Proton Berhad Is the Largest Malaysian Automaker  Essay

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Proton Berhad is the largest Malaysian automaker. Based in Shah Alam, a suburb of Kuala Lumpur, Proton is the older of Malaysia's two automakers and has earned a substantial market share in its home country. At this point, Proton must seek international markets if it is to grow further, since the Malaysian market is becoming mature and Proton now faces intense competition. The company is looking to the Indian market for its main brands, the Savvy, the Saga and the Persona. This paper will examine the Indian market in general, the unique nature of the Indian car market, and will suggest a market entry strategy for Proton that fits with the needs of both the company and the Indian market.

The Indian Market

India is a fashionable place in which to invest right now, a function of several factors, most of important of which is the large and rapidly growing economy. India's gross domestic product (GDP) of $3.68 trillion makes it the world's fourth-largest economy behind the U.S., China and Japan. The Indian economy has grown rapidly in recent years to reach this position. Real GDP growth rates were 9% in 2007, 7.4% in 2008 and 7.4% in 2009. The country barely felt any impact of the downturn in the global economy as a result of this strength has seen significant foreign direct investment inflows. Inflows in 2009 were $157.9 billion, up 26.4% from $123.3 billion the year previous (CIA World Factbook, 2010).

Although the large size of the Indian economy does not directly translate into customers, because it stills implies a per capita GDP of $3,200, the rapid growth of the economy does. Without considering specific details, the market for Proton is going to be in India's middle class. The country's poor cannot afford cars, and the Proton is not a high-end car to satisfy the needs of the country's wealthy. What the rapid growth of the Indian economy means, however, is that the middle class is a rapidly growing segment of the Indian market. The current middle class accounts for 5% of India's population, or roughly 23 million people but is expected to grow to 40% of the country's population in the next couple of decades. This will create the world's fifth-largest consumer market (it is currently 12th) and will dramatically increase private consumption levels and discretionary spending (Beinhocker, Farrell & Zainulbhai, 2007).

There are a number of reasons to believe the growth in the Indian economy will continue at its current pace. The first is the resourcefulness of Indian people, as much of the country's economic growth is predicated on a mercantile culture. The country is also well-positioned, a key component of the Indian Ocean trade corridor that links the Arab world with East Asia. This trade corridor helped found Malaysia's economy in ports like George Town and Melaka and as Malaysia works to increase trade with the Muslim world in particular this trade route continues to be important to the country.

India is Malaysia's 12th largest trade partner at present. The two countries recently signed a trade pact that is expected to lower trade barriers between the two countries and thereby dramatically increase trade. Trade between the two countries is expected to increase by 50% by 2015 to $15 billion annually. The trade pact, with is an adjunct to an agreement signed between India and ASEAN, includes measures on investment, economic cooperation and customs (Damodaran, 2010). It is also worth mentioning that a sizable portion of Malaysia's population is of Indian origin, mainly Tamil, and as a result there are significant cultural links between the two nations that can help to drive trade as well. Both nations trade in English, both have large Muslim populations, and because of the high number of Indian-descended Malaysians there are excellent transportation links between the two countries on both of Malaysia's major airlines.

The Indian Auto Market

With the dramatic increase in wealth in recent years, India has seen a substantial increase in automobile ownership. Despite the futility of attempting to drive on India's choked roads, the automobile is viewed as an important status symbol. The auto industry in India is now one of the largest in Asia as a result. Indian automakers produce 11 million vehicles annually and export 1.5 million of those, making India the fourth-largest auto exporter in Asia. The overall size of the Indian auto industry is $35 billion and it employs 13 million people in the country.

The Indian auto market has some unique characteristics. The types of vehicles sold are different than in most countries, with very small cars being popular among middle class Indians. 91% of vehicles are sold for household usage and 9% for commercial. Of these household vehicles, 12.42% are passenger cars of the type made by Proton. This means that the Indian market for cars is around 1.4 million vehicles per year. Passenger cars, however, have been increasing their market share in India gradually over the past several years, so should be able to continue to do so in the future (Society of Indian Automotive Manufacturing, 2010).

Automobile sales in India are dependent on both the population and wealth of the state. Tamil Nadu (16.2 million), Maharastra (13.8 million cars) and Gujarat (10.5 million) are the states with the most cars in India, with Uttar Pradesh, Delhi and Andhra Pradesh also having large installed bases of cars (Society of Indian Automotive Manufacturing, 2010). Auto sales are spread across the country, but the more remote states remain much lower in sales than major urban centers and the wealthier states. Therefore market entry can be largely focused on the major states and cities without surrendering too much market share.

Proton Berhad

Proton was established in 1983 by then-Prime Minister Dr. Matathir Mohammed and the first Saga was on sale in 1985. Proton was founded in order to create an automobile manufacturing industry for Malaysia, so that the country was not dependent on important cars. The majority of Proton's vehicles are four door passenger cars, including the Saga, Wira, Persona and the Savvy. These vehicles hold a strong market share in Malaysia. An estimated 3 million Protons have been produced over the years. All told, Malaysia remains a small producer of automobiles. Malaysia is ranked 23rd in the world in total automobile production, notably having surpassed Thailand and Indonesia to become the leading auto producer in Southeast Asia.

Proton's cars are marketed primarily to the lower and middle classes in Malaysia. The company is positioned in the market as a cost leader. There are a couple of ways in which Proton establishes this position. The first is with the relatively low labor costs in Malaysia, which give local producers an advantage over cars made in Japan, Korea and most other major producers. The second is government subsidies. Subsidies are common in Malaysia to promote preferred industries, and as Proton is a project of important government figures the company has received significant assistance in its startup operations and to keep costs down so that the vehicles can gain market share as cost leaders. The exact nature of these subsidies is unknown, but they exist and this may create a barrier to entry into the Indian market.

Proton sells its cars in 28 countries already, including many countries on the subcontinent (Sri Lanka, Bangladesh, Pakistan, Nepal), many in the Middle East and countries with large Indian populations such as Mauritius, Singapore and Brunei (, 2010). However, the company has yet to gain access to the Indian market.

Competitor Analysis

Most vehicles sold to the middle class in India are produced locally. Because of the size and rapid growth of the Indian market, there are a large number of competitors and the competition is becoming more intense each year. The firms with the largest market share in passenger vehicles are Tata, Maruti Suzuki, Hyundai and Mahindra & Mahindra. These major competitors all compete for the same market that Proton would be pursuing.

Tata is a domestic firm, part of the larger Tata Group, a conglomerate run by a prominent Parsi family from Mumbai. Tata is well-known for its steel business, but has now become a significant player in India's passenger car industry. With revenues of $14 billion, it is over five times the size of Proton, which has revenues of around $2.5 billion (Society of Indian Automotive Manufacturing, 2010). Tata has a number of joint ventures and acquisitions from the developing world that it has used to gain market share in a number of areas, in particular commercial vehicles. Tata markets a range of passenger vehicles and holds 16.45% share of the market (Society of Indian Automotive Manufacturing, 2010). A major recent innovation for the company has been its new product, the Tata Nano, a car priced at just $2,200 and aimed at India's emerging middle class. Initially popular, the Nano has seen flagging sales as reports of poor quality and a propensity to catch fire have dogged the product (Werbach, 2010).

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