Sustainability Analysis on Proton

Introduction

Proton is a Malaysian GLC. It is the manufacturer of what are marketed as “national cars”. Malaysian government-linked companies (better known as GLCs) are companies that are owned (fully or partly) by the Malaysian government through its investment arm Khazanah Nasional Berhad. This is the list of companies being invested in by Khazanah.

The intent of this analysis is to understand what Proton is doing about sustainability, both from environment and local community stand-point and to critically evaluate whether those activities are truly sustainable activities or merely a greenwash. I have done a similar analysis on Petronas some time ago.

The analysis starts with stakeholder analysis to determine where Proton places the two most important stakeholders (environment & local community) along with other stakeholders in their stakeholder mapping. It will end with a few recommendations for Proton to work towards achieving sustainability.

Key Stakeholders

Proton’s key stakeholders are the Environment, the Malaysian government, the Malaysian public, car owners as well as its vendors and suppliers.

The Malaysia Government

The Malaysian government owns 52% of Proton shares through Khazanah, Petronas and ValueCap. ValueCap is a government investment arm. The government also heavily subsidizes the production of proton cars by giving grants and exemptions/tax credits. But despite that, Proton continues to make loses.

The Malaysian public

The public is the indirect shareholder through EPF (Employees Provident Fund), government unit trust funds Amanah Saham Bumiputera, Amanah Saham Malaysia) and Lembaga Tabung Haji. Together these funds hold around 20% of Proton shares. Additionally, it is the public that pays the tax, which then is used to provide grants and tax credits. Proton also involves in sponsorships in the area of education and sports as well as donations to the needy.

Customers / car owners

I can’t find the exact figures of active Protons cars currently being driven all over Malaysia but I would estimate the figure to be around 3 million (assuming no cars have been fully retired). The figure is justified since I can still see many first generation Proton Saga cars on the road.

Environment

There is also externality factor to be considered by having almost 3 million proton cars on our road (most of the cars produced are sold locally in Malaysia !!). Moreover, the earlier generations of Proton are nearing retirement and may need to be sent to scrap yard and contribute to our ever increasing waste disposal problem.

Vendors & Suppliers

More than 80 per cent of Proton components are currently produced or supplied by automotive component manufacturers and suppliers. Proton’s network of 287 vendors and approximately 3,000 sub-vendors currently supply more than 5,000 individual components and parts for its cars.

Impact on Strategy

Based on stakeholder salience model for Proton, the definite stakeholders for Proton is the Malaysian government. It has the power (by law and as a majority shareholder), legitimacy (as majority shareholder) and urgency (as spelled out in its objective - shown below as well as by its continuous support for Proton to ensure its survival).

Additionally to support Malaysian government goal of industrializing the nation, Proton has thus far encouraged the creation and existence of hundreds of components manufacturers (probably seen by Proton as the dependent stakeholder) especially in the automotive industry, directly meeting its first two objectives. According to a Proton’s press release (in 2005), more than 80 per cent of Proton components are currently produced or supplied by a network of 287 vendors and approximately 3,000 sub-vendors. Together they supply more than 5,000 individual components and parts for its cars. Proton went to the extreme of appointing too many vendors to the extent of impacting the quality of cars it produces.

About 60% of defects are blamed to be caused by its vendors. Proton’s press release also highlighted the fact that only about 10% of their vendors (local and foreign) achieved “Grade A” rating according to TUV audit. This would NOT have happened if Proton considered their customers as an important stakeholder. Seems like, Proton has thus far viewed its customers as the discretionary stakeholder (legitimate but no power and urgency). However, it is good to know that Proton have finally realized they have too many vendors and are working to reduce them to 180 in an effort to improve quality. Proton has also revised their strategies to be more market sensitive. Proton’s key strategy moving forward will be based on growth basically by “building the right model for the right market”. This strategy will be implemented by focusing on product planning to ensure it builds cars that meets customers’ requirements.

Based on Proton’s historical actions (or inactions) such as producing low quality cars, being complacent on its vendors (despite only 10% made the grade A of TUV audit) and continuously losing tax payers money, it can be argued that Proton does not care much about the Malaysian public and to a great extend the environment. Proton does give out sponsorships and donations but a bigger and much more expected outcome is good financial returns to its shareholders (read = the Malaysian public). This can only be done if Proton becomes truly profitable without any special assistance from the government. Additionally, the tax money that the Malaysian public pays should be used for other better purposes instead of continuously paying for poor performance. Proton must realize that the Malaysian public is actually the definite stakeholder given the fact the Malaysian public will have the power, legitimacy and urgency to pressure the Malaysian government to reduce and eventually stop “pampering” Proton as well as to further and truly liberalize the automotive industry in Malaysia. TUV’s key objective is “to work to validate the safety of products of all kinds to protect humans and the environment against hazards”. The fact that only about 10% of its vendors made Grade A, shows that the rest of them (about 90%) is continuously contributing to some form of human and environment hazard either in their products or process.

On a positive note, though, Proton has formed a strategic partnership with Detroit Electric to produce pure electric vehicles. This indicates that Proton has started to view the Environment as an important stakeholder. However, it is yet to be seen whether this is merely an attempt to greenwash the public and its potential customers. Additionally Proton has also introduced a discount program for existing proton car owners to switch to a new models. Since, newer models should be less polluting, this effort should be considered as contributing to environmental well being.

Conclusion

From the above discussions, we can conclude that Proton is not a sustainable organization / corporation. It must take comments, feedback & suggestions from the public seriously. Below are my recommendations to Proton.


Recommendations for Proton to achieve Sustaining phase

To start with, Proton must view and treat the Malaysian public including its potential & future cars owners as well as the Environment as its Definitive Stakeholder. Once Proton started to view them as definite stakeholders, everything else will fall into its place. Some of the actions that Proton can take are:-

i. Be independent.

Proton must realize that they cannot continue to expect protection from the government and financial support from tax payers. It must be proactive to plan and implement a program to reduce direct dependence on the government’s assistance and tax payer’s money for continuous existence. This effort will force Proton as a whole to work harder and smarter and get rid of the "why worry, the government will always protect us” mentality. Working harder and smarter is the only sustainable way forward for Proton.


ii. Quality and Safety First.

Dealing only with Grade A vendors. Proton should work closely with existing vendors to upgrade them to achieve Grade A status based on TUV standards. Proton must set a time frame for all of their vendors to achieve the status, failing which Proton should terminate their contract for good. As for new vendors. Proton should only hire Grade A vendors. This will ensure all proton parts are of higher quality and produced in a human and environmental friendly method or in other words, a more sustainable way.

iii. Take leadership to ensure success of pure electric car project.

There will be challenges such having sufficient charging facilities throughout the country,
employing qualified and sufficient mechanics well versed in this new technology at its service
centers and keeping overall costs low for the average Malaysian. Proton must be very sensitive to these challenges and start to work on addressing them. Just selling the electric cars and doing publicity stints won’t do. As the national car maker, Proton must take the leadership in those areas and don’t wait for government’s help. It should work closely with electricity suppliers to generate electricity in an environment friendly way for its cars. Otherwise, what is the point of having electric cars in the first place? It will be merely a greenwash project then !! The current management should be more open minded in hiring foreign talents to fill in whatever gaps that they have now to ensure the success of the electric car project. Proton should not repeat its mistake by taking the everybody especially customers for granted.

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Additional reference: Mitchell, R.K., Agle, B.R., Wood, D.J. (1997). Toward a theory of stakeholder identification and salience: Defining the Principle of Who or What Really Counts. Academy of Management Review, 22(4): 853-886.
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Haze In Penang, June 2009

The picture on the left is taken a few days ago [June 20, 2009] from my apartment aiming at the Penang International Airport. I can't see any airplanes :-(.

In these past few weeks, there were many newspaper reports on the haze problem.

I wondered why we keep having this haze problem??

Well it is caused by open burning in Sumatra !! That is what almost everyone in Malaysia says especially politicians. Sounds like a very easy answer to escape from being responsible and accountable on this issue.

On the other hand, Indonesian officials says that is not true. It happens in Indonesian soil but culprits are not Indonesians!

" ... Indonesian Consul-General in Malaysia Moeni Soenanda told Malaysian reporters this month that "checks" revealed that "none of the companies" involved in open burning were Indonesian.

"The companies involved in illegal logging and open burning are all foreign," he said without naming any company.


Anyway, I don't remember facing haze some 10 or 15 years ago during my schooling days. Is open burning a new phenomenon ? I don't think so. I wondered why only now we are having this issue of haze due to open burning. This article has the answer

"In the past, open burning did not lead to haze since land clearing exercises were always timed with the seasonal changes. after the land clearing exercise, the rainy season would avail itself on time ..."

Oops !! looks like mother nature have stopped clearing up the mess we are creating. Just look at the many damages that we are doing to our beloved earth and expect mother earth to correct them. We have taken too many things for granted especially our environment.

Unfortunately, open burning does not happen in Sumatra alone. We have our fair share of open burning incidents.

The Selangor state government is taking some actions on this. But this is very short-term solution. It seems that open burning is a cheap way for farmers to clear their land. So they are going to continue with it. Can the government work closely with these farmers to avoid open burning? I guess that will ensure a sustainable solution and the key learning can be proliferated to other states of Malaysia as well as to our Indonesians government and farmers.

According to this blog post, Indonesian government is taking lots of actions too, unfortunately it does not seems to be effective.

Interestingly there is something called ASEAN Agreement on Transboundary Haze Pollution, an environmental agreement between all ASEAN nations signed in 2002 and became into force on November 25, 2003. Unfortunately Indonesia, despite being the main 'player' for the whole issue, has not ratified the agreement. I wonder why ??

I guess what is key now is not trying to understand how to solve it, probably many experts have provided the suggestions and recommendations, but rather executing them. All the countries must show strong will to address and resolve this issue, starting with getting Indonesia to ratify the ASEAN Agreement on Transboundary Haze Pollution as soon as possible.

An analysis on Malaysian Environmental Laws

My focus will be to scan through a few key environmental laws that I think are important and try to find the weaknesses in them to understand why pollution and environmental degradation still happens despite Malaysia having many laws on Environment.

I will start with Environment Quality Act 1974, its no brainer right !!

Environment Quality Act 1974 (EQA 1974)

The "key" law is the Environment Quality Act 1974. Its purpose are the prevention, abatement, control of pollution and enhancement of the environment, and for purposes connected therewith.

Among others, this Act calls for the establishment of a Environmental Quality Council (established in 1977) to advise the Minister of Environment*. The council consists of representatives from various ministries* (1 representative each from Environment, International Trade, Domestic Trade & Consumer Affairs, Agricultural, Human Resources, Transport, Health) , 1 representatives from Sabah, Sarawak, representatives from various industries (1 representative each from petroleum, oil palm, rubber, manufacturing), 1 academician and 2 representatives from registered societies knowledgeable and having interests on environment.

Since each each of them have equal voting rights, the number stakeholders should be in balance too. The council settings seems to be concentrated with reps from industries, who, many will agree, are the culprit for most of the environment degradation and destruction in Malaysia. The council should have more places allocated for registered bodies/NGOs which has interests on protecting and preserving the environment. Guess what ?? Only in 1986 were 2 NGOs appointed into the council (The Sun). What about consumer groups ? We should have them in the council too. In short, we need a good check and balance mechanism in important councils like this Environmental Quality Council.

This Act also calls for the establishment of a Environmental Fund. The money will be used to cover the costs of cleaning up a pollution, prevention from further pollution, encourage conservation as well as for research purposes. It is expected that those producing, transporting or storing oil, environmentally hazardous or waste products to contribute to this fund. A good idea but definitely not sufficient with the rate of pollution we are encountering now.

I guess a portion of our income tax should also be channeled to this fund. In fact, the government should impose environment tax on all industries and this tax money should be channeled to this Environment Fund. This should be on top of the regular business tax that they are paying.

There were a total of 5 amendments to this act. However, most of them are centered around wordings and summon/fine value increments over the years. Nothing substantial.

There are many related regulations of this Act that has been enacted but first let's go back in time to touch on Waters Act 1920.

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Waters Act 1920 (Act 418)

Perhaps one of the oldest environmental law of modern Malaysia. Its purpose is to provide control of rivers and streams. Interestingly it only covers 6 states and 1 federal territory. How about other states ?? And there are differences between each state. Is this why we have a new Act [Water Services Industry Act 2006].

Since land and water comes under the purview of individual states, all powers resides on the state authority (State Secretary).

True to its purpose, this Act does not attempt to prevent pollution, rather just to control it. This is not good enough!!. There seems to be loop holes in this Act, whereby licensed pollution can still happen.

It is very unfortunate that we fail to see that rivers and streams are important if not critical water source for farming, animals and poor people. We fail to see that rivers and streams must be prevented from being polluted at any cost. Rivers and streams and its contents (living and not living) are important part of us and they should be protected.

We need stronger legislation that not only protects the environment but encourages everybody to work towards sustaining it.

Water Services Industry Act 2006

The purpose of this Act is to provide for and regulate water supply services and sewerage services.

Under this law, contaminating water is a serious issue. You will be punished with death or imprisonment up to 20 years with whipping if found guilty of contaminating the water supply system and causing death. Unfortunately the same seriousness is not shown in the Waters Act, whereby rivers polluters are only fined RM1000.00. Potential polluters can even buy license to pollute.

This Act calls for the establishment of a Water Industry Fund whereby the money is to be used basically to ensure sustainability and qualitative improvement of water supply.

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Now, back to the Environment Quality Act regulations. Two of the regulations that I scanned through are:-

• Environmental Quality (Clean Air) Regulations 1978 - P.U.(A) 280/78

Again (as noticed in the Waters Act 1920), the punishment for offense for air polluters is only a maximum of RM10,000 or 2 years imprisonment. I doubt this type of punishment will or can deter business especially big business from polluting our air. And you know what ?? All these offenses are compoundable, meaning that the culprit can just settle the case by paying the compound and don't have to go to court. It may be even cheaper for culprits to pay the compound then take efforts to reduce their pollution !!!

The legislators should actually make all these offences not compoundable !! Ever wondered why we have haze these days?? It is unheard of those days !! There is even a Wikipedia article on the haze situation in Malaysia. The problem is we are blaming Indonesian for it when we ourselves are not adequately protecting our environment.

The sources of pollution is well known according to DOE but the questions are what are they (DOE) doing about it and are they doing enough to stop the pollutions ?? Enacting laws is just the first step. Educating the polluters and working closely with them to reduce and eventually totally stop pollution is as important to have a holistic approach of protecting and nurturing our environment. I guess Malaysian authorities (federal & state governments) are still stuck with "ownership" issues as pointed in this report ..

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" The state governments have authority over matters relating to land use planning,
agriculture, forestry, fishery, water resources, but the federal government has authority
in regard to environmental affairs. While the collection, treatment and disposal of
municipal waste also come under local government administration (Global
Environmental Forum, 2000).

This division of powers and roles among the various layers of government in relation to
environmental protection and management makes the implementation of integrated
planning a real challenge. Often, this institutional weakness is cited as a hindrance to
adopting an integrated approach to environmental management and enforcement of
laws related to the environment (Ramakrishna, 2002). "

excerpt from Sustainability in Penangite Accent

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• Environmental Quality (Scheduled Wastes) Regulations 2005
  

What stroke me is this part of the regulation, see below

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Regulation 7. Application for special management of scheduled wastes
(1) A waste generator may apply to the Director General in writing to have the scheduled wastes generated from their particular facility or process excluded from being treated, disposed of or recovered in premises or facilities other than at the prescribed premises or on-site treatment or recovery facilities.
(2) An application under subregulation (1) shall be submitted to the Director General in accordance with the guidelines for special management of scheduled wastes as prescribed by the Director General and shall be accompanied by fee of three hundred ringgit and shall not be refunded.
(3) If the Director General is satisfied with the application made under subregulation (1), the Director General may grant a written approval either with or without conditions.
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What does it tell us ? A potential polluter (waste generator) can even apply (under what circumstances is not specified) to dispose his/her dangerous and harmful waste without being treated. The risk is merely RM300.00 in the form of application fee. Another loophole !! Making the offence compundable also does not help to relay any concrete and serious message to offenders not to even think about polluting the environment.


National Forestry Policy 1978 (Revised 1993)

Now let's look at forest protection in Malaysia. Guess what? We have a very loose forest protection laws. Why? Economic development is of higher priority than environmental well being.

Forests in Malaysia is seen by the Federal and various state governments as one major source of income. So the law talks about how to sustainably manage the forest and not really on how to strictly protect it. May be not a bad idea.

In fact, few assessments done and reported by a UN body shows that there are continuous improvement on sustainable forest management in few states of Malaysia. However, a PhD research done by Kanta Kumari casts reasonable doubts on this.

I guess we must not take the forest for granted. Instead, we should start reducing our dependence on timber activities and eventually reduce destruction of the forests. There are also problems of illegal logging, reported here and here. These illegal must be addressed by the government with utmost urgency. I guess it must be lucrative enough for culprits to continue with these illegal activities. So the legislators must enact a much tougher law & improve enforcement while at the same educate and encourage the public to report these activities to the authorities.


Conclusion & recommendation

1. There must be strong will by the government of the day to phase out and close down all industries that are producing harmful wastes. We should start to think long term benefits health and environment and eventually economic benefit out of it of not having these industries and not short term economic benefit of having these industries
2. All the environmental laws and regulations must be scrutinized again and revised to eliminate its' loop holes. The Environment Ministries Key Performance Indicators (KPIs) should include the "improvement" made to environmental laws.
   
3. The enactment of environmental laws seems to exclude important stakeholders namely the public. The public must be consulted extensively by legislators.
4. Exceptions must be minimized. The absolute power given to Director-General to give exceptions must be revoked and given to a council instead. In the instance of exception being considered, locals and other dependents such as those farming along the river should be consulted.
   
5. In addition to point # 4 above, the membership of various councils should include representatives of the public including consumers associations and environmental interest groups.
6. Punishment (fines and jail terms) should commensurate the seriousness of the offense. Environment pollution must be seen as a serious offense because it affects not only present generation but many generations to come. We as humans must also realize that we are sharing this earth with others, flora & fauna. Environmental offenses should be made NOT compoundable.
   
7. All producers of waste must be made fully responsible to treat their waste sufficient in order not to harm the environment. There should be no exception given to anybody in whatsoever situation.
   
8. In addition along with point # 7 above, the government should be more proactive to help the small players to treat the wastes before being thrown out to sea, river or even land-fill.
   

Notes
* I intentionally did not use the exact names of the ministries as it have changed and can still change in future.