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.