The Proton Saga Continues

Malaysia

Economic News

22 Jul 2010
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Negotiations for a foreign partner to align with Proton have resumed, with Volkswagen and General Motors being the front-runners to take up a significant partnership in Malaysia's struggling national car company.



Proton was established in 1983, under then Prime Minister Mahathir Mohammed, as part of a programme to spearhead industrial development. For three decades, the company thrived in a protected environment guaranteed by heavy duties placed on imported vehicles. Ten years ago, every six cars out ten sold in the country were a Proton. Today, the company has lost significant market share as duties on foreign imports were lowered in line with regional trade agreements and as Malaysians are now able to afford foreign cars. Proton recently reported a loss of $172m for the year ending March 31, compared to a profit of $13m for the same period in the previous year.



Under a recovery plan, Khazanah Nasional, the government's investment arm, which owns a 43% stake in the company, is looking for a foreign partner to inject new technologies and improve efficiency. Initially, the government had imposed a March 31 deadline to forge an alliance between Proton and a foreign partner, but a final decision has still not been made and talks were recently put on hold.



However, negotiations have resumed over the past few weeks, with officials from the prime minister's office, the finance ministry and Khazanah Nasional having met with officials from Volkswagen in two separate rounds of talks, the first one in New York beginning of June and the second one in Bangkok in the second week of June. A third round of negotiations looks very likely, though no timetable has officially been set.



General Motors, in the meantime, has been named by the government as a potential partner, with Said Najib Razak, Malaysia's deputy prime minister, arguing that the government has not closed the door to companies other than Volkswagen and that a proposal with GM is still on the table.



However, talks between Volkswagen, Europe's largest car manufacturer, and Proton appeared to hit a snag last week over the government's unwillingness to sell its entire 43% stake. Control of Proton's manufacturing division is reported to be an important component of the deal for Volkswagen, as it would give access to South East Asia's car market.



"Whether we give up a substantial stake, that's the question. Substantial means majority. Are we willing to give up a majority in the manufacturing side? " commented Najib.



Nor Mohamed Yackop, the second finance minister, indicated that talks are continuing and that the prospects for a third round look very probable.



"The fact that VW and Proton held their first round of talks in New York earlier this month and then met again in Bangkok recently with the possibility of a third round would almost by definition be good news. If it was bad, if it was not workable, we would have stopped at the first round," stated Nor Mohamed at a press conference on June 25.



The Proton saga is being watched closely as there is much interest in the extent to which the government will relinquish control of the national company.



Government Linked Investment Companies (GLCs), such as Proton, make up a significant portion of the country's economy, employing an estimated 5% of the workforce and accounting for approximately 36% of the market capitalisation of the country's stock exchange.



The GLC Transformation Programme was implemented by Khazanah Nasional, with the aim of re-structuring and turning around GLCs into "high performing entities" through "Business Recovery Plans".



Malaysia Airlines (MAS) stands out as the strongest and most recent example of a successful Business Recovery Plan. In 2006, Idris Jala became managing director and CEO, tasked with implementing a Business Turnaround Plan for the national airline, which was experiencing substantial losses at the time. The airline, through cost cutting and reorganisation, achieved $38m in net profit for the first quarter of 2007, a marked turnaround from 2006 when first quarter figures showed a $89m loss.



Jala told OBG, "I see Malaysian Airlines as a pilot GLC transformation company. People were sceptical at first whether we would be given the freedom to do what was needed, and I am very happy that we were given the freedom to act decisively and turn around the company in order to make it profitable."



Similarly, for Proton, Najib openly stated that the government was willing to let a foreign partner run Proton without political interference, saying, "If we want a foreign partner, then we have to accept that it has to be run on a commercial basis."

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