Proton changes rules of the game ahead of AFTA

Proton changes rules of the game ahead of AFTA

Eileen Ng, Agence France-Presse, Kuala Lumpur

National carmaker Proton is gearing up for greater foreign competition as motoring-crazy Malaysia prepares to slash tariffs on car imports by 2005 under a regional free trade area.

Protected since 1985 by high tariffs and other advantages, Proton is hoping a major restructuring unveiled last week will enable it to face off Japanese, American and European rivals that are already biting into its 60 percent share of the domestic market.

Last year, car sales by state-controlled Perusahaan Otomobil Nasional fell 10 percent year-on-year to 239,783 units and slid another 16 percent in the four months to April.

Sales are set to suffer further when the market is liberalized in January 2005 under the Association of Southeast Asian Nations (ASEAN) Free Trade Area (AFTA), putting cheaper foreign cars on Malaysia's roads.

Tariffs on imported cars in Southeast Asia fell below 5 percent in January under AFTA but Malaysia has obtained a reprieve for its auto industry until 2005.

Malaysia is the biggest car market in the region with a 34 percent share, despite having just one-tenth of Indonesia's population, and Malaysians are mad about motoring.

Even humble homes in rural villages boast a Proton, and the country hosts the only Formula One race in Southeast Asia.

But the reality of open competition under AFTA is forcing Proton, which previously insisted it could race down the track on its own, to change the rules of the game under a surprise restructuring exercise.

This will see a new holding company take over Proton and its listing status. The group will be streamlined into four core businesses of manufacturing, engineering, marketing and ancillary services.

Analysts say the new structure gives the carmaker flexibility to expand into other businesses and seek foreign partners without losing control.

Proton is sending "quite strong signals to the market that it is prepared to think much more actively about strategic and possible equity alliances" to arm itself for battle, said an industry analyst.

"It is a change of attitude after saying they will do it alone. They will need at some stage to tie up with a foreign manufacturer to get economies of scale, marketing skills and new technology," he said.

Seow Choong Liang, research chief at K and N Kenanga, said the move would allow Proton to boost exports that currently stood below 10 percent of its total production.

"Proton is beginning to face the realities of post-AFTA. They have woken up to the fact that they need to compete," he said.

"It is weak in distribution as marketing is previously left to agents. Proton will have to assume a key role now, probably starting in ASEAN. It will be a whole new ball game for them."

Proton's original partner was Mitsubishi, which provided the engine and most of the other components of the first Proton model, the Saga, which is now on display at the national museum as an icon of Malaysian development.

But over the years, Proton has stepped up its research and development to create its own engine and purchased Lotus, a British specialist maker renowned for its sports cars.

It is building a three-billion-ringgit automotive township north of Kuala Lumpur, modeled after Detroit in the United States, that houses a high-tech manufacturing plant that will cut costs by 20 percent.

The plant, due to be operational by year-end, will double Proton's annual production to 500,000 units by 2005 and to one million by 2010. It is expected to roll out new competitive models equipped with Proton's own Campro engine by early next year.

With the door open wide now, market watchers are waiting to see who will be the new partner for Southeast Asia's biggest car manufacturer.

Potential partners being touted are Ford Motor which has once made a pitch for an alliance, and DaimlerChrysler AG, the parent of Mitsubishi Motor Corp. which holds a 16 percent stake in Proton.

European carmakers such as Citroen and Renault, which still do not have a strong base in ASEAN's market of 500 million people, as well as Japan's Toyota and South Korea's Daewoo are also on the list.

"Proton is ready made manufacturing platform for foreign carmakers to access the growing ASEAN market," an analyst said.