EMERGING MARKETS ANALYSIS: A Chinese cure for the 'Malaysian Patient'?
By Mark Bursa | 14 May 2008
Against the odds, Malaysia's Proton is staging a comeback thanks to a renewed focus on emerging markets sales. And the company seems to have found a new partner in China that is prepared to go where Western automakers would not. Mark Bursa reports.
BMW's managers famously referred to Rover as "the English Patient" - and sadly the company's afflictions were terminal. With Rover gone, the unwanted mantle of the world's least healthy carmaker surely passed to Proton.
Out of favour with local politicians and unable to find a global partner, Malaysia's "National" carmaker even suffered the indignity of losing domestic market leadership last year to rival Perodua. The fall from grace has been swift - Proton's share of the domestic passenger car market fell from 60% in 2001 to 24% last year.
A foreign partner was sought - but talks with GM, Volkswagen and PSA Peugeot Citroen, came to nothing. Last year, the Malaysian vultures began circling, with intense speculation that another local automotive company might mount a takeover bid.
But perhaps surprisingly, the Malaysian Government has resisted any attempt to acquire its controlling 52% stake in Proton. For the moment, suitors such as DRB-Hicom, Naza Group and Sime Darby have been told to wait while Proton's own turnaround plan is given a chance.
And remarkably, it actually seems to be working. Proton made a loss of $169m in the 2007 financial year, but in the fourth quarter to the end of December 2007, Proton posted a modest net profit of $3.2m - a big improvement on the loss of $87.4m in the same period a year earlier. The "Malaysian Patient", it seems, is off life-support.
The fact that Malaysian prime minister Datuk Seri Abdullah Ahmad Badawi has given Proton this chance is seen as a surprise - many believed Badawi favoured Naza, as Naza's founder SM Nasimuddin Amin hails from the same part of the country, and prior to becoming prime minister, Badawi was a strong cheerleader for the Naza Group.
Proton, on the other hand, was very much the pet project of Badawi's predecessor Mahatir Mohammad, who Badawi succeeded as prime minister in 2003. Since then, the two have fallen out. Mahathir has constantly criticised Badawi's policies - including a call for greater protection for Proton.
In 2006, Badawi urged Naza and Proton to "compete like brothers", and added that he "would not be jealous if Naza performed better than Proton". In other words - get your act together, Proton. "I will be angry with Proton if they cannot be the best carmaker," Badawi said.
Badawi is a popular figure - Malaysians call him "Uncle Abdullah", and he sometimes refers to himself in the same terms! But the opposition in Malaysia is stronger than it ever was under Mahathir. In Elections earlier this year, Badawi won a second five-year term, but with a greatly reduced majority.
However, he is a canny politician, and he knows that damaging Proton would be unpopular with voters. So he's given the Malaysian Patient the opportunity to heal itself. Last November, he told an ASEAN summit in Singapore: "Proton should be given a chance. I believe this will be a successful turnaround. No question of a bailing out. Proton is doing well today."
Proton's turnaround plan is simple. It involves renewing older products and focusing export activities on other emerging markets in the region, rather than pumping cheap cars into the West. This has proved a disaster - in the UK, for example, a promising early start in the 1990s with a private distributor was squandered once Proton took the distribution in-house. Cars were heavily discounted, and residual values were at one point so low that Proton was forced to buy back used UK Protons and re-export them to right-hand drive emerging markets.
Now the focus is on Indonesia, Thailand, Turkey, Iran and China - price-sensitive markets where Proton is seen as an experienced foreign carmaker - and hence carries something of a premium. And to maximise that appeal, Proton is also starting to make better use of its prime asset - Lotus Engineering, acquired in 1998.
Proton is belatedly starting to do deals with its ASEAN trading partners. Proton started exports to Indonesia in 2007, selling around 1,200 units - mainly Wira models for the local taxi market. And in late 2007, Proton also launched the Savvy small car in Thailand, pitching it as a low-cost model aimed at young drivers. These are small deals, but they represent incremental business - a few thousand units are significant for a company whose production fell to just 120,000 last year.
Greater opportunities are presented elsewhere. Proton has been present in Iran since 2005, when it started assembling a few thousand Waja models per year for the local taxi market in partnership with Iranian automaker Zagross Khodro. In late 2007, Proton and its Iranian partner announced the 'Islam Car' programme - a car to be assembled in Malaysia, Iran and Turkey fitted with additional "Islamic" features designed to appeal to buyers across the Middle East and in other Muslim markets.
The programme, which will essentially be little more than a marketing exercise to underline the Islamic credentials of Proton's cars, is slated to begin in 2011. Proton recently said it was looking for a suitable production site in Turkey - and it would use this as a source point to Europe. Proton has been present in Turkey before - from 1998 to 2000 - and it still has a Turkish distributor, Ulu Motor.
But most significant of all is Proton's entry to China. This is a highly unusual strategy - Proton has signed a deal with Jinhua Youngman Automobile Manufacturing Co Ltd to export 30,000 completely built-up Proton Gen2 models over two years, to be sold under the EuropeStar brand as the RCR model. But it promises to be very lucrative for Proton. Proton managing director Datuk Syed Zainal Abidin said the deal would generate around $300 million in revenue and royalties of $32m.
On top of that, Youngman has signed a licensing deal for Proton's Lotus-designed Campro engine, whereby Proton would sell 150,000 CKD units over the next six years, he said. This, combined with parts supply and royalty payments from parts localisation in China, is worth "a few billion Ringgit", Zainal told the local Malaysian Bernama news agency. Parts localisation alone is likely to generate $20m in revenue for Proton. Lotus also receives around $60m for engineering and design of the car.
This is "paradigm-shifting" stuff - by agreeing an up-front per-car royalty deal, the foreign partner gets a guaranteed revenue stream at low risk. The design piracy risk is lessened too - as any copycat cars would be infringing the copyright of a Chinese company - and the courts might offer more protection to a local firm.
It's perhaps unsurprising that Youngman Auto Company should be at the vanguard of this new business relationship. It is a fascinating business, based in Jinhua City, Zhejiang Province. Its core activity is a JV to manufacture German Neoplan buses and MAN trucks, and it builds around 2,000 buses a year, giving it 70 per cent of the luxury bus market in China.
Youngman's chairman, Pang Qing Nian, is a self-made entrepreneur who dropped out of school with no qualifications, but who appears to have a good grasp of the power of branding. "I have built Youngman group based upon three key principles: quality product, technology and brand," he told Malaysia's New Straits Times. He has been able to enter the car market through the purchase of a car production licence in 2004.
He knows the Proton Gen2 was developed in the UK by Proton's subsidiary Lotus, and even though the days when Jim Clark, Emerson Fittipaldi and Mario Andretti won the Formula 1 world championship at the wheel of a Lotus are long gone, the sports car maker remains a well-known brand in China. So every EuropeStar RCR (the Lotus link justifies the faux-Euro brand) has an "Engineered by Lotus" badge on its tailgate - just like Isuzu used to do when GM had a stake in both companies.
Youngman pays Proton an extra royalty of $50 per car for the privilege of doing this - but Pang believes it's worth the cost. Indeed, he wants to develop a new range of "made-in-China" EuropeStar cars, engineered by Lotus. Indeed, the plan could have major benefits for Proton. Already, Pang wants to pitch EuropeStar as a premium brand, and Youngman has started to produce some components for the EuropeStar cars in China - labour-intensive, but premium-priced parts such as leather seats.
Proton would be able to import these high-quality, low-cost components back to Malaysia for fitment to locally-made Protons, bringing down costs while increasing quality. The deal will roll out further models - already a version of the Proton Persona is being engineered as a EuropeStar.
Ultimately the plan is to produce distinct cars in China under a new brand - not EuropeStar, not Proton, not Lotus. Lotus is providing Youngman with consultants to help with design work for several new models that will be launched over the next five years. Proton will be a supplier to the project, perhaps under an extension of the brand-royalty approach, which would generate cash to help the turnaround.
Youngman already has a 1 million sq ft manufacturing facility in Jinhua, and is adding capacity that will enable it to build up to 200,000 vehicles per year. It also has a strategic partnership with Californian electric car specialist ZAP, with the intention of developing electric and hybrid vehicles for the Chinese market - and this could also be part of the new brand's DNA.
Syed Zainal is full of praise for his new partner - and amazingly has compared him to the entrepreneurial chief of Proton's Malaysian nemesis, Naza. "The Beijing government is supportive of this man (Pang) who could be a Tan Sri SM Nasimuddin in the making," he told Bernama.
So it seems that Chinese medicine is proving to be the cure for the "Malaysian patient". And who knows - Proton may have missed out on securing a Western partner - but it might just have found one in the East.
Mark 'Coolbear' Bursa
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