Introduction

Perusahaan Otomobil Nasional, or Proton, was established by the former deputy prime minister
Tun Mahathir Mohamad in 1983, also known as the national car company, Proton has catalysed
Malaysia's industrialisation capabilities to match those of developed nations (Proton, 2016a).
Proton was started as a 70:30 venture between Mitsubishi Motors and the state-owned Heavy
Industries Corp. of Malaysia (Hicom) (Fletcher and Poh, 1997). In 1996, Proton had already
produced a million cars and made acquisitions with the Group Lotus the same year (Lotus, 2016;
Malaysian Business, 2010). The company had also set up a transmission assembly plant in Shah
Alam to carry on in-house engine operations in 1989, and as a means to upgrade their
technological competencies (Proton, 2016a).

2012 marked a new phase in the companys structure as the takeover by DRB-HICOM Berhad
shifted the companys government-linked structure to a private entity (Proton, 2016a). both
Proton and Lotus have now transformed as globally-recognised automotive players thanks to
DRB-HICOM's experience as Malaysia's largest manufacturer of automobiles (Proton, 2016a).
Proton acquired all engine technologies and knowledge developed by Petronas in 2012, that
enabled the organisation to acquire new technology and engineering related advancements,
including development of more fuel-efficient engines and gasoline sprayed injection technology
(Proton, 2016a).
Protons Vision is to have a very strong presence in the domestic market by becoming a
regionally competitive automotive company, creating value by earning customers' trust
through the innovation and quality of their talented people and products (Proton Annual
Report, 2010). To realise this vision, Proton is aligned to engage with more and more
technology partners and innovative people who are ready to produce fresh ideas (Proton,
2016a).

Protons Mission statement is to drive Malaysias transformation into a leader in quality and
technology. Proton possesses passionate group of people who work together to create
exhilarating products and services for global markets, that is a reflection of great styling of
leading technology and innovation (Proton Annual Report, 2010).

As of 2015-2016, the refreshed product line of cars include: (1) Proton Persona 1.6 (standard,
executive and premium) (2) Proton Perdana (2.0L and 2.4L) (3) Proton Saga Plus (MT and
CTV) (4) Proton Exora 1.6 (standard, executive, premium, and super premium) (5) Proton
Suprima S Standard (6) Proton Iriz 1.3 (standard, executive, and premium) (7) Proton Preve
(executive and premium), all cars with manual, automatic (semi or fully automatic) variants
(CarBase, 2016).

2010 was a good year for Proton (Malaysian Business, 2010). However, since then, the
companys sales were declining, particularly in the home market of Malaysia. Proton
management had to revamp their strategic direction not only for short-term improvement, but for
long-term business sustainability as well (Malaysian Business, 2010). There are some key
reasons for this.

The creation of the ASEAN Free Trade Area (AFTA) in 1992 reduced taxes and barriers to trade
in the ASEAN region, however, Malaysia was late in relaxing its trade barriers (in 2005)
(Worldbank, 2001). For Malaysia, this meant liberalisation of import duties and attracting FDIs.
Unfortunately, Proton did take quite some hit due to the increased open competition. The
Malaysian government used protectionist policy before and had set import duties in the range of
140% to 300% whereby Proton was given a preferential treatment to cover it from the real-world
foreign competition (Gabilaia, 2001). This led to many foreign automotive companies coming in
to Malaysia and other ASEAN regions. Competitors like Toyota, Honda and Hyundai were
providing better quality cars and at very competitive prices. The competitors technology was
also rapidly improving. Therefore, Protons overall sales were declining because customers had
better substitutes in terms of quality, price, design and technology to choose in the market.
Although Proton acquired Lotus, a British company best known for its high-end sports cars, for
$81.9 million in 1996 (Lotus, 2016) as a means to acquire design know-how, and also to reduce
Protons reliance on Mitsubishi, another reason behind the acquisition was Proton imported
Japanese parts, which amounted to a third of the cost of the Proton car and was highly exposed to
the fluctuating Yen (Shari, 2003). But before Proton could reap the fruit of the acquisition, the
export market faced a slump due to the South East Asian financial crisis in 1998 (Shari, 2003).
The financial crisis halved Protons overall sales to 87,500 cars in 1998 and the profits
plummeted by 80% to $25 million in 1999 (Shari, 2003). Proton had less than five years to
recover financially since Malaysia was opening up to free trade in 2005.

Therefore, heavy competition and declining sales in the local market changed Protons strategic
intention to expand in the ASEAN markets. This strategic decision has enabled Proton not only
to regain the declining profits, but to achieve economies of scale too because they are high-
growth markets for Proton (Malaysian Business, 2010).

However, in order to regain its home market share and for successful global expansion, Proton
management had to undergo a massive revamp structuring (Malaysian Business, 2010). This
included a new refreshed product line to satisfy consumer needs. The short-term objectives under
this structuring helped achieve a more efficient decision making, while the long-term objectives
helped achieve flexibility in forming strategic alliances (foreign companies for market
expansion) without direct involvement (Figure 1). This overall restructuring will improve
Protons cars and attract foreign company investments such as forming alliances, and other type
of partnerships (Malaysian Business, 2010). In terms of improving quality management and
R&D (which falls under this new restructuring), the management aims to improve after-sales
services, reduce material costs, and build higher quality products (Malaysian Business, 2010).
This improved the company subsequently and boosted forming foreign partnerships where
Proton intends to expand (Malaysian Business, 2010). Protons strategy for market development
has led to collaborating with global OEMs as well as local partners. This had reaped fruitful
deals including joint production development, leveraging local distribution partners to sell cars,
building regional production hubs (using existing capacity and resources), and joint sourcing and
implementing local plans (Malaysian Business, 2010).

Figure 1: Protons short-term and long-term strategic plans to boost competitiveness

Source: Malaysian Business, 2010, p.25

The External Environment

This section will use the PEST and 5 forces analysis to analyse Protons overall external
environment. The home market of Malaysia along with the different regions Proton serves, will
be taken into the analyses.

The PEST Environment

The PEST framework (cited in Johnson et al., 2014) will enable analysis of the external
environment at a macro level. These inter-connected macro factors are the Political,
Environment, Social, and Technological environment. These key environmental drivers help to
understand the changes in the industry structure (Johnson et al., 2014).

According to Wheelen and Hunger (2010), The main variables for political are foreign trade
regulations, tax laws, stability of government, government ideology, foreign policies, legal
systems, foreign assets ownership regulations, and protectionist sentiments. Similarly, economic
variables are GDP trends, inflation rates, unemployment rate, currency strength, money supply,
per-capita income, economic development, monetary policies, and membership in WTO, EU,
NAFTA, AFTA, etc. The social variables are lifestyle changes, population growth, age
distribution, population shifts, various demographics, social classes, culture and attitudes towards
foreigners. Finally, the technological variables includes industry/government expenditure in
R&D, focus on technology efforts, technology property rights and patent protection, IT
infrastructure, resource availability, transport network, skilled capital (both HR and system) and
regulations on technology transfers.
Political

The political environment in different regions effects protons strategic choices and overall
functioning. Firstly, looking at the home market of Malaysia, there is no political hindrance in
Protons functioning. The Malaysian legal system is a mixed legal system of English common
law, Islamic law, and customary law, while the government is a federal constitutional monarchy
and constitutes a mixed market economy (CIA Factbook, 2016). Malaysia has now relaxed its
taxations through the AFTA and is now a member of the WTO (CIA Factbook, 2016).
Unfortunately, the government can no longer protect Proton and Peroduas interests. With high
production, labour and land costs and lack of good standard local vendors, there is a high
possibility that the local market may still be dominated by imported cars. However, to tackle this
issue, Proton has bought Lotus company since 1996, which has excellent expertise regarding
engineering and R&D (Lotus, 2016). This along-with acquiring engine technologies from
Petronas in 2012 (Proton, 2016a) has enabled Proton to outperform both local and foreign
competition in the home market. Proton had also struck deals with international automobile parts
suppliers like TRW, Lucas, and Clarion to set up shops in Malaysia after AFTA came into effect,
and since 2004, these suppliers have been supplying around 70% of the Protons components
(Clarion, 2016; TRW, 2016; Lucas, 2016).

Furthermore, the introduction of National Automotive Policy (NAP) in 2006 meant favourable
sustainability of national car manufacturers in Malaysia, particularly for Proton and Perodua
(MITI, 2015; MAA, 2014). However, the NAP was reviewed in 2009 to enhance the
competitiveness and capability of the domestic automotive industry (MAA, 2014). Some
advantages Proton has attained include certain tax exemptions, promoting hybrid and electric
vehicles and development of related infrastructure (as part of governments R&D technology
initiatives), providing soft loans/grants to enhance competitiveness of parts/components
manufacturers and development of global standard value chain (MITI, 2015; MAA, 2014).
However, in spite of preference given to Proton by the Malaysian government under this new
policy, it has opened many opportunities for foreign MNCs to come in, particularly for hybrid
cars such as Toyota where hybrid cars are exempted from import duty to encourage R&D
infrastructure (MITI, 2015).
Looking outside the home country in the ASEAN region, a similar political stance can be
observed. Particularly in countries like Singapore, Indonesia, Vietnam, Thailand, and the
Philippines where proton can freely export their cars within the ASEAN region due to the
advantage gained from the AFTA policy (ASEAN Market Research, 2016). However, Philippines
have the left-hand-drive system (as opposed to right-hand-drive system in other ASEAN
countries) to which Proton must adhere to the little difference in product standard (Ellison,
2016).

The political aspect in the ASEAN region may not directly influence Proton. This is because
Protons collaborations with foreign partners for strategic alliances, or simply to export without
physical operations in every country means indirect presence which is advantageous for the
company. Looking at the types of horizontal and vertical collaborations Proton uses, the
advantages and disadvantages can be evaluated, as described in table 3 in the internal analysis
section.
Economic

The economic factors of any country effects both Protons operations, as well as the consumers
purchasing power. The commonly used tools to measure a countrys economic power is through
analysing its various resources, GDP, unemployment rate, labour force, inflation rate, citizen
taxation, and exchange rate fluctuations (Wheelen and Hunger, 2010).

Table 1: ASEAN countries ranking based on economy

Source: ASEAN Market Research, 2016

Starting with the home country of Malaysia, it is a middle-income country where 80% of the
export revenue is achieved through exports of rubber, oil and gas, electronics, and palm oil,
whilst the Bank Negara Malaysia (central bank) maintains healthy foreign exchange reserves
(CIA Factbook, 2016). Peoples per capita income is RM 36,675 (Malaysia department of
statistics, 2016). 36% of labour force falls under industrial sector, while unemployment rate is
2.7%, and inflation is 2.1% (CIA Factbook, 2016). Corporate tax of 25% and GST of 6% has
been already set for a while (ASEANTax, 2016). These factors along-with 80% export earnings
(CIA Factbook, 2016), Proton still has a very good opportunity in the home market (although
Malaysian market is quite saturated), as well as exporting opportunities to ASEAN markets.
However, the increasing labour costs and raw material prices have made it difficult for Proton to
maintain a balance between quality and price of vehicles.

Singapore has the highest per capita income compared to any other country (60,410), with
Brunei, Malaysia, and Thailand coming in number 2, 3 and 4 respectively (Table 1). For Proton,
this means that people of Singapore, Brunei and Thailand have high purchasing power, and these
countries have been growing rapidly in terms of economy, which can serve as a high growth
market for Proton to increase sales there (Table 1). On the contrary, The Philippines, Indonesia
and Thailand have the lowest per capita income where its citizens have very low purchasing
power (Table 1). Indonesian labours, for example, usually migrate to Malaysia in search of better
jobs. This brings in new skills to the Malaysian market. Therefore, Proton may introduce fuel-
efficient cheap affordable cars for Philippines, Indonesia and Thailand, and provide high quality
latest design (with latest functions) to high markets of Singapore and Malaysia.

Vietnam is also currently the fastest growing economy in the ASEAN region and it is predicted
that Vietnams automotive industry will enjoy the fastest growth in Southeast Asia in the next 20
years because of rising demand and support from the government within a few coming years
(Tuoi Tre News, 2015).

Social

This part of environmental factor could affect Protons sales because this section analyses
customers social perspective, and how Proton can provide customised products depending on
the demands pertaining to the different countries.
 Table 2: ASEAN countries ranking based on population demographics

Source: ASEAN Market Research, 2016

Starting with the local Malaysian market, it comprises of a mostly collectivistic society, meaning
that loyalty, family and group influences their purchasing decisions (Hofstede, 2016). Young
individuals prefer their peers, friends and family members as reference groups (Hofstede, 2016).
This means that the individuals are usually self-conscious, trendy and have a high self-esteem.
Therefore, they choose to own cars that has a strong brand image and premium quality. Although
the Malaysian market is quite saturated, the number of car ownerships have been increased
because of increasing transport needs and also the increased purchasing power of customers
(Table 1). More customers have been increasingly switching to owning vehicles (in exchange of
motorcycles and other transport) to accommodate their both individual and family needs. Many
peoples perception to be environmental friendly have led to buying eco-friendly and/or fuel-
efficient cars.

There is a similar pattern observed in countries of the ASEAN region regarding the social
attitudes of the country people. However, some differences arise, for example, Singapore
consumers may prefer spacious large cars and dont want to compromise on quality, drive and
functions. That is the reason those people like Toyota and General Motors as their preferred car
choice, for both brand image and premium vehicle. On the contrary, Indonesia, Malaysia and
Philippines people are still opting for compact and fuel-efficient cars. One reason is increased
petrol prices and traffic where people are still purchasing compact fuel-efficient cars to save both
time and petrol costs.

Also, the population growth of Indonesia, Philippines and Vietnam (Table 2) along-with the
increasing of per-capita income, purchasing power and country economies have created a great
window of opportunity for Proton to look for increased sales in those countries, apart from its
home market.

There has also been an increasing concern towards the environment, particularly by the
Malaysians and Singaporeans. This has led to an opportunity for eco-friendly cars and Toyota
has succeeded so far with increase in sales of their hybrid eco-friendly cars.

Technological

Protons decision to acquire Lotus company (Proton, 2016a) is paying off because the UK
company has the latest R&D and engineering solutions for the ever-changing technological
environment. Lotus technology and innovations are also being protected under the UK
government through intellectual rights and patent protection (Lotus, 2016). The technological
expertise Proton absorbs from Lotus can be easily transferred to its automobiles without any
issues as Malaysia is also rapidly developing technology-wise to keep up with the global
standard (CIA Factbook, 2016). Protons strategic choice of acquiring Lotus, engine technology
from Petronas and selecting suppliers worldwide are bringing in new technological and R&D
ideas from everywhere, and at the same time, minimising technology related risks and sharing
with other markets through Lotus and trusted suppliers. Therefore, the technologies of Proton are
a competitive advantage in order to sustain in the stiff competitive global stage.

However, new technology trends that are disrupting the automotive industry must be taken into
consideration by Proton. Gao et al., (2016) have predicted that within a more complex and
diversified mobility-industry landscape, incumbent players will be forced to compete
simultaneously on multiple fronts and cooperate with competitors; City type will replace country
or region as the most relevant segmentation dimension that determines mobility behaviour and,
thus, the speed and scope of the automotive revolution; and most importantly, electrified vehicles
are becoming viable and competitive; however, the speed of their adoption will vary strongly at
the local level. Toyota, for example, have introduced their hybrid technology cars and are
quickly working towards introducing concept electric cars in order to stay with the current trend
and competition (Toyota Annual Report, 2014).

For Proton, this could mean to increase investments in R&D, update themselves and their
suppliers with the newest technology, and bring-in new technologies from the global marketplace
to keep up with the trend. For example, one of the Protons global supplier Clarion has made new
innovations like smart software cloud-based security systems, dash cams, car play android music
system and sensor technologies whom they are already been supplying to global giants such as
GM (Clarion, 2016). Proton needs to update their cars technologically to accommodate these
new technologies from their current suppliers.

Porters 5 forces analysis

Porters 5 forces analysis (cited in Wheelen and Hunger, 2010) will enable Proton to assess the
markets environment and situation and analyse industry attractiveness (Johnson et al., 2014).
Also, it will help determine the profit potential in the industry, where long-term ROI is the
preferred profit potential (Wheelen and Hunger, 2010). Therefore, the 5 forces are threats of new
entrant, intra-industry/constant rivalry among existing businesses, threats of substitutes,
bargaining power of buyers, and bargaining power of suppliers, and the more these forces get
stronger, the less the ability to raise prices and/or profits (Wheelen and Hunger, 2010). These
forces may present themselves as constraints in the short-term, however the long-term strategy is
reducing these forces to the companys advantage (Wheelen and Hunger, 2010).
Threat of new entrant

The threats of new entrants in Protons home market is highly unlikely because of Market
saturation, however, in other markets particularly in the Asian region, there can be threat of new
entrants. The newest international entrant to the ASEAN region is the Volkswagen group,
Volkswagen Group has ambitious plans to strengthen its presence, dealerships and offerings in
Asean. (South China Morning Post, 2016). Volkswagen is aiming to strengthen its presence in
the ASEAN region (including Taiwan) by having a target market size of four million cars by
2020 (South China Morning Post, 2016).

This is because these emerging markets provide a greater chance of scale economies (Johnson et
al., 2014). Those companies who have cost advantage may outperform their competition. The
capital need to invest in these countries is cheaper as compared to other markets (Johnson et al.,
2014). For example, availability of cheap land, labour and capital and AFTA policies have
attracted FDIs and businesses to establish there (Worldbank, 2001). Easy access to various
distribution channels, suppliers and transportation is another advantageous factor for the ASEAN
markets. For Protons home market, Proton still holds major competitive advantage. This is
because the barriers to entry in terms of product differentiation, achieving economies of scale,
etc. will make it almost impossible for new comers to the home market.

Constant rivalry among existing businesses

Mercedes Benz, BMW, TRW Automotive, DENSO, Automotive Lighting, NWB and Honda
Malaysia Sdn. Bhd. (joint venture: 51% Honda, 34% Hicom, and 15% Oriental Holdings
Berhad) are some of the successful foreign automotive and component companies already in
Malaysia (MIDA, 2010). As of the 2015 Malaysian market share, Perodua dominates by 36.1%
of market share, whereas, no. 2 is proton with 17.3% share and third rank is Hondas not far
behind with 16% market share (Chin, 2016).
In terms of the ASEAN market competitors, the Japanese automakers (Toyota, Honda, Isuzu,
Mitsubishi and Suzuki) have dominated almost 90% of the market share, particularly in Thailand
and Indonesia (ASEAN Market Research, 2016).

Although these statistics may suggest market saturation in passenger car sales in both home
market and ASEAN region, there is still a good opportunity for other car types. For example,
General Motors have changed their strategy that focuses on selling two of its midsize truck/SUV
models, the Colorado and Trailblazer which is a source of 70% overall sales in the ASEAN
region, particularly in Thailand (Ellison, 2016). This new successful strategy can motivate Proton
to offer similar SUVs to the ASEAN region as GMs competition because Proton still has the
edge to produce cheaper cars than expensive American cars of GM. The increase in buying of
bigger cars can be linked back to peoples increasing purchasing power and population growth
that is creating a demand for different vehicle types (Table 1; Table 2).

A competitive move by any competitor may have a noticeable effect on the overall automotive
industrys competition. Some factors (cited in Wheelen and Hunger, 2010, p.160) may affect
intense rivalry. Since both local and global competitors are few (in numbers), the competitors
watch each other closely so as to match a new move with a countermove against the
competitor(s) (Johnson et al., 2014). The rate of industry growth is another factor where slowing
down of any competitor will eventually increase sales for other firm. Another factor is capacity,
where Proton has enough manufacturing plants to run at full capacity to keep unit costs as low as
possible (Proton Annual Report, 2010). The exit barrier is also low for competitors because
manufacturing and selling of cars is a specialised business and very few companies voluntarily
leave the industry (Johnson et al., 2014). Finally, diversity of rivals isnt that unique because they
provide the same automobiles in terms of standardisation, technology, etc. with some noticeable
design changes.

Protons home market is quite saturated with slower growth rate, although ASEAN markets still
have potential for increasing market share.
Threat of substitute

Substitutes may limit the ROI for firms by placing a price ceiling on the profits charged
(Wheelen and Hunger, 2010). The threats of substitutes for Proton can be alternate modes of
transport, such as motorbikes, railways, taxis, etc. for both home and global markets. Currently,
the major threat of substitute in the home market is The Land Public Transport Commissions
(SPAD) proposal to allow any foreign and local car models to be used as taxis (Kumar, 2016).
This will further side-line national car Protons sales.

The total sales of substitutes like motorcycles and scooters in 2012 in the ASEAN region suggest
that most sales were made in Indonesia (7,141,586 units) then Thailand (2,130,067 units)
whereas the least sales were made in Singapore (9,923 units) against vehicle sales (ASEAN
Market Research, 2016). Therefore, both threat of substitutes and declining sales lies mostly in
Indonesia and Thailand.

Bargaining power of buyers

Buyers and customers are one of the biggest driving bargaining force for any industry (Johnson
et al., 2014). Usual bargaining chips are higher quality with low prices. This customer demand
made Proton to refresh its product line in the first place and now, Proton management is listening
closely to its customers to continuously improve quality, design, technology and reduce price
(Malaysian Business, 2010). Since the direct buyers are not the customers, common bargaining
power is influenced by distributor and retail showrooms who in-turn sell cars to customers
(Proton Annual Report, 2010). Since these buyers purchase large proportion of Proton cars
(especially in terms of import quotas to ASEAN markets as per demand), they have considerable
amount of influence to Proton sales. The major risk is that these purchasers have very little profit
margins, there is little incentive or loyalty to repeat purchase as it is easy to terminate or change
to different competitor if the demand isnt high, or other substitutes are more profitable (Johnson
et al., 2014). Proton must work closely with both buyers and suppliers to sustain a smooth
bargaining.

Bargaining power of suppliers

Various suppliers of Proton may affect the company by their ability to raise prices or reduce
quality (Wheelen and Hunger, 2010). For example, TRW, Lucas, Mitsubishi, Honda, and Clarion
are international automobile parts suppliers that supply to both Proton and other competitors
simultaneously (MIDA, 2010; Lucas, 2016; TRW, 2016; Clarion, 2016). Since there are limited
number of dominating global and local suppliers in the automotive industry, the bargaining
power is really high and influences Protons manufacturing. For example, Protons declining
sales along-with high demands from suppliers has led Proton to borrow additional RM 1.5 Billon
from the government as a bail-out package to pay to its suppliers and vendors for components
(Harman, 2016). However, to reduce dependence and decrease bargaining power of suppliers,
Proton is forming strategic alliances, collaborations and partnerships with both local and
international suppliers, which falls under their transformation strategic plans for success and
expansion in global markets (Harman, 2016).
The Internal Environment

Value chain analysis

The value chain (cited in Wheelen and Hunger, 2010) will enable Proton to analyse its internal
competencies and formulate new strategies based on internal strengths and weaknesses. A strong
and sustained value chain will be a source of competitive advantage (Wheelen and Hunger,
2010). Also, possible opportunities for vertical integration and/or outsourcing may be identified
(Johnson et al., 2014).

Figure 2: Value Chain Model for Proton

Source: Adapted from Wheelen and Hunger, 2010, p.194

The core competence lies in the primary activities which includes inbound and outbound
logistics, operations, marketing and sales, and services (Wheelen and Hunger, 2010; Figure 2).

Primary Activities

Inbound Logistics: This part of value chain involves activities related to raw materials, handling,
warehousing, stock control and transporting whilst also receiving, storing, and distributing inputs
internally (Wheelen and Hunger, 2010). Analysis form Protons annual report (2010) reveals that
Proton has 280+ suppliers, vendors and sub-suppliers and Proton assembles more than 5,000
individual components. However, improper inbound control has resulted in some defects thus
effecting quality standards. This has led to Proton terminating Ingress supplier and collaborating
with global suppliers such as TRW, Lucas, and Clarion who maintain global standard and
provide new technological advancements to Proton. Proton can reduce the number of suppliers
by condensing them in forming strategic alliances with various groups. This will enable Proton to
obtain/learn new technology related capabilities, reduce overall costs, reduce both financial and
political risks, and possibly obtain access to specific/new markets (Wheelen and Hunger, 2010).
Another tactic which can reduce dependence of suppliers is by creating joint ventures with them.
This strategy helps allocate ownership, financial risks/rewards, and operation responsibilities,
whilst preserving distinct identity and autonomy between both parties (Lynch, 1989, cited in
Wheelen and Hunger, 2010). For critical and heavy suppliers, however, it is recommended for
Proton to form a value-chain partnership. This strong and close partnership will enable long-term
partnership with key suppliers and distributors for mutual advantage (Wheelen and Hunger,
2010). Although all these activities of forming suitable partnership with the right supplier(s)
takes time and involves heavy investment costs in the short-term, this will reduce dependence,
reduce overall costs and risks, and improve quality and technology of suppliers and their parts,
also, suppliers who form longer term partnerships are more mutually profitable than multiple
short-term contracts (Andrews, 1995, cited in Wheelen and Hunger, 2010).
There are different types of partnership alliances Proton can adopt, reflecting to their long-term
objectives. Each partnership type comes with their advantage and disadvantage. These are
summarised in table 3 below.

Table 3: Different types of horizontal and vertical collaboration, its duration, advantages, and disadvantages

Source: adapted from Tidd and Bessant, 2013, p. 486

However, in the practical world, in order to successfully execute strategic partnerships, some key
success factors must be considered. It is usually challenging for both the parties interests to be
mutually aligned (Johnson et al., 2014). For example, if Proton were to make some sort of
alliance with Lucas to establish repair service and diagnostic centres in Malaysia as after-sales
services to customers, Lucas can also extend its services to Protons competitors that will
intensify competition even further as opposed to reducing it. Forming alliances is also quite
challenging when it comes to sharing technology. The decision of Proton to acquire Lotus has
enabled both parties to share technologies to smoothly share strategic know-hows and
technology without any clashes (Proton, 2016a; Lorange, 1997, cited in Wheelen and Hunger).
Therefore, there is a need to articulate strategic alliances objectives and success factors, some of
them are highlighted in figure 3.

Figure 3: Strategic Alliance Success Factors

Source: cited in Wheelen and Hunger, 2010, p.247

Operations: Value activities like engineering, manufacturing, and quality control come under
Protons operations as these transformation activities change inputs into outputs (Wheelen and
Hunger, 2010).

Engineering process includes styling and technology development, product development, and
process improvements (Wheelen and Hunger, 2010). All operations of engineering are
undertaken by Lotus group (UK, China and USA plants) and Proton Engineering Research
Technology Sdn. Bhd. (Proton Annual Report, 2010). Both the product development and styling
and technology development ensures high quality cars (and continuously improving every
consecutive model), whereas the process improvement involves reducing overall vehicle cost by
minimising effect of material cost increase to the car price and considering cost improving
activities even at designing stage (Proton Annual Report, 2010; Malaysian Business, 2010).

The manufacturing process is done mostly by Proton (Malaysia, Indonesia and China plants) and
Lotus (UK plant), and partly by Miyazu (Malaysia) and Goldstar (China) (Proton Annual Report,
2010). The main manufacturing plants in Malaysia producing Proton cars are Shah Alam Plant
(for manufacturing Saga, Waja and Arena models with capacity of 200,000 units per year),
Tanjung Malim Plant (for manufacturing engine & transmissions, stamping, trim, final assembly,
body assembly and painting with annual capacity of 150,000 units), and the Glenmarie
Component Plant (for Casting, EMT, and Stamping) (Proton Annual Report, 2010). Also in 2009,
Proton was awarded the SIRIM QAS International and VCA awards (along with 14001:2004
certifications) for the Tanjung Malim Plant for best manufacturing process in passenger cars,
engines and parts supply (Proton Annual Report, 2010). Another notable award was given by
Frost and Sullivan in manufacturing excellence in April 2009 (Proton Annual Report, 2010).
Since then, Protons management continually strives to maintain smooth manufacturing
processes.

The quality control, although to reduce cost, has different functions. They are categorised into 4
sections of innovative-driven quality, quality culture, customer focus, and total quality ownership
(TQO) (Proton Annual Report, 2010). The customer focus function dealt with problems stated by
customers that helped Proton improve any reported issues. The quality culture initiative
structured routine meetings by all operating units/divisions in which issues were resolved and
discussed to achieve company values. The innovation-driven quality function deals with all
innovation related activities and also provide employees a chance to bring in ideas and
suggestions for innovation and/or improvement. Finally, the TQO involves various programs
rolled out that targets to improve the overall quality (including supplier quality performance
evaluation) performance (Proton Annual Report, 2010).
Outbound Logistics: This part of value chain includes various activities such as collection,
storage, distribution, and transportation of assembly and/or finished vehicles to the customers
(Wheelen and Hunger, 2010). Introduced in 2012, the CLASS (the Centre for Logistics,
Allocation, Storage, and Services) initiative helped Proton management to deal with issues
including, reduced inventory time and faster transport times (Proton Annual Report, 2010).

Marketing and Sales: The marketing, sales and distribution activities are mostly undertaken by
Proton Marketing Sdn. Bhd. in Malaysia area, other division includes Proton Singapore Pte Ltd,
Proton Motors (Thailand) Limited, Proton Parts Centre Sdn. Bhd., and PT Proton Edar Indonesia
(for spare parts sales and distribution, for during both manufacturing and after-sales maintenance
services for customers). (Proton Annual Report, 2010). General marketing includes advertising
by, broadcast media such as TV, print media such as magazines and direct mail, display media
such as posters and billboards, and online or social media (Johnson et al., 2014). Sales include
direct selling to customers (by showrooms) and authorised dealers, and furthermore, Proton has
made some special deals for locals that enable local customers to purchase a brand new car
through loans or instalments (Proton Annual Report, 2010).

Service: Proton has exceptional after-sale services for its customers (Proton, 2016c). Protons
customer care 24-hour Mobile Assist provides customers roadside assistance in any unexpected
accident. Other services include online booking for servicing or buying new car and pick up &
delivery services for customer convenience (Proton, 2016c). Furthermore, the Product
Improvement Initiative (PII) is a voluntary programme in which Proton offers free inspection
and if necessary, parts replacement for new and existing customers (Proton Annual Report,
2010). There are also more than 30 service centres, branches, test-drive centres and showrooms
strategically placed nation-wide for customer convenience (Proton, 2016d).
Support Activities

Firm Infrastructure: Accounting, legal, administrative, and general management activities

constitute a firms infrastructure (Wheelen and Hunger, 2010). Like any other organisation,
Proton management has a centralised hierarchy and a top-down management system approach
(Proton Annual Report, 2010). Although R&D and engineering activities are communicated
between Proton and Lotus, the R&D is kept centralised as much as possible. The IT systems such
as HPE technology helps Proton management optimise high performance, availability, reliability,
and disaster tolerance (HPE, 2015).

HR management: Having the right talented people at the right position and at the right time is
key for any business performance (Tyson, 2006). The foundational values of Protons
management are to keep employee motivated enough to be dedicated to the long-term success of
Proton and operate under employee groups shared values to help foster respect, trust and sharing
of knowledge as effective teamwork policy, all while promoting and protecting the health and
safety of employees (Proton Annual Report, 2010). Proton is also collaborating with universities
to find a pool of talented staff, rolling out overseas training and development programs and also
setting up events like Proton Innovation and Invention Competition (PIIC) that enables Proton
staff to generate new ideas for next generation cars (Proton Annual Report, 2010).

Technology Development: This part of value chain includes design engineering, testing, and
R&D practices (Wheelen and Hunger, 2010). The core value of Protons R&D is to maintain
technical assistance and staying current with technological advances (Proton Annual Report,
2010). The R&D activities are further sub-divided into stages of safety technology, styling
technology development, homologation testing, vehicle platform, and powertrain development
(Proton, 2016e). The vehicle platform stage includes programs involving engineering design,
styling, product strategic planning, and supplier development programs. Proton management
uses the ALIAS software and CATIA 3D modelling software to stay in the automotive industry
standards (Proton, 2016e). The powertrain development division develops internal combustion
engines (ICE) and also working on hybrid and electric cars to cope up with the future trend of the
automotive industry (Proton, 2016e). The main objective to set-up homologation testing is for
safety testing. The safety testing is done in areas of Component, Material, Strength & Safety
(CMSS) Laboratories, Emission Development Laboratory (Euro 5 carbon dioxide emission
standard), Noise Laboratory (testing exterior noise, interior noise, cabin noise and vibrations),
and Test Track [semi-high speed test track for testing durability, fuel efficiency, durability,
squeak and rattle, simulation tests (various road surfaces), shower testing (flood and rain
simulation) and hand-brake testing (of different gradients)] (Proton, 2016e). The styling
technology development includes four primary units of design and Computer Aided Styling
(CAS), colour design, model design and advance design (Proton, 2016e). The digital designing
process involves sketching, rendering and surfacing, as well as rapid prototyping that further
enhances the design process (Proton, 2016e). The safety technology initiative, called as 360
degree safety, is done through both simulation and real crash testing to test the car to its limits in
terms of safety (Proton Interactive, 2016). As such, Proton cars are using high quality HPF
carbon reinforced steel to make it both lightweight 5 times stronger than any other steel alloy.
There are also both curtain and driving wheel airbags for increased safety (Proton Interactive,
2016).

Procurement: This part of value chain includes purchasing activities and what Proton does to get
the resources it needs to operate, this includes finding vendors and negotiating best prices
(Wheelen and Hunger, 2010). Proton purchases raw materials, parts and components from both
local and foreign manufacturing as an effective supply chain management. Some of Protons
global suppliers are Clarion, Lucas and TRW, while the list of local suppliers are summarised in
table 4 below.
Table 4: List of local Proton suppliers and vendors

Source: Abdullah, Lall and Tatsuo, 2008, p.52

The value chain of Proton provides insights in the strengths and weaknesses of different sectors.
It is quite clear that the competitive advantage of Proton is in providing high quality global
standard cars at low cost (as compared to competitors) while its internal strength lies in the R&D
sector. To further improve their R&D and sustain a competitive advantage, it all comes to low
cost versus differentiation strategies (Johnson et al., 2014). Since the competitive advantage of
Proton is towards the low cost at a broader target market, the management should peruse a cost
leadership strategy (Johnson et al., 2014). By this, Proton can use large economies of scale from
both Malaysia and the ASEAN region with tight cost discipline to serve the larger market at a
very competitive price (Johnson et al., 2014). However, Johnson et al. (2014) argue that there
are key cost drivers that can help deliver the cost leadership strategy: Firstly, the input costs such
as raw materials, labour, etc. must be low. Proton still has low production costs but it may reduce
it even further by opening additional plant in Vietnam for example. Secondly, economies of scale
need to be achieved to reduce overall costs by spreading the fixed costs of R&D and engineering
towards the number of vehicles produced. Finally, there are two main requirements for Proton to
achieve this strategy. The first one is the cost being lower than that of its competitors. The second
one is a balance between quality and price. Therefore, Proton cars are quite cheap (as compared
to its competitors) and at the same time, they are high quality vehicles. Perhaps Proton can avoid
further R&D costs through imitating from its competitors (Wheelen and Hunger, 2010).
However, they must consider listening loosely to customers and meet those needs in lieu of
imitating competitors in which they are better at.

Proton management can also consider outsourcing activities of marketing and sales and after-sale
services to local companies in every country of ASEAN region to not only reduce costs, but to
increase efficiency as well. The outsourcing can be done by purchasing independent
companies with long-term contracts (Wheelen and Hunger, 2010). This will relieve Proton off
some operations so that they can have a core focus on its internal strengths to sustain their
competitive advantage. Although the outsourcing procedure may seem time-consuming and
costly, it will help to reduce costs and expand operations in the long-run.

Using Dunnings (1988) Eclectic Paradigm, Proton can find its benefits in terms of ownership,
location and internalisation advantages. Protons home country of Malaysia already has location
specific advantage. This is because its main manufacturing plants are in Malaysia, so are the
resources, talented employees and majority of local suppliers (Table 4). Proton also benefits from
low taxations thanks to the AFTA around the ASEAN region and imports/exports without any
observable issues. This has enabled the firm to produce and sell high quality and cheaper cars
than competitors who cannot possibly fully exploit the ASEAN opportunities. If Proton looks for
FDIs in foreign countries, whether directly or through some type of partnership, it must have a
greater competitive advantage if it decides to have more presence in foreign markets. Currently,
in its operations throughout the ASEAN region, it benefits from ownership advantage because
the firm has major control of its operations where its trademarks, secrets, technology, R&D,
intellectual properties, etc. are well protected and usually not shared with partners. Finally, since
Proton benefits from their own in-house production and relies mostly on its own core
competencies, Proton has internalisation advantage. From all this OLI advantages, Proton needs
to use export strategy, since both of its ownership and location advantages are strong (Dunning,
1988).
Strategy Alternatives and Recommendations
TOWS Matrix
External Opportunities
O1. Vietnam fastest growing
economy in ASEAN region
O2. Economies of scale in
Vietnam and ASEAN region
O3. Indonesias growing
population
O4. Growing per-capita
income in Singapore, Brunei,
Malaysia, and Thailand
Internal Strengths Internal Weaknesses
S1. Strong engineering & W1. Marketing and sales
R&D through Lotus W2. Too many suppliers
S2. Strong local after-sales W3. Still no true global
services network expansion
S3. Efficient W4. Lack of strategic
manufacturing/production alliances, especially with
capabilities global partners
S4. Access to local suppliers
(location-specific advantage)
S5. Talented staff
S6. Providing high quality-
low price vehicles
S7. AFTA advantage in
ASEAN region operations
S8. Long experience of more
than 30 years in local market
SO WO
SO1. Further establish WO1. Look for global
manufacturing plants in partners to build concept
Vietnam to increase sales in electric and/or driverless cars
ASEAN region (O1, O2, S3, (O5, W3, W4)
S4, S7)
SO2. Increase sales to
accommodate growing
population and purchasing
power in the ASEAN region
O5. Changing trends in
automotive industry in
technology (electric and
driverless cars)
External Threats
T1. Volkswagen as new
entrant in ASEAN region
T2. Local market saturation
T3. Intensifying competition
in ASEAN region
T4. SPAD decision will
sideline taxi sales
T5. Increase in substitute
buying
Source: self-analysis of external and internal environment
Recommended Strategies
(O3, O4, S6)
SO3. Increase R&D support
to embrace with new
technology trends that will
disrupt automotive industry
soon (O5, S1, S5)
ST
ST1. Meet competition by
providing new improved
models as new product
offering, i.e., product
development strategy (T1,
T2, T3, S1, S2, S6, S8)
ST2. Improve brand image
and look for reducing further
vehicle prices (T4, T5, S6,
S8)
Table 5: TOWS analysis of Proton
WT
WT1. Reduce threat of
competition by looking for
more strategic alliance
partnerships to build a
broader network (T1, T3,
W4)
WT2. Improve marketing (or
outsource activity) and brand
image of Proton, and provide
same cheaper cars to reduce
threat of substitutes (T4, T5,
W1)
WT3. Reduce supplier
dependence by increasing in-
house production or
buying/partnering up with
ASEAN region suppliers (T3,
W2)
After analysis of the TOWS matrix, it is quite clear that Proton needs to provide more new and
improved models as new product offering to the existing market in order to meet the intensifying
competition and market saturation. This is known as a product development strategy from
Ansoffs model (Johnson et al., 2014). To achieve this, however Proton must use its both new
and existing technological capabilities in order to restructure their marketing capabilities thereby
managing consumer perception successfully.

To reduce supplier dependence, it is highly recommended for Proton management to vertically

backward integrate (Johnson et al., 2014). The backward vertical integration strategy will allow
Proton to bring in activities within its value chain for in-house operation leading to not only
capturing more profits in value chain, but to expand in size and reduce overall expenses as well
(Johnson et al., 2014). Although it requires investments to integrate, it becomes cheaper in the
long-run.

An alternate recommendation for growth (especially in local home market) is the growth-based
diversification strategy (related) to which Proton can expand using its strengths because it will
lead to increase of revenue from current customers, strengthens relationship with current value-
chain players, current competencies can be used to leverage market growth (Wheelen and
Hunger, 2010). Examples include dispersing car products such as engine oil, radiator water,
battery, etc. to various outlets under the Proton brand.

Finally, to expand in the global markets, Proton can use export strategy as entry mode, where
risks are minimised, vehicle is still produced under Proton, and Proton will only rely on foreign
partners for marketing and selling of its vehicles (Wheelen and Hunger).

Conclusion
The new strategies outlined above will result in boosting of Protons competitiveness, however in
the long-term. Going through Protons current plan to boost competitiveness (Figure 1), most of
its intended strategies are still viable, which may however, need some modifications. For
example, Proton should use export strategy for global market expansion in the long term. This is
because collaborating with global OEMs or product development in new markets may prove to
be risky, and operations should be under Proton and also the firm can use its extensive R&D and
Lotus engineering to come up with better cars to export globally. Proton can also use the
suggestion of growth-based (related) diversification strategy to capture short-term profits.

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