Carmaker Proton under siege as Malaysia woos foreign rivals

Carmaker Proton under siege as Malaysia woos foreign rivals

Eileen Ng, Associated Press, Kuala Lumpur

An ambitious new roadmap designed to turn Malaysia into Southeast Asia's new auto powerhouse - challenging Thailand - will benefit foreign auto companies but spells bad news for struggling national carmaker Proton, analysts say.

The framework for a long-awaited national auto policy unveiled on Wednesday offers wide-ranging incentives including low- interest loans and grants to entice foreign investment in the sector. But it strips Proton of its tax privileges as part of Malaysia's auto liberalization.

Under the new policy, priority will be given to manufacturers and assemblers using Malaysia as a launch pad to tap regional and international markets, the government said.

"It's a bold announcement and a wake-up call to national auto makers that the days of protections are over," said Mohamed Ariff, executive director at the Malaysian Institute of Economic Research.

Set up in 1983 as a symbol of Malaysian self-reliance in heavy industry, Proton has long enjoyed government protection in the form of high tariffs on imported cars. But as tariffs are being slowly eroded under a regional free trade pact, its market share dwindled to around 30 percent in June from 57 percent in 1993.

Proton, without a chief executive since August, has sunk into the red in the quarter that ended in June and is currently in talks to sell an equity stake to German auto giant Volkswagen AG.

The race is expected to become more intense after the government slashed import tariffs on cars made in other Southeast Asia countries to 15 percent from 20 percent as part of a free trade agreement under which they are to be phased out in three years.

The government has also ended a 50 percent rebate that Proton previously received on excise taxes that are imposed on all cars sold in Malaysia. Analysts said that would be a blow to Proton, but that it would benefit from newly announced government grants - for research, training, and technology acquisition - aimed at helping local carmakers face growing foreign competition.

This will buy Proton some time, but the message is clear for the carmaker.

With the government's new push to overtake Thailand as "Detroit of the East," analysts say it is imperative for Proton to accelerate negotiations with Volkswagen and strike a strong partnership that can boost its quality and help it gear up for foreign competition.

"The one thing that Proton needs at the end of the day is foreign technology. The message is clear for Proton: it needs a foreign alliance to survive. Otherwise there really is no hope in sight," said Edward Ong, auto analyst at Macquarie Securities.

Thailand is currently the top production base in Southeast Asia for foreign carmakers, including Toyota Motor Corp. and General Motors Corp.

But production in Thailand focuses largely on commercial vehicles such as pickup trucks. Malaysia is the biggest producer of passenger cars, accounting for 24.4 percent of such vehicles made in the region last year.

HLG Research says a tie-up with Volkswagen will benefit Proton by improving the general impression of its car quality and bringing in a potentially stronger management team. That should also help boost production at Proton's mega factory in Tanjong Malim, in central Perak state, which is designed to produce 1 million cars, but currently rolls out less than 200,000.

"Proton is under siege, but not all is lost," HLG said in a research note. "The proposed VW alliance brightens Proton's prospects and longer-term survivability."

Volkswagen may abort the alliance if majority stake and management control are denied, the research firm said.

Proton, which is controlled by the government's investment arm, Khazanah Nasional Berhad, last month said it is open to selling an equity stake to Volkswagen but will not cede control to Europe's largest carmaker.

The government last week reiterated it will safeguard the national car industry as some 300,000 people have jobs related to Proton.

Other analysts said the new auto framework and duty structure have dispelled some uncertainties and will allow players to make concrete strategic plans for the future.

"We feel that the non-national players are the main benefactors as they would now receive the same incentives given to national players," said AmResearch.

However, it said the auto policy framework is still short on strategies to make Malaysia a regional auto manufacturing base and insufficient for it to catch up with Thailand.

The government is to announce full details of the national auto policy within three months.