Patrick Chalmers

Patrick Chalmers Reuters Tanjung Malim, Malaysia

Malaysian carmaker Proton's new factory in Tanjung Malim is the best thing to happen for a long time in a town bypassed by the country's arterial North-South highway.

But residents are not rejoicing yet because of questions over the company's future, and memories of the project stalling during the Asian financial crisis in the late 1990s.

Proton has 60 percent of Malaysia's car market, the largest in Southeast Asia, but that is now under threat as Japanese and Korean firms nibble away even before car tariffs of up to 300 percent fall to a maximum five percent in 2005.

It is a scenario that plagues carmakers in other Asian countries, such as India, where Maruti had a market share of more than 80 percent for decades but is now facing stiff competition from foreign rivals producing locally.

Property prices have firmed since Proton revived plans to build a plant in Tanjung Malim, but even property agents are cautious about prospects for the town's potential savior.

"The problem is not that they haven't got the facilities, it's that they are in an incredibly competitive part of the market," says one, a Proton Wira driver.

Proton has a lot at stake. Sales have slipped and the firm is desperate for new models to replace its dowdy Iswara and Wira sedans. It has even started talking about alliances with foreign makers, something analysts say could lead to a merger.

It was Prime Minister Mahathir Mohamad's ambition to wean Malaysia off commodities that gave birth to Perusahaan Otomobil Nasional Bhd, or Proton, in 1983.

A growing middle class, Japanese technology and fat margins enjoyed behind tariff barriers have helped it survive despite a global carmaking shakedown.

Tanjung Malim, a nest of Communist activity and fighting in the 1950s, lost most of its transit trade when the four-lane highway passed it by.

Hawker stalls once busy feeding truck drivers and other travelers make do with leaner pickings. Many youngsters migrate the 80 km (50 miles) south to Kuala Lumpur.

The Proton plant, with an initial investment of 1.52 billion ringgit (US$400 million) to make 150,000 cars a year, is due to start production in the first quarter of 2004. It will employ 2,000 workers.

Initial output of a variety of models could quickly satisfy domestic demand if sales decline as expected, leaving a question over the plant's potential to expand to a million units.

Times are changing for Proton's aging stable.

In May, Proton warned of weak consumer sentiment and global uncertainties, a view at odds with the Malaysian Automotive Association forecast of 3.5 percent market growth to 450,000 units this year.

Its sales fell 10 percent, in both value and volume, during the year to the end of March to 9.27 billion ringgit, or 216,083 units, from the previous year.

Net profit was flat, but only because R&D spending was at least 200 million ringgit below a company forecast.

The firm might replace the Wira with a 50,000 ringgit car that has the look and feel of a Lotus, one analyst said. Proton bought the British firm in 1996.

"If you like Proton you are betting on one thing: the car coming out next year," says an analyst at a foreign research house in Kuala Lumpur, who declined to be identified.

Lotus has already helped Proton develop its Satria GTi hatchback, the flagship Waja sedan and CAMPRO engine.

Proton's strategy is tough to gauge, but the bones of a plan have emerged. Last month it announced it would give company segments a chance to chase business and alliances on their own.

Analysts saw the move as heralding new partnerships for a three-track plan: lower volumes of jazzier models at home, joint ventures to make and sell overseas, and farming out some manufacturing at home.

"It's quite clear they are just trying to give themselves some flexibility for foreign ventures," said another analyst.

Toyota might be one partner, given its hand in designing Tanjung Malim's state-of-the-art production lines, but its Malaysian ties and aggressive inroads into Proton's domestic sales may stand against it.

Proton Chief Executive Mahaleel Ariff eulogizes Toyota for its Tanjung Malim work, in contrast to recent bland remarks about shareholder Mitsubishi, which has a 15.9 percent stake in the company. The Japanese firm would have to vie with other alliance partners for selling parts and services, he said.

John Bonnel, Bangkok-based director of Auto Resources Asia, sees a Japanese partner for Proton, because Japanese would likely be more attuned to national sensitivities.

"Eventually, Malaysia will give in. There will be a company that will protect the dignity and name of Proton within Malaysia," he said.