Volkswagen originally wanted to be in the Malaysian market in the early half of the 2000s and expected to be in a strong position by the end of the decade. They had a plan to team up with Proton in some way, just as they had collaborated with carmakers in China for over 25 years.
But politics and the vested interests of different groups saw the German carmaker being given false hopes, misled and even being told that a deal was on… only to have it cancelled literally at the eleventh hour. A friend familiar with that episode told me that a team was on their way to the airport to come to Malaysia to begin the process of a partnership when they were informed that their assignment was cancelled as Proton had called it off suddenly.
This delayed Volkswagen’s entry for a few years as they then decided they would push ahead on their own. However, they understood that the rules of the game [for Malaysia] are such that they had to be ‘behind the barrier’ if they wanted to have a meaningful volume and not just be a brand selling imported cars with limited volumes. That meant they had to assemble some products locally and also have a local partner, which they eventually chose to be the DRB-HICOM Group (ironically, also the owner of Proton).
DRB-HICOM was one the best partners to have as it was a government-linked company (GLC) and more importantly, it had a manufacturing complex in Pekan, Pahang. This meant that assembling vehicles could start faster and by 2012, the first car – a Passat – was produced. Volkswagen said that another two models would follow although it turned out to be three models – the Jetta, Polo and Polo hatchback (the latter two are treated as separate models).
The assembly of Volkswagen vehicles is significant because the German cars have not been assembled in Malaysian since the mid-1970s, although some window vans were assembled at the Tan Chong assembly plant for Auto Dunia in the 1980s for a while. Prior to that, the first generation of the Golf was assembled and of course, the original Beetle. In the 1980s, this region was not yet ‘sparkling’ with potential and Volkswagen had just started to do business on a larger scale in Asia when it started a joint-venture in China in the mid-1980s.
But during this decade, the significance of Asia, especially India and ASEAN, has led European carmakers to give more attention than ever before. It’s a region that will have constantly growing demand as many countries develop further economically. China has already shown how economic improvement has created an explosion in demand for new cars and made the country the largest market in the world.
While China will no doubt be the primary contributor to Volkswagen’s aim to be No. 1 globally by 2018, it also sees that there can be contribution from ASEAN, hence the attention being given. It started off with Malaysia probably because this market is where the majority of its products will be in demand. In Thailand, pick-ups are dominant while in Indonesia, MPVs are the leading vehicle type. In Malaysia, passenger cars are dominant and this is what Volkswagen has a variety of to offer.
Having ‘German Engineering’ as a strong selling point of its products, Volkswagen Malaysia has obviously had to ensure that even those assembled locally are of the highest standards in quality. It can ensure that in its own factories in Europe but in Malaysia, the relatively small volumes mean that the level of sophistication in assembly processes is limited since the high investment needed has to be justified.
Assembly plants in Malaysia have varying levels of technology, from the highly automated processes at Perodua and Proton to the more manually-intensive operations at the smaller plants. The issue for most plants is that the production volume is still low by global standards and automated assembly, ie using robots, cannot be justified.
However, the demands of higher quality and the use of new manufacturing processes have made it unavoidable in some areas to use advanced equipment. This is the case with the assembly of Volkswagens in Pekan – and that’s for an output of just 80 cars a day for now. Needless to say, the entire process of assembling a Passat, Jetta or Polo follows strict procedures to ensure quality levels that complement the German engineering.
Before going further, it has to be made clear that the vehicles produced at Pekan are assembled from CKD (completely knocked-down) packs of thousands of parts which come from suppliers in other countries as well as Malaysia. Most come from India, Mexico, South Africa and Europe while a number of Malaysian companies also send parts to Pekan.
This differs from manufacturing which involves producing major parts further ‘upstream’, ie stamping body panels and casting engine parts. These require very large volumes as the investment is high and only companies like Perodua and Proton actually manufacture their cars although some, like UMW Toyota Motor, do stamp some body panels in Malaysia too.
So for the foreseeable future, Volkswagens will be assembled in Malaysia until such time – perhaps if a much larger volume has to be produced for exports – that the cost of stamping and other upstream activities can be justified.
The body panels come from various larger factories in the Volkswagen world which also assemble the same products, except that instead of assembling the panels together, they are put in a box and shipped to Malaysia. This approach goes back to the 1960s when the government created its very first automotive policy which gave benefits to those who assembled locally and used local parts. The main incentive was lower taxes and this was certainly a good ‘carrot’ as many carmakers, especially the Japanese, quickly started assembling locally. The same approach applies today in a slightly different form because, since 1985, the government also got into the business, so to speak, by having national brands which were given extra-special privileges to enable them to beat the established makes that had already invested millions in the country.
In as far as local suppliers are concerned, their parts do not have to travel far to reach Pekan although there’s always 5 days of stock available at the plant in the event of delays or other major disruptions to the supply chain. At least one supplier, Hicom-Teck See has also set up a small operation inside the plant to assemble dashboards which are delivered to the assembly line nearby on a ‘just-in-time’ basis. This is already an established practice in many countries where suppliers are clustered near the main factory and assemble their parts into modules in close synchronization with the vehicles being assembled the same day.
(The way it works is that when a vehicle starts its journey down the line, its dashboard is assembled into a complete module which is then transferred to the assembly line in time to be installed into the vehicle. This requires precise planning although in the Malaysian operation, it is much easier than in the factories that supply globally since each vehicle will be different in specifications (different colour, different equipment, and even the steering wheel on the left or right side). The Malaysian specs are simple and limited so there is minimal variation.
Most of the assembly process is similar to that in other local plants but the type of equipment used differs and it’s surprising to see the level of automation for an output targeted to be 30,000 units a year (on 2 shifts) by 2018. Robots weld the structure together and a framing system there is said to be the most advanced in the Volkswagen network. Laser welding is also used for the roof to provide higher quality. Daily, one vehicle body is randomly subjected to an audit to check that every dimension is correct. Strict attention to dimensional accuracy is crucial because even a tiny deviation can result in an opening being out of alignment and this could allow water to leak into the boot or lights, for example. In fact, calibration of all the welding and framing equipment is compulsory to prevent the body from being distorted over time.
One thing which Volkswagen has to accept for the time being is that the paint shop has to be shared with other makes that are also assembled at the same plant, ie Suzuki and Mercedes-Benz. While the paint shop is often where a ‘blockage’ occurs in many plants because you can’t rush the process, the problem is not yet occurring at the plant as the capacity of the paint shop is large enough for all three brands. However, it is not a situation which Volkswagen likes (this is the only operation in the world where it shares a paint shop with others) and discussions are ongoing with DRB-HICOM (which owns the manufacturing complex) to build a new and larger paintshop which it could use alone or perhaps share with Mercedes-Benz.
This is just the start of things for Volkswagen and it aims to increase production as quickly as possible. Some of the models assembled already have at last 40% local/ASEAN content which means they can be exported around the region and not be subjected to import duties under the AFTA agreement. In the near future, when the versatile MQB platform is introduced at the plant, there will be the possibility of adding other models and one of those which is being considered is the next generation of the Tiguan.
In order to achieve the high level of quality it promises, Volkswagen has had to introduce processes and equipment which are more advanced than might be necessary for such a volume. And training the workforce to achieve and maintain the high standards has also been a big part of the ‘Malaysian project’. There are almost 600 workers at the plant of which only 10% are Volkswagen personnel from overseas, and these too are not permanent as they are here to provide training and guidance and some supervision. So it’s not like what some people say about a foreign company taking over and Malaysians will lose employment because foreigners will replace them. That would hardly be the case as foreign workers, especially those from Europe, are very expensive to use, as Proton would know when it ‘imported’ a group of German workers to be involved in assembling the Savvy 10 years ago. In most cases, foreign companies will want to localize even their management as soon as possible because sending senior people over is a huge cost.
What’s important to the government, of course, is transfer of technology and creation of more jobs, both of which Volkswagen is doing. It’s impressive just how much advanced technology the company has put into its operation here and if Malaysia does become a regional hub, larger investments will surely come to enable even higher outputs.
Click here for more news and articles about Volkswagen. To view or test-drive Volkswagen models in Malaysia, contact Wearnes VW or any authorised Volkswagen dealer in Malaysia. To locate a showroom, visit www.volkswagen.com.my.