For Malaysia’s premier national carmaker, life is certainly not getting any easier. Eighteen years after the launch of its first model, the Mitsubishi-derived Saga, the future of Perusahaan Otomobil Nasional Bhd (Proton) has never been so uncertain as sales volumes, revenues and earnings have continued to plummet this year. By contrast, some its main Japanese competitors have seen sales volumes rise twofold and even more this year. Tony Pugliese reports.
Proton’s strongest ally, Dr Mahatir Mohammed, is no longer Prime Minister and it remains to be seen how strongly his successor will feel about future support for the company. How Mr Badawi goes about implementing the expected cuts in ASEAN import tariffs in January 2004 will be indicative of the country’s future automotive sector policy.
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Profits drop continues
Last week, Proton announced a more than 48% drop in pre-tax profits for the second quarter of the current fiscal year (July-September) to RM229m, from RM 443m a year earlier. This was only marginally better than its performance in the first quarter, when pre-tax earnings dropped by over 52% to RM187m. For the first half of the year, earnings were 50.3% lower at RM416m. Such a steep decline came despite an improved product mix, with the higher-margin Waja accounting for roughly 35% of sales compared with a 25% in 2002.
Proton group revenues declined by a hefty 31.8% in the first half of the current fiscal year to RM3.6bn. This reflected not only lower domestic sales volumes, which account for over 90% of the total, but also increasingly stiff price competition from Toyota, Honda and Kia in particular. In the first ten months of the year, Proton’s domestic sales have dropped by around 26% compared with the same period last year, and volumes are likely to struggle to reach 165,000 units in 2003 compared with just under 223,000 in 2002.
In the same period, new vehicle registrations in Malaysia have declined by 8.4% – which means that the overall market decline is almost entirely down to Proton given that it typically accounts for 50-60% of the market. So far this year, Proton’s share of the domestic vehicle market has fallen to 41%, from 50% in 2002. Malaysia’s second national car company, Perusahaan Otomobil Kedua (Perodua), saw its sales slip by less than 2% in the same period. By contrast, non-national car companies increased car sales by almost 64% in the first ten months of the year.
Inevitably, the country’s top component manufacturers, including APM, Malaysia Auto Lighting, Patco, Kris Components, have reported declines of a magnitude similar to that of Proton. Pressure on OE volumes and prices more than offset the buoyant market for replacement parts. Proton’s main distributor, Edaran Otomobil Nasional Bhd (EON), also reported a drop in revenues and earnings of well over a third in the first six months of the current fiscal year.
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By GlobalDataThe industry is struggling to justify Proton’s dismal performance this year as a rare combination of negative factors, and is increasingly inclined to see these latest developments as a taste of things to come. While there have been some one-off developments this year, it looks increasingly likely that Proton’s privileged position is coming under permanent pressure, and there a feeling that the need for the company to re-invent itself is becoming increasingly urgent.
Cheaper and better cars to come?
While car companies rarely are drawn into making comments on new product programmes, it is widely expected that next year will be a big year for new model launches for the company. It is expected that the two-box Satria model, while not a great seller, will be replaced in 2004. Other new product launches that are expected include a new mid-sized passenger car and the replacement for the Iswara from late 2004/early 2005.
Local industry observers reckon that consumers are anticipating better car-buying times ahead. The expectation of new Proton models, which tend to be made cheaper than their predecessors as more of the design is brought in house and more efficient manufacturing processes are introduced, are thought to have delayed purchasing. There is also the expectation of lower prices across all brands resulting from forthcoming cuts in import duties – another reason for delaying purchases. So a badly needed rebound in sales for the company can be expected in 2004.
Proton this year has also been confronted with very strong competition from the Toyota and Honda, which launched the Vios and City compact cars respectively at the beginning of the year. With high levels of regional content, and with more relaxed local pricing controls, the two Japanese companies were able to claim unprecedented success in this market.
Domestic market conditions unlikely to improve
While a number of negative factors seemed to have converged this year for Proton, it does not necessitate that 2004, in hindsight, will be judged as a year of exceptional; challenges for Proton. If this were the case, then there are likely to be many more exceptional years to come – unless, that is, the government intervenes heavily to offset the effects of competition. As things stand, it looks likely that competition in the Malaysian car market will continue to increase.
Proton is clearly not diversified enough geographically to avoid the regular recurrence of “bad years” like 2003. Also, its sales volumes are too low to sustain a programme of new product development that would allow it to keep up with real market conditions. R&D budgets are a significant burden as it is, given the limited return in terms of sales volumes, and product replacement cycles are typically very long. Improvements in production efficiency merely help the company stay in touch with its competitors.
In other words, the company is treading water and no amount of “time to adjust” will change this. Both the government and the company’s management are beginning to take this into account. Management is now starting to look seriously at options to diversify the company’s geographic dependence and may also be taking a look at diversifying the nature of its core business core.
Malaysia’s domestic car market, while the largest in the ASEAN trade block, is close to maturity. The potential size of a sustainable annual vehicle market in Malaysia is not too far away from what it is at present. At the same time, the government is under increasing pressure to reduce protectionism not only from its regional trading partners; Malaysian consumers are also increasingly reluctant to pay abnormally high prices for their cars. This can only mean bad news for Proton.
The government has announced that it will reduce ASEAN import tariffs in January 2004, though it has not said by how much. It is widely expected that tariffs on ASEAN cars and parts will fall to 20%. Unless other taxes are adjusted to compensate for this, Proton will find it difficult to compete even with a range of new models. As we have seen this year, even minor changes in domestic market conditions can have substantial effects on the company’s performance.
The Malaysian government risks isolating itself if it maintains a policy of discriminate taxation against imports for too long. With a population of 23m, its domestic market is small. The more Malaysia delays implementation of regional trade pacts, the more it will miss out on foreign direct investment, the establishment of regional supply operations and access for its products to neighbouring markets.
Halting shrinking overseas presence?
Proton’s success in overseas markets to date has been limited. Exports volumes peaked in the mid-1990s at around 26,000 units and have declined ever since to around half that level. The company has found it particularly difficult and costly to maintain its presence in Europe. Here, relentless competition from other Asian vehicle manufacturers, such as Hyundai-Kia, means that pricing has to be kept especially keen.
The company is looking increasingly at Middle-Eastern and North African markets as a means of increasing export volumes. But here, Proton has less protection than in its home market – so making money will also be tough. This is likely also to be the case in China, where it is planning a new assembly joint venture. In Iran, which has a more regulated and low-tech vehicle market, is prospects are better. Overall, however, overseas sales will struggle to make up for its shrinking domestic market share.
Exit strategy?
Unless its strategy to expand into Iran and China provide ample reasons to be optimistic – and quite soon – Proton is likely to be looking for an exit strategy from the car business. The most likely way to accomplish this would be to sell its domestic production facilities to a foreign vehicle manufacturer. This would mean dropping the Proton name, and remaining a domestic vehicle distributor at the most. Local unnamed industry analysts suggest that Proton’s new assembly lines are very modern, and flexible, and that there are still some global vehicle manufacturers that lack capacity in the ASEAN region. Talks have been held in the past with the likes of Ford, GM and Mitsubishi, but so far none have been successful.
Considering that most of Proton’s business is in domestic vehicle production and distribution, the sale of its Malaysian assembly facilities would indeed represent a radical upheaval. Proton is still a cash-rich company, so it remains to be seen where it would go from here if it did sell its Malaysian vehicle operations. The company could remain in control of the UK’s Group Lotus and in the last few months stories have been circulating that it has been holding takeover talks with MV Augusta, the Italian high-performance motorcycle manufacturer. A high performance vehicle and motorsports company? It remains to be seen whether the present management has the stomach for such a transformation. At some stage, however, something will have to be decided.
