Foreign control may strengthen Proton

Foreign control may strengthen Proton

Dow Jones, Kuala Lumpur

The acquisition of Proton Holdings Bhd. by a foreign carmaker is
likely to expedite quality improvements and increase sales, but
could spell the end of Malaysia's homegrown autos.

"There seems to be some attempt to buy up the company,"
Mahathir Mohamad, former prime minister and Proton adviser said
on Tuesday. "Our fear is of course if they buy 100 percent they
might close the production of our national car and just assemble
their car."

Mahathir said the government's investment arm Khazanah
Nasional Bhd., which holds a controlling 42.7 percent stake in
the 20-year-old company, has until the year-end to reduce its
stake to 33 percent or less under a ruling by stock-market
regulators.

Analysts believe that with an established foreign carmaker in
the driver's seat, Proton could regain its shrinking domestic
market share even as Japanese and South Korean rivals
aggressively competing on price and quality.

Even the likelihood Proton will have to give up its own engine
and car design manufacturing efforts hasn't damped analysts'
optimism for the entry of a major foreign investor.

"Giving up a controlling stake to a major auto player will
fast-track Proton's improvement process and Proton should go the
way Perodua has gone and give up national pride," said an auto
analyst with a mid-sized brokerage.

Perusahaan Otomobil Nasional Bhd. (Perodua), which makes
mostly compact cars, benefits directly from the technology and
support of parent Daihatsu Motor Co. of Japan, analysts say.

There isn't a shortage of buyers for Proton, Mahathir noted.

"If you want to you can sell more than 50 percent to
Volkswagen. They are quite willing to buy even 100 percent. There
are many other companies which will gladly buy 100 percent of
Proton," the former prime minister said.

Proton is currently in talks with Volkswagen AG of Germany for
a technical tie-up or collaboration to make cars in Malaysia for
export.

However, most analysts believe an equity partnership between
Volkswagen and Proton is necessary for the transfer of real
benefits to Proton, such as technology development.

The quality of Proton cars has often lagged that of its
Japanese and South Korean counterparts, but Proton recently
appointed an independent German audit firm to improve its cars.

Once holding around 60 percent of the domestic market, Proton,
Southeast Asia's biggest automaker, has seen its market share
drop to 44 percent in 2004 from 48 percent in 2003 with the
opening of the Malaysian market under a regional free-trade
agreement that reduced tariffs that kept the prices of foreign
cars artificially high.

Proton's share price has lagged the broader market since the
beginning of this year, reflecting investors' concerns about the
company's ability to compete with foreign rivals, analysts said.

Since the start of this year, Proton shares have fallen 18.8
percent to 7.30 ringgit at 07:00 GMT, while the benchmark Kuala
Lumpur Composite Index has dipped only 0.8 percent to 900.42
points in the same period.

"The underperformance of the share price is reflective of the
market's negative sentiment on Proton," Mayban Securities said in
a recent research report.

Although Proton shares are now considered cheap, many analysts
have a hold recommendation on Proton.

One of Proton's key attractions as an acquisition target is
its cash assets of more than 2 billion ringgit. Along with non-
cash assets, the company is valued at around 8 billion ringgit.

Proton's Chief Executive Mahaleel Ariff, ruffled feathers last
week by reportedly criticizing in a newspaper interview the
government's auto policy as forcing Proton into a corner.

Several local dailies reported that Mahaleel, a Mahathir
loyalist, would be sacked soon.

But Mahathir said Mahaleel remains at the helm of the company
and "as far as I know he has not been asked to leave."

"I think Mahaleel was duty bound to protect the name of
Proton. He has to explain things because if he doesn't then the
sale of Proton will go down," Mahathir said.

Proton will make about 190,000 cars this year. Malaysia is the
region's biggest car market, buying about 487,605 new vehicles
last year.