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.