Malaysia's Proton Board Shows CEO The Door

Monday July 25, 2005, 10:33 pm

KUALA LUMPUR (Dow Jones)--The embattled chief executive of Proton Holdings Bhd. (5304.KU) will step down from Tuesday, weeks after he publicly criticized the government's "unfair" automotive policy.

Proton said it board of directors decided at a meeting Monday not to renew CEO Mahaleel Ariff's contract. The board is now searching for a new leader from within and outside the country for the MYR4.64 billion market capitalization company.

Mahaleel's departure was welcomed by some analysts as they say it could pave the way for German auto maker Volkswagen AG to take a stake in Proton.

Proton has been in talks with Volkswagen to establish a partnership where the German car maker would use the Malaysian company's production facilities to assemble Volkswagen cars for the Southeast Asian market. Proton, in turn, would benefit by tapping into Volkswagen's technological know-how to improve the quality of its own models and help it boost its flagging market share.

"The board has resolved not to renew the tenure of the present group CEO beyond his existing tenure," Proton Chairman Mohammed Azlan Hashim told reporters at a press conference.

Mahaleel, a protege of former Prime Minister Mahathir Mohamad, will be on leave from Tuesday and will "retire" from the company in September. Mahathir will remain an adviser to Proton and has been informed of the board's decision, the company said.

Azlan didn't want to be drawn into whether Mahaleel's contract was not renewed because of his criticism of the government's automotive policy, or differences with the board of directors.

"It's a question of change, Proton is an institution, it is not about individuals," he stressed.

The new CEO will have his work cut out. "Proton needs to sell more cars, it needs to increase its export market, it needs to increase brand awareness in other countries and it needs to expand its product range," the chairman said.

Proton also promoted two senior executives to joint chief operating officers. Kisai bin Rahmat, the director of operations, and Kamarulzaman bin Darus, the CEO of Proton Tanjung Malim Sdn. Bhd., which runs the company's newest plant, will help Proton continue operations while the board searches for a new CEO, the company said.

Macquarie Securities senior analyst Edward Ong said Mahaleel's departure was "highly positive" for Proton.

He said he believed Mahaleel's exit would smooth the way for Volkswagen to take a stake in the Malaysian company.

It is widely held that both Mahaleel and Mahathir were not keen on a sale of a substantial stake in the company.

"If Volkswagen takes a majority stake in Proton, we will have to review our investment view on the stock," Ong said.

He currently has a neutral call on Proton with a MYR7.90 price target. Proton closed trading Monday up 0.6% to MYR8.45.

Mahaleel earlier this month told a local newspaper that Malaysia's automotive policy of gradually removing protective tariffs was hurting the 42.7% government-owned car maker, prompting a strong rebuke from Prime Minister Abdullah Ahmad Badawi.

The government protects Proton by imposing high tariffs on foreign cars and by allowing Proton to pay a smaller excise tax.

Mahaleel was appointed chief executive of the 20-year-old carmaker in April 1997, but he had been at odds with the company's board for over a year now on strategic issues. These include the prospect of Proton teaming up with a multinational manufacturer in a bid to counter stiff foreign competition.

Those differences boiled to the surface in February when Abu Hassan Kendut resigned as chairman of Proton's board after the government overruled an earlier decision by directors not to renew Mahaleel's contract.

One of Malaysia's best-known companies, Proton is the sole surviving vestige of an ambitious industrialization drive initiated by Mahathir in the early 1980s. The government poured billions of dollars into steel and cement ventures that ultimately fared poorly.

Now, Proton is under siege. A plan by the 10-member Association of Southeast Asian Nations for a regional free trade area, known as AFTA, requires Malaysia to dismantle its high auto import tariffs.

The Malaysian government is committed to removing the protection, Abdullah said earlier this month, and urged Proton to improve its quality to compete with foreign makers.

"The protection is being reduced gradually because that is the right thing to do," Abdullah said. "While we gradually reduce protection, Proton must improve quality and capability so that it can compete with other cars."

In recent years, Proton also has seen its dominant market share chipped away by rivals such as South Korea's Hyundai Motor Co. and Japan's Nissan Motor Co., which have introduced locally assembled models at competitive prices. Proton's market share fell to 44% in 2004 from 48% in 2003.

-By Joseph Edwin, Dow Jones Newswires; 603 2692 5254;