Proton faces squeeze by foreign carmakers

Proton faces squeeze by foreign carmakers

Eileen Ng, Associated Press/Kuala Lumpur

For Malaysia's national car Proton, a 20-year honeymoon with
consumers is turning into a seven-year itch.

Once the king of the road, the ubiquitous Proton is facing
increasing competition from foreign vehicles as Southeast Asia's
largest passenger car market gradually tears down tariff walls
under a regional free trade pact.

The tariffs had turned Proton -- which started off by
producing Mitsubishi clones in 1985 -- a virtual monopoly.

But today, consumers can choose from an auto smorgasbord
including affordable Korean cars like Kia and Hyundai, classier
Japanese Toyota and Honda models, and luxury brands like BMW and
Mercedes-Benz.

The race will only become more intense and analysts say
Proton's future looks bleak unless it forms a strong partnership
with a foreign maker to fix its biggest shortcoming - quality.

"Malaysia's auto market has evolved over the years," said
Sharath Somasundaram, an auto analyst with local brokerage MIDF-
Sisma Securities.

"Proton's honeymoon has come to an end. If it wants to
survive, it has to latch on to a foreign partner to boost its
image and secure economies of scale. It cannot compete as a lone
ranger. Proton needs a more powerful guy in the driving seat."

The company has taken tentative steps in that direction by
forming a technical alliance in November with Germany's
Volkswagen AG, which may take a stake in Proton.

A pet project of former Prime Minister Mahathir Mohamad,
Proton was a poster child for Malaysian self-reliance in heavy
industry. Initially it built sedans and mid-size cars with
technology and parts taken from Mitsubishi of Japan.

The relationship soured when Mitsubishi failed to provide
Proton with the cutting-edge technology needed in new-generation
cars. Proton produced its first all-Malaysian car, the Waja
sedan, in 2000.

But the rattling, noisy interior, the shoddy exterior
trimmings and the so-so engine of Proton cars have sent buyers
rushing to the now-affordable foreign models. A Honda City or
Toyota Vios are now only 15 percent more expensive than a
comparable Waja automatic with a price tag of 63,000 ringgit
(US$16,500). A Kia Spectra costs about the same.

In the past, foreign cars cost at least 50 percent more.

Malaysia was obliged to reduce tariffs on foreign cars
manufactured or assembled in Southeast Asia under a free trade
pact within the 10-member Association of Southeast Asian Nations.

As a result, Proton has seen its market share drop from 65
percent to 44 percent of the approximately 400,000 cars sold last
year. Foreign carmakers doubled their market share to around 20
percent last year. The remaining vehicles come from a second
national car maker, Perodua, and gray market imports.

Aishah Ahmad, chairman of the Automotive Association of
Malaysia, says foreign cars will become even more competitive as
Malaysia is obliged to cut import tariffs to below 5 percent in
2008 under the ASEAN free trade pact.

"There will be further changes with market opening. It is
inevitable," she said.

New trouble emerged for the company last week after its chief
executive, Mahaleel Ariff, openly criticized the government's
auto policy for putting Proton at a disadvantage by allowing
cheaper imports.

In an interview with the Oriental Daily newspaper on Monday,
Mahaleel, a Mahathir loyalist, lamented the "poor treatment"
Proton is receiving from the government, the major shareholder in
the company.

"Proton is in a situation where it cannot figure out who its
enemies are," he reportedly said, echoing Mahathir's view that
Proton as a national industry should remain protected until it
can take on the giants.

"If the government only needs automobile assemblers, we can
grab a Mitsubishi car, fix it with a Proton emblem and say 'this
is Proton car,"' Mahaleel was quoted as saying.

The company's board of directors called an emergency meeting
on Wednesday and demanded an explanation from Mahaleel. He was in
England on a business trip and has not yet responded.

The confrontation spells serious trouble for Proton as the
government has made it clear that it has no intention of
mollycoddling the company any more.

Malaysia recently signed a free trade pact with Japan that
will pave the way for even cheaper Japanese cars.

Pressure is also piling up on Proton with the entry of China-
made cars -- Chevy Alado, a four-door compact made its debut in
Malaysia in April, selling at around the same price as a
comparable Proton.

Two other Chinese manufacturers, the Geely Group and Dadi
Automobile Industry, have also tied up with Malaysian companies
to bring in vehicles.

Mahathir, who is now Proton's adviser, warned the government
last month that "Proton is still young."

"We are competing with giants all over the world. We produce
200,000 cars or so (a year), but the giants produce millions of
cars. It will take us a little bit of time."