Future competition for protons

Malaysia's carmaker Proton driving in search of a future

 

The new Iriz by Malaysia's national automaker Proton is showed to the press before Thailand International Motor Expo at Muang Thong Thani in 2014. (Proton photo)

KUALA LUMPUR - Malaysia's struggling national automaker Proton Holding Bhd, once the country's sales leader, recently saw its fortunes slip further by seeing its market share usurped by Japan's Honda Motor Co.

"That is very shocking for everybody," veteran auto reporter Chips Yap told Kyodo News of the fact that Honda beat Proton in the latter's much-protected home turf.
The company once dominated the industry with 74% of the local market in 1993 but now has only 14%.
After being the top carmaker for years, it slipped to the number two spot in 2006, beaten by rival local carmaker Perusahaan Otomobil Kedua Sdn Bhd, or Perodua, which counts Japan's Daihatsu Motor as a major shareholder.
But this year, national pride was dented when Honda beat Proton to the number two spot, becoming the number one non-national brand. For the month of April, Honda sold 24,741 units while Proton sold 23,702 units. Perodua, which specialises in compact cars, was far ahead with 62,078 units, according to figures from the Malaysian Automotive Association, an industry watchdog.
The ails affecting Proton were laid bare by Prime Minister Najib Abdul Razak when he unveiled on June 14 Proton's latest model that he hoped will boost Proton's sagging fortunes.
"Proton flourished, yes, but only due to a very high level of government help. Our car industry grew under the umbrella of protectionism, with quotas on engine sizes and Malaysians paying high import duties on foreign cars," he said.
Since the company was established in 1983 by then prime minister Mahathir Mohamad, Najib said the government has spent nearly 14 billion ringgit (120 billion baht) in the form of grants, various forms of assistance and tax forgone.
The latest handout was a 1.5 billion ringgit loan extended in April to enable Proton to pay its vendors. Early this month, 1.25 billion ringgit of that amount was used to buy convertible shares from Proton's owner DRB-Hicom Bhd.
If the government chooses to convert the debt into shares, it will again end up holding nearly 80% of Proton.
Besides lacking research and development capabilities and having a negligible export market, many of the company's problems stem from political interference.
Proton, Southeast Asia's only full-fledged car manufacturer, was Mahathir's brainchild. He saw it as a catalyst to promote industrialisation in an economy that relied heavily on commodities.
According to Yap, he was heavily involved in its operations, ranging from company strategy, management, right down to designs and sometimes this involvement delayed the decision-making process.
And at times Mahathir's lofty ambitions for Proton did not make business sense, such as building a second plant in Tanjung Malim in northern Perak state that cost 1.8 billion ringgit and is five times bigger than its first plant in Shah Alam in the outskirts of Kuala Lumpur.
"At times there was a sense of hubris, that Proton could do anything because the government would always back it. Two factories were built, capable of producing 400,000 units a year. But last year Proton sold only 102,000 cars," Najib said.
Throughout Mahathir's 22-year rule, Proton was untouchable despite dwindling sales and bleeding money that led to several government interventions.
When he left office in 2003, he was made an adviser to the carmaker and subsequently its chairman, a position he held until becoming entangled in a protracted row with Najib, whom he accused of being corrupt.
The feud affected Proton as the government was reportedly holding out on its request for more grants to help it pay off its debt.
Mahathir ultimately quit as Proton chairman on March 31. A week later, the government announced a 1.5 billion ringgit loan package that came with conditions.
Among them, Proton is to relocate its operations from Shah Alam to Tanjung Malim, draw up a turnaround plan and seek a foreign strategic partner to help in research and development in order to make it competitive to help it expand locally and abroad.
The government also announced the setting up of a task force to ensure the restructuring is successful.
Najib said the government had to step in to ensure the welfare of the 12,000 employees of Proton and 50,000 workers of its 350 vendors.
"Now, I am pleased to say, there have been significant changes at the top levels of Proton. Tun Mahathir's era of political interference has come to an end," he said.
Writing in his widely read blog five days after he quit, Mahathir attempted to deflect criticism away from Proton, saying the company had given more than it took from the government.
He said that since 1985, it has contributed 24.9 billion ringgit to the treasury in the form of various taxes like excise duty, sales tax and corporate tax.
He complained that the government has been too accommodating with foreign carmakers.
"Incidentally all the countries exporting cars to Malaysia implement tariff and non-tariff barriers resulting in excluding Proton's importation into their countries. This contrasts with our policy of allowing foreign cars to enter Malaysia with minimal or no restrictions," he said.
"It should be noted that Proton has to compete in its own domestic market against the likes of Toyota (10 million cars per annum), South Korean carmakers (5 million cars), German carmakers (6 million cars) and others," Mahathir added.
For the moment, Proton may have gotten a lifeline to stay afloat to enable it to launch new models. Besides the Perdana sedan model that was launched by Najib last week, which is a collaboration with Honda, Proton is expected to come up with three more models including one in collaboration with Suzuki Motor.
Hong Leong Investment Bank in a June 7 research note on DRB-Hicom pointed to a not-so-rosy outlook for the auto arm of the conglomerate.
Proton is acting as a financial drag on DRB-Hicom, which reported a net loss of 991.9 million ringgit for the year ended March 31 against a profit of 300.2 million ringgit a year ago.
The bank highlighted the risks due to "prolonged bank tightening measures on lending rules, slowdown of the Malaysia economy affecting car sales and global automotive supply chain disruption."
"The new launches should cushion the cash-flow requirements and survivability in the short to medium terms. However, Proton needs a strong partner to lead it into the international level playing field with improved products and technologies," the bank said.
Proton rolled out its first car in 1985 with a tie-up with Mitsubishi Motors Corp. The joint venture floundered in 2004, due to Mitsubhishi Motors' financial problems in Japan and sluggish sales in Malaysia.
Proton's then owner, sovereign investment fund Khazanah Holdings, approached German's Volkwagen AG as a potential partner. But those talks broke down due to opposition to Volkswagen's plan to acquire a controlling stake in Proton.
Local media reports that Proton is currently in talks with the French PSA Group, which owns the Peugeot and Citroen brands as well as Renault.
Another auto journalist Yamin Vong is skeptical a deal could be struck, citing the Volkswagen experience.
"The managers at Proton are generally not in favor of the PSA Group's bid," he wrote in an article published by the official news agency Bernama early this month, "This is to be expected whenever a takeover bid looms. Also, the perception that the Proton culture is one that rejects changes is very credible."
"The companies that will really want Proton as a partner for Malaysia and the Asean markets are brands that do not have an Asean presence and desire to have a significant share in the regional bloc," Vong said, referring to the 10-member Association of Southeast Asian Nations