamental errors was the fact that the Malaysian market was not yet ready for the vehicles that Proton was trying to market in Malaysia using the Proton brand name. These models were developed with European tastes. For example, in the UK, hatchback cars are more popular than sedans by a large proportion. However, in Malaysia this is the reverse. In the Malaysian market, sedan vehicles sell much better than hatchbacks. This was clearly proven when the Proton Gen.2 was developed into a sedan and introduced as the Proton Persona, sales began to show a remarkable improvement.
Another model which has not been favourably accepted in the Malaysian market is the Proton Savvy. Although most magazines both in Malaysia and overseas have given very good reviews with a string of awards under its belt such as the Malaysian Guinness Book of Records for most fuel efficient car in its segment, and the best Small Car of the Year 2006, the car sales have still been less than satisfactory. Again, it boils down to the fact that Proton has tried to offer to the discerning Malaysian market, a car that is not desired or wanted in the first place. Among the reasons why the Proton Savvy has had dismal sales is due to the fact
3 The 2008 Malaysia Initial Quality Study (IQS) is based on evaluations from approximately 3,200
owners who purchased their new vehicle between September 2007 and May 2008. Vehicles evaluated
included 52 passenger car, pickup and utility vehicle models covering 15 different brands. The study
was fielded between March and July 2008.
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that it is powered by a 1.2 litre Renault engine. Somehow, Malaysians have had a series of bad experiences with French cars. In the case of Proton, 2 earlier cars, the Proton Tiara and the Proton Waja 1.8 were also fitted with French engines. The Tiara had a 1.1 litre Citroen engine while the Waja 1.8 had a 1.8 litre Renault engine. Both these cars were very well known for the huge number of problems the cars had, including the prohibitively high cost of maintenance and spare parts. As a result, these negative perceptions were just too strong for Proton to work against. To date only about 37,000 vehicles have been sold since its launch in June 2005. Another setback was that the car was launched only weeks after the successful launch of the Perodua Myvi. Proton had not considered the Myvi as a direct competitor as it was one segment larger than the Savvy. Unfortunately, the Malaysian public did not have the same impression and a direct comparison was frequently made by customers and salesmen alike. Hence, the Proton Savvy was often at the losing end. Customers made their buying decisions based on what they knew best, and that was the interior space of the vehicle. The fact that Proton was using a foreign engine which was markedly more expensive due to the sudden increase in the exchange rate of the Euro to the Malaysian Ringgit only compounded the issue even further.
The Turnaround
Proton began to embark on a Business Turnaround in 2006. After the new management took over, various changes were immediately effected. There were a list of 11 main initiatives ranging from “Enhancing the Product Portfolio”, “Improving Quality”, “Improving Sales and Distribution” and “Enhancing Human Capital” just to name a few. In the initiative “Enhancing Product Portfolio”, several sub-initiatives were developed such as establishing a „New Product Introduction‟ or NPI process. This process had several gateways that had to be met diligently. By complying to this process, the management at Proton could ensure that the products developed met the necessary quality standards and equally important, Proton could sustain the manufacture of the components since the vendors in turn had to comply with the NPI. Additionally, Proton was to follow a new product development process and an element called Voice of the Customer or VOC was introduced. A new division called the Marketing Division was introduced and this division took on the daunting role of facing customers and identifying exactly what it was that they liked about Proton cars and also more importantly, what they did not like about the car. The list of dislikes was obviously very high. All these findings were then compiled and the information was then fed back to the Research & Development Division in order for the development of the new car to begin. Due to the product development efforts and the positive response to customers‟ needs and complaints, new models such as Persona, Proton Saga with the 1.3 litre Campro engine which was developed in house and Exora which enhanced customer‟s trust in the product and in the brand.
Quality Assurance
Another common practise among OEMs is to have Resident Engineers at the Vendor‟s site during the initial stages of production, just to ensure that the vendor complies with the basic quality requirements. A resident engineer is usually an experienced engineer from the OEM, typically from the Quality, Procurement or Production divisions, and is stationed at the vendor premises for a pre-defined period of time. The resident engineer will advise the vendor about the specific requirements of the OEM which the vendor may not already be familiar with. The Resident Engineer will normally ensure that the vendor production has stabilized before returning back to base.
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Strategies Employed by Nissan
Up until 2007, Nissan sales in Malaysia were almost negligible. Nissan did not have any models that were really making any impact or generating any significant interest in buyers. When the Nissan Grand Livina was launched however, sales began to see an immediate increase and the Nissan brand has become another major player in Malaysia again.
The MPV market in Malaysia has been growing steadily over the years, from a meagre 13,570 units in 2001 to 53,744 units in 2008. It is within this segment that the Nissan Grand Livina has managed to gain popularity. Malaysians are not only looking for a people mover, they are looking for one that is both affordable and practical with a satisfactory level of comfort to boot. The Livina managed to fill a void that had been there for a long while. Suddenly customers were given a choice they liked and they snapped it up. Nissan had a waiting list of approximately 10 months in the initial stages of the Livina introduction.
After understanding what the customers wanted, Nissan came up with 1.6litre and 1.8litre versions of the Livina. Nissan needed to introduce both variants since there was a demand for both engine types. This was clearly proven when the market share for sales in 2008 for the Nissan Grand Livina 1.6 and 1.8 were 10% and 12% of the MPV market respectively.
Unfortunately, the sedans that Nissan introduced have not caught on as well as their rivals. One possible factor is the price of the vehicles themselves. Perhaps if they were marginally cheaper then they would have caught on. Another aspect is the overall size of the vehicles, which are relative smaller than their rivals, the Honda City and Toyota Vios. The primary reason why only the Livina made great impact was that the Malaysian customers were looking for an alternative for the MPV‟s available. In the case of the sedan market, the Honda City and Toyota Vios had already made a strong presence in their segment and thus new entrants would find penetrating the market to be extremely difficult. This would be compounded by the high perceived price of the car and the fact that it had yet to prove itself in terms of reliability, a convenient service network and availability of reasonably priced spare parts.
LESSONS TO BE LEARNT BY OTHER OEMS IN MALAYSIA
Having seen the various strategies employed by the companies mentioned above, it is a good idea to summarize what we have observed so that other OEMs can benefit from this research. The findings are discussed below.
Importance to Continue Product Development Efforts
For most of the Automotive OEMs, the current economic turmoil is a very alarming and troubling time. However, product development initiatives must never be neglected. Although product development poses a huge cost outflow where the typical product development cost including tooling, jigs and dies is about RM500 Million, it cannot be sidelined, especially during economic slowdowns. This is because when the economy begins to improve, car companies need a fresh product to entice buyers. Only the car OEMs with the right products at the right time will be able to capitalise on the positive economic climate. By declaring huge losses, some companies such as Toyota may have already taken into consideration the capital expenses on its product developments even though potential revenues may not be able to support that cash outflow in the same year. But the benefit is a ready and fully developed range of models as soon as the economy picks up again. All the top 5 companies
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in this study have a new model in their stable. From Toyota‟s 2007 Vios, Proton‟s 2007 Persona and 2008 Saga and the recently launched 2009 Exora, Perodua‟s 2007 Viva, Nissan‟s 2007 Grand Livina and the 2009 Honda City, all these models were either developed during or just shortly before the crisis struck. If these models were not developed and therefore were not available for launch, the sales of the said OEMs would probably not be as good.
Managing the Supply Chain
OEMs also need to be concerned about their suppliers. During the development process, some suppliers may have difficulty with financing. Especially during these trying times when the revenues are fast reducing due to shrinking demands. Credit lines tend to become a big problem due to the poor credit rating of the automotive industry in general. At this time, the OEM must be firmly behind the supplier to ensure that the new model is developed as per design intent or else, certain components may not be ready at the time of launch and this would not be acceptable at all. The problem is that the financial distress is not only being experienced by the smaller suppliers but even by the big global players such as Delphi, Continental and Denso just to name a few.
For Malaysian National Car maker Proton, where product development is carried out holistically in Malaysia, getting the full support from the suppliers is very crucial. Fortunately, the economic slowdown in Malaysia has yet to reach its peak. Nevertheless, many suppliers are already in desperate times, trying to secure financing and extending credit lines. Without the sufficient funds, product development may not be comprehensive. Hence, Proton would have to lend an extra hand to cover for some of the vendor related product development costs. The main problem here is that the cash situation of Proton as a company will also be under severe threat. This activity may potentially result in the product development costs escalating well beyond the RM500 Million mark, which can be financially impossible. This is where the government funds become extremely important to ensure the complete automotive eco system is sustained. The recently announced Automotive Development Fund (ADF) is one such government initiative from the Malaysian government with primary intent of saving the automotive vendor community in Malaysia.
Toyota has a system called “Kieretsu” whereby the vendors are part of the “Toyota family”. In this way, Toyota is able to capitalise on the economies of scale and procurement can be centrally controlled from Japan for all its manufacturing outfits including subsidiary companies such as Daihatsu and Perodua. In doing so, raw materials can be purchased as prices significantly are lower than any competitor is able to get. This gives Toyota the upper hand to reduce the Bill or Material (BOM) costs even further.
Bringing the Right Product to Market
Currently, since most customers have concerns about making purchases on big ticket items, it does not mean they will not make the purchase at all. Instead, they may start to scout around and compare products on offer from various OEMs. When their financial status permits, they will quickly make the purchase based on the decisions made earlier. This means, the purchase is merely delayed. Therefore, OEMs cannot afford to stop offering the products just because the economy has slowed down. Rather, entice the customers so that the moment they can afford the car, the first one they consider is the one which has won their hearts when they were in the financial difficulty.
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In this regard, it can be noted that Naza Kia has indicated that it intends to bring in the Kia Forte, a C-Segment sedan which is very popular in Korea, China and parts of Europe into the Malaysian market. Judging from the success of the Toyota Vios, Honda City and Proton Persona, this car may have a high possibility of success since most of the cars mentioned are also in the C-Segment Sedan category which is a very dominant category in the Malaysian market.
The Proton Exora, Proton‟s first attempt at a Multi Purpose Vehicle (MPV) is also a very brave move. The vehicle was launched on April 14 2009. This is the beginning of the economic slowdown of the Malaysian economy. So far bookings have been quite positive for a typical launch of this magnitude. Given that the economy is not at its best health, and that this is the first MPV from Proton, especially with a 1.6 Litre engine, the number of units sold is very encouraging. Initial reports by a select few journalists who were privileged to test drive the vehicles shortly before the launch have been nothing but praise. But it will take a lot more than merely journalist evaluations to secure bookings and ultimately sales of this kind of vehicle. The MPV market in Malaysia has been growing steadily over the years. Currently, total MPV sales is approximately 11% of Total Industry Volume and with more players introducing MPV‟s recently, that ratio may well grow. The recent success stories have been the Toyota Avanza, Toyota Innova and Nissan Grand Livina. It will be interesting to see how the Proton Exora will fare in this segment. The recent launch of the Perodua Alza, the latest MPV to hit Malaysian roads was launched on November 23 2009. With the fuel price at RM1.80 and the recently adopted ruling where all occupants of a vehicle are required to buckle up their seatbelts, the potential rise in the number of MPV‟s on Malaysian roads is highly likely. Unfortunately, the author wishes to point out that at the time of writing this article, the sales figures for both the Proton Exora and Perodua Alza were not available.
Inventory Management
Most car manufacturers have to keep some level of inventory. This is because the time it takes between the cars being produced to when the cars are delivered to the customers may take at least 2 weeks. Some companies forecast what the customers will want to buy and produce the cars in advance. In this way, a potential customer may get delivery of the new car very quickly since the car is already in stock. However, this approach has its limitations. For example, it takes at least 3 months lead-time for the automotive suppliers to order raw materials in order to produce the component. This is especially true when the component requires raw materials to be ordered from overseas. When the OEM has ordered these components, it has to assemble the vehicles quickly since some of these components have a shelf life and also once these components have been ordered, the OEMs need to honour the orders come what may. It is when the forecast goes wrong that all the plans go haywire. Stockyards pile up with “the wrong cars”, cars which were built but nobody wants to buy. Typically, the ultimate stock level for an OEM should be about 1.5 months worth of stocks. For example, if an OEM sells 4,000 cars a month, then there could be up to 6,000 cars in stock at any given time.
However, the current stockpile of most OEMs the world over is very much higher than this. Due to this, production has been slowed down to curb the number of unsold cars in inventory from growing to an uncontrollable figure. In some European and Japanese car factories, production has ceased since December and some companies have even given extended Christmas holidays
4.
4 “Today, it was reported BMW’s Mini plant had quietly let slip about 90 more temporary workers over
the Christmas break and Honda extended its Christmas holiday shutdown all the way to June.” – “THE
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Promotions
January 2009 saw a very bad sale figure for most OEMs in Malaysia. In February onwards, car advertisements have been more aggressive and airtime on local radio and television media channels have also been more prominent. Customers are all concerned about cash flow. Having a new car also means the loan repayments will have to continue and the maintenance will be an issue. The typical gimmick of „Zero Down-payment‟ has lost its bite. In the past, salesmen have been able to offer a vehicle of slightly lower specifications, and processed the loan documents for a vehicle with the highest specifications available. In this way, when a customer buys a vehicle such as the Perodua Myvi for say RM45k, the salesman will process the loan for the same vehicle but with the higher specifications, at RM50k. The RM5k difference will be used to pay for the down-payment of the vehicle or in some cases be given back as a “rebate” to the unsuspecting customers. In the end, the customer has to pay for a loan which is more expensive than it could have been. Since the financial crisis, banks have been more stringent in their loan approvals, and this kind of manipulation of the system has been more closely monitored. Hence, salesmen have to be more knowledgeable about their products and how they fare against competitors.
Promotions best suited for tough economic slowdowns
Among the problems facing a car owner, especially during these difficult economic slowdowns is car maintenance. When someone owns a second hand car, especially a relatively older car, there will always tend to be a problem or two which requires fixing. More often than not, these small repairs can be costly especially when they recur. Due to this, some car owners tend to opt for a brand new car. The only problem is that these new cars require the periodical maintenance carried out religiously. It is essential that these maintenance jobs are done on time and at the authorized service centres in order to maintain validity of the manufacturer‟s warranty. This may burden the car owners since authorized service centres may charge a little more than the independent service workshops.
In November 2008, Honda Malaysia launched a promotion called “Low Maintenance”. In this promotion that lasted 2 months, until 31
st December 2008, selected models such as the
Honda Stream and Honda Civic came with free maintenance for 18 months or 30,000 kilometres. That means that for up to 30,000 kilometres or 18 months, the owner will not have to worry about paying for any maintenance.
This promotion is very similar to other car promotions especially in Europe and the USA. However, most promotions of this sort give only up to three years of free service. There have yet to be car manufacturers which offer up to five years of free maintenance.
If a car manufacturer were to launch a car in this current economic scenario, then one possible way to do it with a “Big Bang” would be to launch a new model (at least some minor facelifts) with a revised price to incorporate the cost increase to offer free scheduled maintenance for up to five years. Although there could be a minor price increment, the end result is a value proposition that would be highly attractive. If the OEM is confident about its product quality and reliability, then it could also promote its five year warranty. Instead of selling a car, the OEM unique value proposition could be tuned and marketed as selling “Peace of Mind”. These are several benefits of having the five year maintenance programme. Firstly, the customer‟s car would be better maintained since the owner would most definitely try to send in the car as soon as the scheduled maintenance is due. Secondly, the owner
WEEK THAT WAS: Buckle up for a long rough ride”; Graeme Roberts, just –auto.com editorial team,
16 January 2009; retrieved from http://www.just-auto.com/article.aspx%E2%80%A6 on April 3, 2009
would have to bring in the car to the service centre as soon as a problem is found. This would most definitely improve throughput of the service centres. Finally, since the cost of the five year maintenance has been accounted for in the price of the vehicle, the actual revenue stream for the service centres will be more predictable. Furthermore, the costs for the five years maintenance programme would have been collected at the point of sale of the vehicle. This money could be used to generate better cash preservation initiatives as well as rolling capital for other investments.
Organizational Strength
Like any other industry, the automotive industry is plagued with a host of management concerns. Due to the complexity of the business it is imperative that these concerns, ranging from the product development, raw material purchases, manufacturing, sales and distribution, have to be carefully orchestrated in order to support the smooth running of the business. Therefore having an organization that works together between divisions well is definitely an advantage. In most cases, working in silos is a problem. Divisions find it difficult to cooperate and get a cross functional task done efficiently and effectively. However, in Toyota, the workforce culture is second to none. The culture of „Kaizen‟ or continuous improvement has been the foundation for the sustainable continuous improvements. The „Ohno‟s Circle‟ is where a manager is asked to stand within a circle drawn out of chalk. The circle is just big enough to stand in. The idea is that the manager has to look at the production line as it is running and note every little detail which could be improved. This may go on for two hours and the superior will then ask for a detailed report the following day. This is to ensure that the manager is in touch with the shop floor.
Potential Promotional Ideas
To counter the concern by customers that the service and maintenance costs of a vehicle are too high, an OEM may offer service vouchers at the point of sale of the vehicle. This set of vouchers may be for as long as three years. Instead of giving the vouchers for free, the OEM may offer the vouchers to the customers for a fraction of the total price of maintenance. In this way, the customer does not have to worry about maintenance costs escalating over the years.
Proton Edar could offer the customer to buy the service package as a pre-paid deal at a discounted rate. Assumng the total cost of maintenance is RM1,500 for the given period, the customer could opt to purchase the service vouchers at a 40% discount at say RM900 only. Since the vouchers explicitly mention the parts and labour carried out at each service interval, the customer no longer has to be concerned about escalating maintenance costs since for the given period, the cost has been paid for upfront. In this way, Proton Edar will be able to offer the customer peace of mind. In addition, this system will also guarantee that the customer will come back to service the car at the recommended mileage intervals. It also provides cash upfront to Proton Edar and this is something very much needed at this juncture. Although the vouchers are sold at a discount, the typical profit margins for parts and labour are 40% anyway, which means that the vouchers can be sold either at cost or even slightly higher than cost and yet please the customers with a large discount. In economic slowdowns, customers typically try to avoid periodical maintenance on their vehicles. This can impact car manufacturers in two ways. Firstly, the throughput into service centres will decrease resulting in a contraction of revenues. The second impact is that since the customers do not maintain their vehicles, these cars may ultimately break down in the middle of the road and this will give a negative connotation to other motorists about the particular brand of car.
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This system of prepaid maintenance is very similar to a passenger who books for an Air Asia flight and chooses to pre-purchase the baggage check-in. If the baggage is paid for on-line and in advance, the passenger gets a 50% discount. However, if the passenger only decides to bring luggage at the check-in counter without having pre-booked the luggage, the price would be significantly higher.
For Proton and Perodua, the recently announced „scrapping incentive‟ by the Malaysian Government should be immediately and effectively exploited. In this government incentive customers wishing to buy a brand new Proton or Perodua vehicle may opt to trade in any 10 year old car (or older) for a RM5,000 cash voucher which can be used for the down-payment of a new vehicle of their choice. Some terms and conditions may apply, but in general it is hoped that with this new incentive, the sales of Proton and Perodua vehicles will rise in the immediate future especially during these very difficult times. The entire automotive industry and its eco-system are in jeopardy if these two companies do not pull through during this period.
SUMMARY
Based on the case study of car manufacturers in Malaysia it is evident that each automotive manufacturer has its own set of strategies that can improve sales to a certain extent during the economic uncertainties. However, the long term strategies which effectively executed such as the case with Toyota will give the maximum benefit to the organization. For this to be realised, a strong leadership coupled with succession planning is essential to ensure the long term strategies remain executed even though there is a change of leadership. In many OEMs, the strategies are designed to bring short term gains. This will ultimately look good for the current leadership. However when there is a change in leadership, the strategies take on a slightly different course and whole workforce becomes confused and lethargic due to the frequently changing directions.
It is also important to point out that due to the dynamic nature of the automotive industry, and since the article was written in 2009, some facts may have already become obsolete. Reader‟s discretion is therefore highly sought.
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Table 1 Registered Sales of Cars in the “A” Segment for 2007
Table 2 Registered Sales of Cars in the “A” Segment for 2008
Table 3 Registered Sales of Cars in the “A” Segment for 2009
This data shows the sales of A-segment cars in 2007 through to 2009. A segment cars are defined as the small cars such as the Perodua Kancil, Proton Savvy and Naza Sutera. Typically the engine sizes of these cars are below 1.3 litres.
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Model Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Table 4 Registered Sales of Cars in the “B” Segment for 2007
Table 5 Registered Sales of Cars in the “B” Segment for 2008
Table 6 Registered Sales of Cars in the “B” Segment for 2009
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This data shows the sales of B-segment cars in 2007 through to 2009. B-segment cars are defined as the medium sized sedans and hatchbacks such as the Perodua Myvi, Proton Saga, Honda City and Toyota Vios. Typically the engine sizes of these cars are above 1.3 litres but below 1.8 litres. This is the second largest segment in the Malaysian TIV, after segment D. Table 7 Registered Sales of Cars in the “C” Segment for 2007 Table 8 Registered Sales of Cars in the “C” Segment for 2008
Model Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Table 9 Registered Sales of Cars in the “C” Segment for 2009
This data shows the sales of C-segment cars in 2007 through to 2009. C-segment cars are defined as the upper medium sedans and hatchback cars such as the Proton Persona, Toyota Altis and Honda Civic. Typically the engine sizes of these cars are above 1.3 litres and below 2.0 litres. Note that there is a very wide range of on-the-road (OTR) prices of the cars in this segment. Table 10 Registered Sales of Cars in the “D” Segment for 2007 Table 11 Registered Sales of Cars in the “D” Segment for 2008
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Model Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Table 12 Registered Sales of Cars in the “D” Segment for 2009
The data shows the registered sales of cars in the D-segment. This is the luxury sedans and include the likes of the Toyota Camry and Honda Accord This is the largest segment in the Malaysian TIV. Table 13 Registered Sales of Cars in the “MPV” Segment for 2007
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Model Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Table 14 Registered Sales of Cars in the “MPV” Segment for 2008
Table 15 Registered Sales of Cars in the “MPV” Segment for 2009
This data shows the sales of MPV-segment in 2007 through to 2009. The MPV segment is defined as a people mover or multi-purpose vehicle. It is the fastest growing segment in Malaysia due to the affordability of these vehicles as well as the choices available. The newly launched Exora will face competition from the soon-to-be launched Perodua MPV later in the year. Engine sizes for this segment are typically 1.6litres and above.
Source: MAA Sales Report, gained from
Marketing Dision, Proton Holdings Berhad
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Registered Sales by OEM
OEM Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
