New era unfolds for Malaysia's ailing Proton

New era unfolds for Malaysia's ailing Proton

Eileen Ng, Associated Press, Kuala Lumpur

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 (US$440 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 last 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 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.