Malaysia and Korea: two approaches to the dirty business of technological learning

In the second half of the twentieth century, Malaysia and Korea were two Asian countries ready to forge their destinies in the post-war era. In 2024, we have a clear picture of how their journeys played out. One country, despite starting off with a worse position, industrialized successfully, and became an export superpower. The other country failed to do either of these things.

What business lessons can these two countries offer us? We'll be taking a look at this through the lens of their best car-makers respectively, Hyundai and Proton.

Of course, why Hyundai and Korea flourished in comparison to Malaysia and Proton is a matter that exceeds the scope of this blog. But we'll take a simplified view to arrive at certain insights.

How Hyundai learned the ropes

Most of us know Hyundai as an automotive titan that produces cars such as the Verna, Elantra and Creta. Along with other chaebol companies like Samsung, it played a huge part in lifting Korea, battle-torn and impoverished, from rags to incredible riches. But Hyundai didn't start out as an automotive company. It started in construction. And it was profitable, exporting its services to countries around the world. Its shipbuilding venture was a success too. However, Hyundai decided to up the ante with car manufacturing.

"Shipbuilding, which is a less complex business than car making, began to throw off substantial positive cash flow in the mid 1980s and the Hyundai group then spirited much of this cash away to support its auto efforts. If controlling interests in the businesses had been listed on stock markets, investors would never have tolerated such behavior. Yet it was the right thing to do from a technological learning perspective."

In this excerpt from How Asia Works by Joe Studwell, we see how it's not just churning out products that matters, but building know-how and expertise. Hyundai was playing the long game by not being satisfied with the revenues from its profitable shipbuilding arm and pushing the boundaries (for Korean standards at the time) in car making despite the risks involved.

Hyundai Motor Company started in 1967 with a license from Ford to build its complete knock-down car kits. This was a profit-making initiative, and had Hyundai stuck to this approach, it would have been successful. But Hyundai's ambition (not without nudges from the state) went beyond short-term profits.

East Asian countries such as Japan, Taiwan, and South Korea have all had state policy interventions that aggressively focused on technological acquisition and the absorption of technical know-how. They often demanded the exchange of technological know-how in trade for market access. Sahashi Shigeru, head of Japan's Ministry of International Trade and Industry's Enterprises Bureau, demanded IBM to license its technology to local Japanese firms. IBM succumbed in order to have access to the Japan market.

The South Korean state aggressively ensured that businesses such as Hyundai committed to technological learning. Consider the following:

• The South Korean five-year plan for 1962 encouraged kit assembly with foreign partners

• The immediate next five-year plan stated that 20% of components used should be Korean-made

• The very next five-year plan ramped this up to 60%

• By 1973, there was a drive calling for passenger cars to be wholly indigenously made

Sure, they were learning within the technological frontier but still, it was an extremely demanding curve.

Chung Ju Yung, the founder's brother who was put in charge of HMC, went so far as to promise 5000 cars for export to the state but never revealed this promise to the foreign experts he hired until it came time to manufacture them. For good reason, of course — they may never have signed on if they had known.

These kinds of pressures forced Hyundai and other Korean companies to accelerate their R&D journey and catch up quickly with their global peers.

The fact that Hyundai was not merely operating in a protected domestic market but was forced to compete globally with export targets to meet meant that there were added expectations for quality and excellence. Again, this forced technological learning.

Hyundai's first wholly indigenous car, the Pony, rolled off production floors within just two years from the announcement of the plan. Was it a high-quality product? No. But it was a mammoth first step in the process of technological learning, and the cars — despite flaws such as door handles that came off — found a market in geographies where cost was a bigger concern than perfection.

The rest is history. Hyundai went on to make better and better cars over time and with a strong export vision, conquered markets across the globe.

How Proton got tied up  in its grand plans

Out of all the Southeast Asian countries, nobody came closer to replicating the success of their neighbors further east—the Asian tigers of Japan, Korea, and Taiwan—than Malaysia. However, despite its ambitions and some right ideas, Malaysia never took off as a global economic force and was unable to join the ranks of Asian tigers.

Prime Minister Mahathir Mohamad's plan to create a Malaysian auto titan that could compete globally gave rise to Proton, which he founded in the 1980s.

But unlike Hyundai, the Proton and its Malaysian peers never truly got out of the rebadging trap for too long. Rebadging is the process of taking foreign-designed cars and selling them in domestic markets with a local brand.

Countries that aspire to become successful auto-makers start off by having local firms partnering with successful foreign auto companies. Hyundai partnered with Mitsubishi, but it did so without an equity joint venture and succeeded in absorbing technology from the Japanese giant. Even without foreign influence in the form of equity, Chung Ju Yung was paranoid about Mitsubishi's control and brought in third-party experts who sometimes proved his suspicions right in some cases, such as Mitsubishi trying to saddle Hyundai with a second-rate engine.

Malaysia's auto companies, however, were too trusting and entered into equity joint ventures instead, thereby ceding too much control to their foreign partner. It wasn't in Mitsubishi's interest for Proton to absorb technology or to become a global contender in passenger cars. What was in its interest was to remain in a convenient deal that gave it access to a protected Malaysian auto market.

Moreover, there was no pressure or vision to export. As a result, Proton remained complacent. Even when a wholly Malaysian Proton — the Proton Waja —  was finally developed, as a result of its domestic market outlook, it didn't have many of the features or safety standards needed to enter key markets such as North America and Europe. For example, the Proton didn't have airbags. Hyundai? They designed for exports from the get-go, so their cars carried front as well as lateral airbags across markets.

So what can we learn from all this? 

• Technological learning and R&D make all the difference. It requires significant investments, sacrifices, and risks, but that's what it takes to be world-class.
• When it comes to acquiring know-how of existing technology, one needs to be aggressive. Of course, the methods used by East Asian states and companies sometimes flirted with the boundaries of what is ethical. For companies, though, the takeaway needs to be that there is simply no room to be laid back.
• A strong long-term vision is key and sometimes needs to be honored over the allure of short-term profits.
• Complacency is the enemy. In aiming to meet high export targets, Hyundai learned to make world-class products. Competing on the global stage instead of the domestic market forced its products to attain a remarkable level of quality and refinement. In the absence of such a drive, Proton and its peers became mediocre.

The technological frontier 

There is only one route to building technological or manufacturing capability. And that is by doing. There are no shortcuts. What's more, it's a path that is inevitably filled with mistakes and failures. But with a healthy long-term vision, hunger, perseverance, and a desire to continuously iterate and improve, this path becomes more than a museum of errors. It becomes the road to a world-class company.