National carmaker Proton under siege as Malaysia woos foreign rivals

National 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.