Proton on new path with VW, but a bumpy road ahead

Proton on new path with VW, but a bumpy road ahead

Eileen Ng, Agence France-Presse/Kuala Lumpur

Proton's tie-up with Germany's Volkswagen AG (VW) heralds a new
chapter for the Malaysian national carmaker but analysts warn the
road ahead is bumpy and long-term benefits are hazy without any
equity participation by Europe's top auto maker.

Proton announced on Tuesday it would assemble and sell VW cars
as part of a "long-term strategic partnership" that could lead to
technology sharing and joint development of cars.

However there were no plans for VW to take a shareholding in
the 38 percent state-owned Proton.

As part of the deal, Proton gets access to VW engines and
other components. VW will develop a program to boost production
standards at Proton plants and study opportunities to utilize
Proton's technical expertise and facilities for the joint design
and development of cars.

Analysts say Proton's technical collaboration with VW after
the end of a 21-year alliance with its Japanese partner
Mitsubishi Motors would bolster its competitiveness ahead of
market opening in January under the Association of Southeast
Asian Nations (ASEAN) Free Trade Area (AFTA).

The tie-up with VW will boost Proton's brandname
internationally and create a global distribution link for it to
sell its cars abroad, especially in China where VW is the top
foreign carmaker with nearly 30 percent of the market, they say.

But it is premature to determine if this could ensure Proton's
long-term survival, unless the partnership with VW is cemented
with an equity exchange in the long-run, they say.

"It all depends on whether any joint development would
materialize and help Proton cut research and development costs,
enhance production efficiency and quality and raise the variety
of models to compete internationally," AmResearch said in a
report.

"Without equity participation, it may not be in the best
interest for VW to share its intellectual properties with Proton
and vice versa.

"If it reaches that stage, the issue of national pride and
interest would be a major obstacle to overcome. Overall, this is
a positive move but long-term benefits are still unknown."

In the immediate term, AmResearch said Proton would benefit
from additional earnings from assembly and distribution of VW
cars but this was unlikely to be significant due to relatively
thin margins and small volume.

The contract will see an initial production of 15,000 VW units
in 2006.

Set up in 1983 as part of Malaysia's drive into heavy
industry, Proton used to sell six out of every 10 new cars in the
country but its market share fell to 49 percent in 2003 and
dipped further to 44.5 percent in the first eight months of this
year.

Proton's 1.8 billion ringgit (US$474 million) new plant in
Tanjung Malim is designed to produce a million cars a year by
2010 but with a local consumption of only about 200,000 units,
exports are key to its survival, analysts said.

MIDF Sisma Securities said assembling cars for its competitor
was not the end game for Proton and predicted the deal could open
doors for Proton in ventures yet to be disclosed.

"Proton is obviously readying itself for the step in
competition come 2005 when AFTA is implemented. For its survival,
the national car maker has to move competitively overseas and has
identified Indonesia as a possible manufacturing base in ASEAN,"
it said.

"Any further tie-ins with VW will mean an entry into the
English and European markets. The other market that would readily
accept a mass car manufacturer from ASEAN would be China."

Proton, which also controls British sports car manufacturer
Lotus Group and Italian motorcycle maker MV Augusta Moto SpA, is
moving aggressively to expand assembly overseas including China,
India and Indonesia, and has plans to put up to 20 new models on
the road in the next decade.

Under AFTA, import tariffs for most products in the region
were cut to below five percent in the past year. Malaysia
obtained a two-year reprieve for its auto industry until 2005 but
has since said it would defer reducing duties to the required
level until 2008.