Geely Buys Into Proton To Break Japanese Stranglehold On Southeast Asia. Will It Work?
Last week, Geely punched a hole in a Japanese fortress when it took a 49.9% share of Proton of Malaysia.
Now comes the hard part. Having secured ownership, will Geely be able to turn Proton around and win market share?
Some historical background: Japanese brands have utterly dominated Southeast Asia’s car markets since the late 1970s when oil shocks forced American car makers to retreat. Led by Toyota and Honda, Japanese car brands take 92% of the region’s annual car sales.
In Indonesia, Southeast Asia’s largest market, Japanese share of the car market (95%) is higher than in Japan, the highly-protected home market. No wonder industry executives call the markets of Thailand, Indonesia, the Philippines, Vietnam and Malaysia “Japan’s backyard.”
All have met bitter resistance.
Exporting to Southeast Asia markets was never an option. Import duties and non-tariff barriers get in the way. You need to produce inside to sell inside.
Chrysler entered first in 1993. But its low-volume production of Jeep Cherokees was no match for the entrenched Japanese with their larger scale production, deep supplier network, close ties with the Thai government and ubiquitous sales and service networks. Most important, the Jeeps simply cost more to build than the CR-Vs and RAV-4s. Chrysler entered the market in 1995 and was forced to retreat just five years later.
GM and Ford saw something in Chrysler’s defeat. To compete in Southeast Asia, a company needed manufacturing scale. So, they invested more than $1 billion in greenfield plants in the late 1990s to transform Thailand into a global production base for small pickups like the Ranger and the Colorado. The idea was to drive up total production in order to drive down overall manufacturing costs.
Exports of pickups from Thailand grew steadily over time from a small base. But GM and Ford could not convince Thai buyers to leave their trusted Japanese brands.
Ford and GM shares never climbed above 5 percent.
American companies have no monopoly on pain in Southeast Asia. Europeans and Koreans have had bitter experiences, too. During the mid-1990s, Kia formed a national car joint venture with Indonesia, only to have the partnership unravel during the Asian financial crisis. Today, Hyundai and Kia account for 1 % of sales in the region.
In the mid-2000s, Volkswagen came very close to buying a controlling share in Proton, the pride of Malaysia. The Germans wanted a majority stake – or no deal. The proud Malaysians could not bear to give up control of Proton, a company that was originally meant to be Malaysia’s national car. Years of intense negotiations ended with no result. Volkswagen went back to Germany, empty-handed. GM, Ford, Hyundai and Peugeot have walked down the very same trail with Proton, with no result.
In 2013 Volkswagen separately announced plans to invest in a greenfield plant in Indonesia. Then the Germans looked closely at how well their own cost structure compared to that of the Japanese. VW would lose money on every car they built. Within a year, VW did an about-face on their grand plans for a new production base in Indonesia, the 4th most-populous country in the world.
Japanese automakers essentially own Southeast Asian markets, from Bangkok to Jakarta, Manila to Hanoi. Their dealerships and service centers are everywhere. Parts are affordable. Used-car values are strong. Brand names well-established. A near-perfect moat, Warren Buffett might call it.
In taking a minority 49% stake, Geely is daring to venture where VW, Ford, PSA and GM would not go. Why? In Chinese business culture, negotiating for control is an on-going affair, long after contracts are signed. Look for Geely to shake Proton out of it moribund culture, bring a slew of new SUV products and gradually build consumer trust. It does not hurt that ethnic Chinese account for large chunk on car buyers in Malaysia. Many car dealers are ethnic Chinese, too. Americans and Europeans and Koreans had no such built-in advantage.
Japanese counterattacks will be relentless. But Geely Chairman Li Shufu, the man who brought Volvo back from the dead, is unafraid of long odds and a fight.