POLICIES to nurture world-class small and medium enterprises (SMEs) through the “umbrella” strategy cannot be ethnicity-based, said a renowned political economist, following attempts to revive the approach.

Professor Edmund Terence Gomez of Universiti Malaya told The Malaysian Insight that Putrajaya’s use of ethnicity-based conditions in the strategy was why the government’s efforts to help SMEs failed in the 1980s and 1990s.

He said evidence of the failure can be seen in Proton, the national carmaker whose earlier models are notorious for their low-quality components.

Gomez has written extensively on the intersection between Malaysian politics and businesses, and the government’s strategies to help grow a robust private sector on a par with Japan and South Korea’s.

His warning comes as Anwar Ibrahim, who is slated to take over as prime minister next year, expressed hope of reviving the umbrella approach to spur SME growth in the private sector.

Anwar had said the strategy was successful in nurturing SMEs when he was in the cabinet from 1983 to 1998.

The strategy, which has been used worldwide, involves linking small companies to one large firm. The SMEs produce components or provide services for the large firms’ main products.

The umbrella concept was inspired by systems called “keretsu” in Japan and “chaebol” in South Korea.

Gomez said it is worthwhile to use the strategy to help develop SMEs, as they comprise 98% of all companies in the private sector.

But, he said, the problem is in how Malaysia’s take on the strategy does not emphasise competence and competition.

In the case of Proton, Bumiputera SMEs were given preference to become vendors supplying the carmaker with almost all components, such as tyres, seats and spare parts.

“Everything but the engine was locally made. The engine was from Mitsubishi,” he said, referring to the Japanese automaker that Proton partnered with.

“And, everything except the engine came apart” because of the vendor development system used to choose component suppliers, he added.

Could’ve been like Hyundai

Proton’s Bumiputera vendors were selected based on their ethnicity, and not their capacity or know-how to produce car components, said Gomez.

In the 2013 book The New Economic Policy in Malaysia, he said the decision was made because the government wanted to use the vendor programme to help grow successful Bumiputera SMEs.

However, the results were dismal, with the vendor system proving unsuccessful in nurturing Bumiputera firms in the auto industry, said Gomez in a chapter titled “Nurturing Bumiputera Capital”.

“SMEs tied to Proton showed little capacity to enhance their technological skills or develop their ability to serve other companies.

“By tying the growth of the automobile sector to a race-based vendor system, the government failed in its dual objective to create a new breed of entrepreneurial Bumiputera-owned firms and a viable export-driven car industry.”

Non-Bumiputera SMEs with experience in making parts for other auto firms were not hired under Proton’s vendor system, and this prevented it from becoming a successful regional carmaker, he said.

Had Proton chosen its suppliers based on capability, said Gomez, it could have turned out as successful as South Korea’s Hyundai.

“Anwar is talking about an old idea that has worked internationally, but when it comes to Malaysia, it has not. So, he must ask, why has it not worked here?

“The proof is when you have selective patronage. When you target businesses not based on their capacity to produce and ability to compete, but on their ethnicity, then things go wrong.” – September 25, 2019.