New Era Unfolds for Malaysia Car Maker

New Era Unfolds for Malaysia Car Maker

New Era Unfolds for Malaysia Car Maker
Sunday July 31, 10:19 pm ET
By Eileen Ng, Associated Press Writer


KUALA LUMPUR, Malaysia (AP) -- Selling off a chunk of Malaysia's national car maker Proton to Volkswagen AG -- and possibly surrendering management control -- would likely be a blow to Malaysian pride, but analysts say such a move would be huge boost to Proton as it strives to wean itself off government protection and become globally competitive.

Industry sources Friday said the government's investment arm Khazanah Nasional Berhad may sell up to 30 percent in Proton to the German carmaker for 1.65 billion ringgit ($440 million; euro364 million), in a deal that could give a foreign company control in a national icon under intense competition from other Asian automakers.

Khazanah has confirmed negotiations were being held on Proton's "proposed alliance" with Volkswagen as it seeks to enhance shareholder value and return on investment. Buaplt it said there were no plans "at this point" to divest all or part of its 42.7 percent stake in the carmaker.

A deal ceding management control to Volkswagen runs counter to Malaysia's national car dream. But analysts say it's a crucial incentive to woo a strong foreign partner like Volkswagen, or VW, to ensure it doesn't go under.

"It's all about survival. Proton cannot make it on its own," says Edward Ong, auto analyst at MacQuarie Securities.

"If VW were in control, it would not fear that any technology or regional distribution network it invested in Proton would be subsequently used against it. At the same time, VW's incentive to make Proton succeed increases or else it would be a drag on VW's group earnings."

The possible equity sale followed Monday's removal of embattled chief executive Mahaleel Ariff, who has been at odds for months with Proton's board of directors over the company's future direction.

It is unclear how a deal with VW might be structured, but Khazanah is likely to retain a "golden share" in Proton. Such shares, common in state-linked companies, give the government veto powers over key strategic decisions.

Investors have cheered the unfolding developments, driving up Proton's share price nearly 12 percent over the week to close Friday at 9.20 ringgit.

VW officials said Friday they were in talks about their cooperation and work with Proton and future plans, but were far from any concrete solutions or decisions. They would not comment on the reports about a 30 percent stake.

Malaysia's member of parliament, Nur Jazlan Mohamed, says Proton's new direction marks a "major policy shift for Malaysia."

"Clearly Proton cannot continue in the same mold. Proton needs to have access to a global network and build economies-of-scale because production costs will continue to rise and competition is heating up," he says.

Proton was set up as a symbol of Malaysian self-reliance in heavy industry but after 22 years, quality remains its biggest shortcoming -- something that has been exposed as tariffs are gradually torn down under a regional free trade agreement.

The carmaker has sought to lift its image by acquiring British sports car manufacturer Lotus and Italian motorcycle maker MV Agusta Moto SpA. It also invested huge sums to develop its own engine and platforms, and expanded assembly overseas including in Indonesia, the Middle East and China.

But its performance remains pallid, with a low annual production of around 200,000 cars and exports accounting for only 5 percent of its total sales.

Proton's domestic market share also shrunk steadily from 57 percent in 1993 to around 30 percent in June, as Asian carmakers including South Korea's Hyundai Motor Co. and Japan's Nissan Motor Co. erode its business by introducing locally assembled models at competitive prices. MacQuarie's Ong says a tie-up with Volkswagen will strengthen Proton's branding and boost its flagging sales.

"Proton's current models are simply uncompetitive. VW's Fox, Golf, and Passat could all be manufactured in Malaysia with very few modifications and quickly refresh Proton's model range," he says.

By tapping into German technical know-how, Proton can also potentially cut its high research and development expenses by as much as 500 million ringgit (US$133 million,euro111 million) a year, Ong says.

Volkswagen, meanwhile, will get an opportunity to grow its market share in Asia, which last year accounted for just 6.6 percent of its 5.1 million sales, he says. The German automaker has plants in China and India, and by buying into Proton, it will get access to plants here capable of rolling out 380,000 cars a year that can be increased to 1 million units.

Ong says the VW deal will make Proton an attractive stock and could lift its price up to 17 ringgit.