The Imminent Return of Great Depression?

It's clear that yesterday's dramatic intervention in the markets by the Bank of England and other central banks will not be a silver bullet to kill the credit crisis stone dead. But to expect so much would be foolish. After all the 100 billion pumped into the money market could only last until after the New Year. What will happen next? Should more money be pumped in? Or governments are allowing for these economic bubbles in the money market to burst in order to correct the economic cancer which is spreading a little too fast?

The extra liquidity will certainly go some way towards tiding over troubled banks during the difficult Christmas and New Year period, but to assume it will rebuild confidence in capital markets is unrealistic.
However, while this is hardly the end of the whole miserable episode, to coin a phrase, it may well turn out to be the beginning of the end.

One reason for optimism is that for the first time in recent economic history, central banks around the world have taken co-ordinated action to clamp down on the money market mayhem which has reigned since August. They have co-ordinated in the past on currency problems. But while in previous years central bank governors would take soundings from their counterparts all over the world, they would still take action independently. To have them club together so explicitly underlines the global nature of the credit crisis.

Might the central banks be groping their way towards a new international framework for markets and financial stability? Recent history would certainly suggest there might be grounds for governments and their central banks to formalise aspects of their policies.

However, we should certainly expect more collaboration and co-ordination as the central banks work out the best way of solving the current crisis. Yesterday's action, while a start, exposed the sort of anomalies that are contributing to the markets' problems.

Why, for instance, was the intervention not announced on Tuesday, hand in hand with the Fed's decision to cut rates? The two together would have had a greater impact.

At a time when central banks know their ability to cut rates is hobbled by the lurking presence of inflation, such tactics would give their activity greater weight.

Finally, the Bank of England seems to have acknowledged that its concerns about moral hazard are now outweighed by the gravity of the situation.

It makes you wonder how much of this year's problems could have been avoided with a more concerted effort from central banks?

Rio should play it cool over BHP's advances

BHP Billiton is trying to crank up the pressure on Rio Tinto, the object of its desire, and make the rival mining group come to the table for takeover talks. Marius Kloppers, BHP's chief executive, published a new presentation yesterday which was little more than a preening self-justification for why Rio should capitulate.

Marius Kloppers sticks to Rio Tinto offer
Now, in these relatively early exchanges you would expect a suitor to try to make themselves look as handsome as possible. Kloppers' proposal is not an ugly one and clearly the market believes there is some merit to a combination, having added nearly a third to Rio's value since the beginning of November when the BHP proposals materialised.

But Rio also has a perfectly reasonable future by staying single. Having acquired Alcan as recently as July and now under the management of new chief executive Tom Albanese, Rio can make a reasonable argument for why it has a rather brighter future than BHP would be willing to admit. This includes a possible $15bn of disposals it could make to enhance shareholder value. Rio is not in a weak position and should hold out against the BHP pressure.

There is no compelling reason why it should open talks given the current proposal of three BHP shares for every one Rio share. BHP needs to open a dialogue in order to try to start unlocking some of the knotty problems its proposed acquisition throws up, most importantly the competition issues that regulators will investigate with relish.

BHP's implausible argument that there is no regulatory case to answer is a serious weak point in its position. Its current proposal may well be a low-risk way of combining the businesses without the extra cost and uncertainty of launching a hostile bid, but it requires a recommendation from Rio's board and obtaining that is going to cost BHP more than is on the table at the moment. Access to Rio's boardroom will cost more in terms of an improved offer, but also more in terms of much greater thought and analysis of regulatory issues.

There are other risks which mean Rio shareholders should be in no rush to embrace BHP. The reaction of the companies' customers is a big unknown. We are not simply talking about orthodox Western companies. This is a global deal that directly affects the potentially rather more unpredictable interests of bodies such as the Chinese state and its large industrial interests, including the likes of Baosteel. The risk is they will organise themselves against the merger, but what form that organisation will take is anyone's guess.

That's another big risk that needs very careful analysis and consideration before any deal is completed.

Certainly the market is anticipating an improved offer from BHP and, in these situations, the market is usually right.

Anyhow, the credit crunch crisis is worsening and it is showing signs of the return of Great Depression days. Bernake, the current Fed Chairman has devoted most of his working life studying the causes of that nasty stint in world economic cycle, and judging by the way he is acting (calling for orchestrated liquidity plan), he is convinced that the Great Depression might reappear! Remember the falling assets prices especially housing in the late 1920s? Compare this to the current situation! surprise, surprise, can we get out of global recession?

Didn't I tell you so?

In my post- the demise of Malaysian judiciary last month on this blog, I have predicted DS Abdullah Badawi's move of appointing Tan Sri Zaki Tun Azmi as the Court of Appeal President.And much to my delight, I was absolutely correct.Wow, how euphoric I felt upon hearing the news! The announcement of the appointment was made on 5th December by Abdullah, who finally made a good damage control of the judiciary mess by appointing Tan Sri Hamid as the new CJ replacing Tun Ahmad Fairuz, who's contract was not renewed amidst the Lingamgate controversy and call of incompetence while in office.Well, it seems I have managed to read the premier's mind, didn't I? It is just basic understanding of politics darling! A generic Malaysian trademark is that we forget things all to easily. This goes for all Malaysians in general, not just the Malays. It is a unifying sentiment to an extent, "Orang Malaysia mudah lupa."(perhaps Tun Dr. Mahathir should pen a poem based on this title while recovering from his heart bypass!) Why am I claiming so? Well being a proud Malaysian, an a staunch supporter of the Barisan Nasional government ("staunch", not die hard and I have reasons for supporting the government, although I might not agree with all its policies, most of them are sound! and i don't believe in the infallibility of leaders!), it is easy to see why.

The government understands the Malaysian public all too well. After all, the current government has been in power for five decades, they could anticipate Malaysian people's reaction to every problem to say the least. One thing the government knows for certain is that Malaysians in general are temperamental. We condemn rapists when we read the news of increasing rapes, we hurl the minister when toll charges rise,we were angry at MAS management team for making losses and now are still angry at them for not making more profit, we curse at an old Datsun 120y on the highway when it is riding too slow, in short, we get easily upset! It is true to suggest that we are emotional people, aren't we? Moreover, we are also very opinionated, privately but not so publicly, until recent weeks that is. We should be in the top three nations that has everything to say about everything, which makes Malaysian such a great nation! It is what I would call a "healthy Asian democracy." Enough about the greatness of our overactive minds, another defining feature of Malaysianness is what anthropolgists have labelled "momentary temper" or sociologists scientifically claimed "periodic sensual response." This feature is the one manipulated mostly by the government!Well, Gordon Brown would be in wonderland if and only if the British public had this feature! All the prime ministers who have walked in the corridors of power in Malaysia knew this and smile broadly whilst confronted with controversies.

Malaysians quiet down easily after a short period of anger display. In evidence, the Harun Idris scandal, Rahim Thamby Chik scandal, UMNO split, Tun Salleh Abbas's sacking, Rafidah Aziz's AP scandal, all these issues went through a brief period of heavy public criticism but the momentum was lost all to soon. The same with the mess of today's judiciary system. Abdullah played his political card right and chose to appoint Tan Sri Hamid as the new CJ over other candidates. After Tun Fairuz's controversial stint at the helm of the judicial hierarchy, a "cleaner" person is needed to clear up the mess for the time being. Tan Sri Hamid is known around the legal circle for his outstanding judicial qualities and intellectual capacity, evident in a few notable judgements to his credit. Although he is bound to retire by next year, Abdullah chose him over many other candidates, especially Zaki Tun Azmi. Many blogs wrote about the possibility of Zaki being appointed as CJ and the comments received were unanimously out of favour with the idea. It is because Zaki is a high ranking UMNO member (UMNO's attorney for a while then deputy chairman of the powerful disciplinary committee) and was appointed straight to the highest judicial hierarchy in the land, without first presiding over trials in lower courts. Abdullah toyed with the idea, only to find it would be like nailing his own poliical coffin. While many expected the worst - that Zaki will replace Fairuz as CJ, Abdullah delivered a better news in that Zaki would not be CJ, and Hamid will. Malaysians were overwhelmed and will and have already put the judicial mess all behind them, forgetting the judicial controversies altogether. Abdullah has won the first round of battle against the public dissatisfaction. While Malaysians in general think the worst is over that Zaki is not CJ, he is appointed as President of the Court of Appeal. As i have said in my older post on judiciary, this will be a better move for both UMNO and the legal fraternity. Why? UMNO will make itself look vulnerable my probably losing a few cases at high court levels, only to have the decisions overturned at the appeal court level. That is awesome isn't it? Lose the first fight, to win the bigger battle! Watch out for YAA Tan Sr Zaki Tun Azmi as he will be the incoming CJ come April 2008!! A record of merely eight months as a judge, to be appointed as chief to all the judges in this country. Hamid can't do much but temporarily pleasing ignorant Malaysians! He is just warming the seat for Zaki, who is now the legitimate next in line for the CJ throne. A funny legal system we have nowadays, where the judicial novice becomes among the most powerful.Malaysian politics is so interesting, isn't it?! Hidup Pak Lah!=)

Religion and Politics- US less mature than Britain?

There are moments when America seems like a very foreign country and the US elections very distant from Westminster politics.

Mitt Romney's speech on religion - shortly after Tony Blair admitted that politicians who "do God" in the UK are seen as "nutters" - was such an occasion.

The reviews are in and they are mixed. Christian conservative leaders seem impressed by the Republican candidate's, at times, eloquent dissertation on faith in America.

Pat Buchanan, the former presidential candidate declared: "If Mitt Romney wins the Republican nomination, it will be due in large measure to his splendid and moving defence of his faith and beliefs."

Still, it may not be enough to check the phenomenal rise of the Baptist minister Mike Huckabee.

For those used to secular British politics, what seems most alien is the way Romney used the speech to bind himself closely to all branches of Christianity, with friendly nods to Jews and Muslims too, at the expense of the growing number of Americans (one in five by some counts) of no faith at all.

There are not just conservative and liberal Americas or red and blue states, but a religious divide too. Atheists, agnostics and the irreligious have a standing in a political discourse somewhere akin to illegal immigrants. British listeners will find it hard to agree, as Romney claimed, that you can't have freedom without religion.

David Brooks, a very sensible (and rare) conservative columnist at the New York Times, today describes a "war between the faithful and the faithless" in America that hurts both sides.

"Speeches like his both exploit and solidify this divide in people’s minds," he wrote. "The first casualty is the national community. Romney described a community yesterday. Observant Catholics, Baptists, Methodists, Jews and Muslims are inside that community. The nonobservant are not. There was not even a perfunctory sentence showing respect for the nonreligious.

"The second casualty of the faith war is theology itself. In rallying the armies of faith against their supposed enemies, Romney waved away any theological distinctions among them with the brush of his hand. In Romney’s account, faith ends up as wishy-washy as the most New Age-y secularism."

Romney's speech would be unthinkable and unnecessary in Britain. But that is because there is a similar division between faithless and faithful and in British politics it is the secularists and New Labour New Agers that hold sway. Mitt Romney may not have been candid about his specific beliefs, but he wasn't frightened of trying to explain the importance of his faith. Tony Blair, don't forget, did not do God, on orders from Alastair Campbell.

So American politics can seem an alien environment but that doesn't make it any worse than Westminster.

Consumption To save Britain from Recession?

Over the last week prospects for the world economy seem to have slipped again. Money markets are intensely jittery and equity markets have started to register the potential for a severe knock to corporate earnings. Could things get still worse? Could we be on the brink of a severe downturn or even a recession?

In the UK there are some serious vulnerabilities. For a start, the financial sector weakness has a direct impact on GDP because the sector accounts for roughly 10pc of the economy. Some parts of the financial system have been devastated by the market events of the last few months. Structured financial markets are moribund; private equity is a shadow of its former self; commercial property prices have slumped and trading volumes have collapsed; the buy-to-let mortgage market is severely hit. Moreover, there will be knock-on effects on all sorts of ancillary services - lawyers, accountants, surveyors, printers, conference organisers, head-hunters - even economists.
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But there are other areas where both activity and price levels have been high and where bonus and employment levels should hold up well - commodities, gold and oil trading being some obvious examples. Meanwhile, outside the gilded towers of high finance the bulk of activity in the financial services industry is of a more mundane kind - mortgages, pensions, insurance, savings deposits. Much of this - though not mortgages - is likely to continue unaffected.

Apart from the strains in many financial businesses, where a long period of financial excess and easy money has left much of the sector bloated and incompetently managed, the corporate sector in general looks healthy. Profits are high, balance sheets are in generally good shape and businesses are well managed. So you would think that they should be in a reasonable position to weather a downturn. Accordingly, except in the financial sector, as things get tough over the next year businesses shouldn't automatically wield the axe over jobs.

At the other end of the spectrum, manufacturing has struggled for many years and employment levels have been falling. It is far from being bloated. The sector now accounts for only three million jobs. Even so, there is still scope for further pain and for cutbacks. Prospects depend critically upon exports. The US is the big worry. We do not know how serious the American downturn will be but the signs do not look good. Historically our two economies have been closely intertwined.

There has been much talk about decoupling. The centre of gravity of the world is moving to Asia and in 20 years' time China's economy will possibly be larger than America's. But we are not there yet. Yes, China is a huge country and its influence on the world is large and growing, especially in particular sectors. But for all the bluster, its GDP has only recently surpassed the UK's to become the world's fourth largest economy. Moreover, as a reflection of its huge trade surplus, its role in world trade is more about its exports to us than its imports from us.

Nor will the euro-zone be immune to an American slowdown. Interestingly, in Germany, France and Italy the percentage of GDP accounted for by exports to the US is actually higher than it was ten years ago.

Here in the UK, the government sector is not going to be able to offset any weakness from the private sector. Admittedly, there is scant prospect of huge cutbacks in spending but the public sector's contribution to the economy's growth rate is going to be much smaller than it was. It is coming out of a period when spending increased by 5pc-6pc real. It is now set to increase by only 2pc real. The consequence of this is that the public sector is unlikely to be a net creator of jobs. It may even be a net shedder of jobs under pressure from the Government's productivity improvement objectives. This is significant because private sector employment growth has been negligible for years. Just about all the growth in jobs of the last few years has come from the public sector.

But the part of the economy on which so much else will turn is consumer spending. So far it has held up remarkably well. But the omens are not encouraging. The retailers are screaming - as they admittedly often do. The pressure of debt on disposable incomes is intense and the savings ratio is very low. At the moment, real incomes are still rising and the labour market is strong.

But the position is precarious. As it is, unemployment will probably rise a bit next year. If businesses lose their nerve and cut jobs significantly then it could rise a lot. This would then risk setting off a vicious circle - higher unemployment prompts serious weakness in the housing market, which dents consumer confidence further, thus leading to yet weaker spending, so asset values slide, leading to more bad debts for banks and still tighter credit conditions.

Alarmist? Possibly. Such thinking, though, is a valuable counterweight to the prevailing complacency. Most estimates of the losses from the sub-prime mortgage crisis in America come up with figures which look eminently bearable. The big issue, supposedly, is quite where they will land up. Maybe. But this isn't the only big issue. Six months ago, hardly anyone worried about a crisis in the US sub-prime mortgage market. Now everyone knows about this but blithely assumes that there will be nothing else like it to surprise us. Why not? We are shooting at a moving target. If the economy deteriorates, credit quality will deteriorate with it, affecting sub-prime mortgages, prime mortgages, and just about every other sort of debt as well.

Can you take comfort from economists? Hardly. My current forecast is for a decided slowdown, not a collapse into recession - but I'm worried. A gentle slowdown is also the view of most economists. Although they are pretty gloomy creatures by nature, they are cautious and tend to cling to the consensus view like limpets. It used to be quipped that stock markets have forecast ten of the last two recessions but economists have forecast none. What ends up as a recession begins for them as a gentle slowdown.

The fundamental issue is this: excessive debt has been both the threat hanging over the economy and its salvation. Without the large increase in borrowing of the last few years - by both the public and private sectors - the economy would have already slid towards recession. As the credit supply now tightens, will it prove that this borrowing splurge merely postponed the evil day? The answer will turn, I believe, on the related issues of what happens to the housing market and what happens to unemployment.

Zam Zam Alaka Zam

Dato' Seri Zainuddin Maidin aka Zam, is the reason why I love reading Malaysian newspapers. His remarks amuse me to the core on gloomy mornings in Oxford. Zam who is not as bright as he potrays himself to be,started out as a cadet journalist in Utusan, rose up the ranks in ease with his political buttering of leaders of the day, and then was offered a seat in the elections by Dr. Mahathir. The former premier knew that Zam was an incompetent politician, good for nothing but ass-kissing, nonetheless as they were both from Kedah and of Mamak descends, the grand old man of politics made him an MP and later appointed him as parliamentary secretary and then deputy minister. He was never in the first tier of politics, not in second and sadly not even in third. Arguably, the first tiers in the cabinet are made up of the big guns, Pak Lah, Najib, Hishamuddin, Samy, Ong KT, Rafidah, second tiers are like chang kon choy, rais yatim,aziz shamsuddin, tengku adnan and the veterans, third tiers are made up of azalina, shahrizat jalil,and prominent younger blood like khaled nordin. People like zam, and Nazri Aziz are not in the tiers, they are not as important or influential as they claim to be, instead they are peripheral ministers like maximus ongkili, fu ah kiow and other not so famous ministers.Making up for the lack of importance, Zam comes out with amazing remarks in support of everything Pak Lah does. Khairy who constructed the cabinet on behalf of Pak LAH, elevated Zam from being a lowly deputy Information minister, to a full rank minister. By tradition, the Information minister will also be appointed as Secretary General of UMNO and BN, which is a good combination as the SG can dispense party propaganda and news to the public easily as he is in control of the media. This tradition was broken in Pak Lah's tenure. Why? Firstly, he appointed his old close friend, Radzi Sheikh Ahmad as the SG, but he did not appoint him as Information Minister.Zam was promoted and made the Information Minister but not the SG. This was a very smart move indeed, of Oxford education political degree worth. Khairy wanted someone who would butter Abdullah and close every flaw and weakness in the prime minister and make red, blue in the eyes of government controlled media? Radzi would not do a good job of that, he is a lawyer, he has his pride, ego and dignity intact. Who could be that faithful servant? Zam was the obvious candidate: even if Pak Lah asked him to eat dog pooh, I bet you he would treat it like rib eye steak from Outback Steak! Radzi on the other hand was appointed SG because Abdullah felt that it is about time to put the position in a dignified place in politics. It has been tainted with many yes-man before, if Radzi was to make any critical remarks at least his wings could be clipped, he is Abdullah's close friend. Thus, Zam landed with the job, and everyone was happy. Well yes everyone, he provides us with good laughs and allow us to reflect upon ourself just for one moment- are Malaysians that stupid? Zam will continue making eye-raising remarks which are comical in the quest of showing his undying love for Pak Lah. After all these are the days of Islam Hadhari- when you love your leader more than yourself!

Brown : Leader Without Vision

"What am I to do with my life?"


The Tories should not start celebrating too soon because of their opinion poll lead. Indeed, the very words "biggest lead since the Thatcher heyday" should remind them that, between elections, the lady did not normally have opinion poll leads at all; nor did she covet them. Labour was frequently twice as far ahead as the Tories are now - and went on to lose elections with ea

Gordon Brown's far bigger problem is more personal and urgent. It lies in the fact that wherever two members of the political classes meet, it is not just Labour's prospects that are being discussed but his own. More worryingly, the question of "how long he has got" has spread to the more politically-aware pubs and sitting-rooms of Britain.

At one level, this is quite ridiculous. Gordon Brown has been Prime Minister for only five months. The first three of these went very well indeed. Even the ranks of Tuscany (where some of the sceptics were undoubtedly ensconced) could scarce forbear to cheer, albeit through gritted teeth. Brown's confident and inclusive handling of assorted crises flew in the face of preconceptions and silenced all but his most implacable foes, even if they did not quite believe what they were seeing.

The speed with which that mood has changed, not least among those who are generally well-disposed to the Prime Minister, must rank as one of the wonders of modern politics. It is just seven weeks since Gordon Brown was sitting pretty in the polls and the Tories were facing a party conference at which David Cameron's leadership was expected to come under critical scrutiny - precisely because he was making so little headway on the basis of a revisionist Tory agenda.

Then came the incredibly foolish mistake of feeding speculation about a general election to the point at which retreating from it looked like a humiliating climb-down rather than - as it could have been just a week earlier - a magnanimous decision in the national interest taken from a position of strength. (If the novelty of a November election had been pursued, incidentally, it would have been held on the day much of the east of England was encamped in community centres, awaiting the arrival of flood and tempest. Turn-out in marginal Great Yarmouth might have been low).

This single error revived many of the doubts about Gordon Brown's leadership style. He had clearly over-relied on the advice of ambitious courtiers with insufficient experience of either life outside politics or indeed of politics outside the Westminster village. Nobody with any feel for the mood of the electorate could have confused its willingness to be impressed by a new Prime Minister with an enthusiasm for being propelled to the polls, barely halfway through an electoral term.

Since then, Gordon Brown has undoubtedly been afflicted by bad luck. He cannot credibly be held responsible for the unexpected events that have weighed in upon him - the problems of Northern Rock, the case of the disappearing discs or even (as far as we know) the Labour Party funding fiasco. Yet these factors have coalesced to create a public mood that is reflected both in the opinion polls and in speculation about the Prime Minister's own political mortality

Tony Blair never faced the challenge of recovering from a double-digit deficit in the polls, so Gordon Brown has no recent inspiration to draw upon. If one goes back as far as Margaret Thatcher, however, lessons for him are pretty clear, if not wholly encouraging. In the last analysis, the electorate will overlook almost any passing controversy or scandal so long as it is transcended by the strength and appeal of a wider vision which it is the responsibility of the Prime Minister alone to communicate. If Gordon Brown can match Lady Thatcher in that respect, then he too can put all of the current diversions behind him. But can he?

For many who looked to Brown as the prince across the water, eager to revive his bedraggled troops with a message of hope and change, it is the absence of a convincing strategic vision for his Labour government that has been the biggest surprise. To be fair, events have conspired against him. The first few months were spent on managing largely apolitical crises; the last two have been devoted to ducking bullets. Neither context was favourable to the establishment of a clear political credo, setting out an agenda for Brown's Britain.

But modern politics do not really allow the luxury of time for such a crucial piece of image formulation. Quickfire words matched by actions have to set the tone. This is not achieved by a scatter of worthy speeches, many of which come across too much like headline-catching stunts that have not been fully thought through and, crucially, seem to disappear into thin air without the follow-up actions required to imprint them upon public perceptions.

Even when Brown lets it be known that he intends to rely more on the collective wisdom of Labour's relative greybeards, it is irresistible to wonder whether this is a serious message of humility that will be followed up - or alternatively another wheeze from the inner sanctum based on the advice of a focus group that it is something the electorate would like to hear. That is the kind of credibility gap that has to be bridged rapidly with a clear personal agenda and a joined-up programme of government.

One of the big questions before Gordon Brown took over was about the impact on his premiership of his relationship with colleagues, notably those close to Tony Blair, over the previous decade. Would bygones be bygones or would scores be settled? As long as all was going well, it seemed that the former option just might be sustained. That has become less plausible over the past few weeks and Brown must urgently reach out to some of those with ability who have been consigned to outer darkness.

Asked last week what he would like for Christmas, the Prime Minister wryly replied that he would not mind a day off. He should do better than that. However counter-intuitive it may appear to him, he should take a decent break over the festive season rather than flailing around in search of some popularity potion, then come back well-prepared for a fresh start.

Two rules of politics are that any government reaches its sell-by date after a decade while an individual front-line politician might get away with 15 years, after which their face has been around for too long. For governments, the trick is to regenerate through a change of leader and present themselves as a "new" administration. In the current situation, that deals with the first rule but not the second. That one presents a challenge that only Gordon Brown himself can find a way of overcoming.

Life After VW- Proton Survival Game

"Malaysian pride, at home and abroad"

It is officially over. After months of negotiations, the second round of talks between German based automobile company Volkswagen and the national carmaker Proton have finally collapsed. The announcement made by the Second Finance Minister was not entirely surprising as many international analysts have predicted this outcome since the start of the talks. The failure of Proton to offer a more lucrative partnership deal was cited as the primary reason for the failure of the second leg of negotiations which started June this year. Ironically the same reason was behind the fruitless talks between the two companies in 2005. The general Malaysian public would think that Proton was stupid and incapable of making good judgments while presenting their offers. That is a fair remark, given one completely ignores the realm of deal brokering. However, my hats are off to Proton for their remarkable ability to keep playing along with the German automobile firm. It was indeed an achievement for Malaysian thinkers to remain in a competitive psychoanalytical finance game with arguably the smartest race on earth. If you are puzzled as to why I am praising a firm which has failed to close a deal with its potential savior, it is a good sign- I have your undivided attention on this article.

I have always been interested in the studies of bounded rationality in economics. In laymen’s term it is about the behavioral patterns of two competing firms, how they will react strategically to maximize their benefits given that they consider the other firm’s move and at every movement there is definite rationalization of ideas. This was the “game” that Proton was beaten flat at by the established German firm. The tactical and strategic movements of Volkswagen were unpredictable, which sent mixed signals to the national carmaker’s management team. Misinterpretation of information is very costly in international business, which involves immense risks. This is as Joseph E. Stiglitz rightly pointed out- is the product of globalization. Proton miscalculated the risks on both sides and assumed that Volkswagen had written off their initial plan to set up its strategic base and production plant in Indonesia due to factors such as geographical stability. However, the charm of investing in our neighboring traditional economic rival is that the market is under-regulated for international firms excluding Malaysian businesses. This is what historians would identify as Javacentric ideology, the thought of Java as the natural leader of Nusantara and hence the notion that it should remain better than the rest of the cluster Malay islands. Indonesia will never accept Malaysia’s economic leadership in this region which the politicians believe strongly as violating Javacentric optimality position, evident in their eleventh hour hijacking of the proposed merger of PNB’s plantation businesses late last year. Simplifying the situation, Indonesia made a better offer to Volkswagen, which includes a lower tax rate- guaranteeing cost minimization for the German firm hence meeting its primary objective of global expansion. Proton clueless about the ruthlessness of our neighboring economic rival was left to face a bleak future alone, as Volkswagen ended their strategic business game by a full withdrawal. It was like a hard slam on the door for Proton as their German counterpart did not drop any analytical hint of disinterest. One painful chapter in Proton’s short history, but it has to be tightly shut as life has to go on. This reminds me of the famous quote “I can’t go on. I’ll go on,” by my personal favorite contemporary playwright, Samuel Beckett. Can our national carmaker turn over its business fortunes?

It is not surprising why there is little faith in a Proton turn over, it has been promised before but not delivered. This is practically revisiting the MAS dilemma in 2005. Efforts for turnover will be dampened as the share market has been hostile towards Proton upon receiving the news of the deal breakdown by slashing its share value by 19 percent, to its lowest price in seven years, standing at RM 4.80 per unit. It is predicted that the price will be floating around the range of RM 4.50 to RM 5.00 until the share market breaks for Christmas. The lowering share value will lessen the treasure chest which Proton needs very much at this point to expand. Why expansion when finances are unstable? The fundamental problem with Proton is the failure to reach the economies of scale. With the introduction of AFTA, Proton witnessed its monopoly power over the domestic market-the only market it is surviving in, sliced by half, to 30 percent in 2006. Today, it stands at only 25.5 percent. There is insufficient demand to supply cars at the competitive prices, with lower costs. That was why Proton wanted badly to tie up with Volkswagen, as the German firm will provide Proton with a springboard to dive into the Euro car market. Proton wanted to infiltrate the Eastern European market in particular, which it has potentials to be a competitive automobile firm. The deal collapsing is an opportunity loss for Proton, a big one. Nevertheless, Proton must expand for its strategic benefits, and its tactic for the time being is to abandon the profit and loss sheets. Financial stability is secondary now and all efforts must be directed towards expanding the firm. With liabilities for the financial year ending March 2007 standing at nearly RM 1.5 billion, can Proton continue expanding?

In my opinion, it can continue chartering its expansion path, but it has to do so within a stipulated framework. There must be a realistic time frame of expansion, say for instance three years. Defining the timeframe has been the main problem for the Proton management. There is an ongoing argument between the management and the major shareholders on the timeframe of the business turnover plan. Official losses reported for this year is a staggering RM 550 million, and if this is taken as the average, Proton has less than five years to survive, on basic accounting principles. It is losing RM 1.5 million on a daily basis and given other things remain constant, five years is the expected date of demise for Proton. Ironically, despite being in the red for the last three financial years, Proton remains an asset rich firm. It has its current and fixed assets portfolios in good shape. This is the reason it is able to expand. The monopoly power for twenty years was fully utilized in accruing assets for rainy days. However, the amount of assets could not be stretched beyond another five years, which is discounting inflation. All in all, Proton has a good ten years of life. Its priority now is tackling the South East Asian market and the Middle East. The launch of Pesona which was well received in the domestic market, will improve the firm’s financial standing. Furthermore, the reported production of “halal” cars- extreme labeling I guess, will be appealing to the Iranians and other Middle Eastern countries. Proton is taking it one step at a time now, surviving in the wilderness on its own. Why on its own?

After Khazanah consolidated the position as the major shareholder of Proton from Petronas, it has been trying to assume more control over the national car maker. This led to an internal rift which witnessed the departure of Proton’s long time leader, former CEO, Tengku Mahaleel. An autonomous Proton is a better Proton, wouldn’t you agree? As we speak, the current CEO is having a tough time dealing with the turnover plan as it has to be authorized by Khazanah. The assurance from the Second Finance Minister that the management team will be given “time” to sort its own house out has an underlying political tone. The government will not bail Proton out anymore. The EPF was the last contributor to Proton funds by acquiring 830 000 shares of Proton in January 2007, and I can assure you, the national carmaker will not receive further assistance from the government. This is primarily because Khazanah is tied down managing all the economic regions launched by the government at various stages in 2007. Khazanah will not make further capital available for Proton, as it believes the economic regions have better potentials of reaping higher returns for the investment arm. It leaves Proton to fend for itself. Is Proton that unimportant in Malaysian economy? Well, the government views that since Proton does not bring in tax revenues for the country, it should not be given priority. Well, this is untrue. Proton provides 10300 job opportunities to the economy, with a further 5000 dealers nationwide. If Proton is allowed to fall flat on its feet, how is the government going to ensure that the mouths of these employees and their dependents are well fed? Proton has come to the point that it has to expand or face the possibilities of shut down within the next decade. If MAS sold their headquarters, what can Proton sell? Nothing, because they need all they have now to efficiently produce. Proton needs to find the market. And they have to find it fast.

In a nutshell, Proton’s future is not as bleak as many believe. There is still a ray of hope for Proton to successfully turn around its business and prove the analysts wrong. Product differentiation and management autonomy are two key issues which have to be addressed before Proton goes on the expansion path. The government must not abandon Proton at this juncture as it is the point where Proton could simply make or break. However, the government itself is facing financial difficulties due increasing fuel subsidies in the world where price per barrel is nearing USD 100. Moreover, the commitment towards building the economic regions further aggravates the government’s financial position. Nonetheless, one could never dismiss the notion that there is an equivocal agenda by certain political powers to drown Proton now, and drive its share prices down, setting the scene for a perfect takeover of the asset rich firm. Is there an attempt to politically take over Proton? Think and you might just find the missing link.