Malaysia’s first national car company Proton and Volkswagen, Europe’s largest carmaker, are said to be close to agreeing a strategic alliance following a meeting reportedly held in New York between Malaysian government representatives and Volkswagen.

A separate report in the Malaysian newspaper The Edge Daily Financial at the end of last week suggested that the two sides are close to agreeing a deal that would involve Proton Holdings spinning off its manufacturing and engineering operations into a separate joint venture that would be 51% controlled by Volkswagen.

It was unclear whether the new company would comprise both Proton’s Shah Alam and the Tanjum Malin assembly plants, or just the latter – the newest and most advanced of the two. Local reports suggest that the new joint venture company would comprise all of Proton’s R&D operations, including Lotus Engineering – the UK-based chassis engineering specialist, and the attached sportscar maker Lotus Cars. Proton Holdings would control the Proton brand and its related domestic distribution operations separately.

Proton’s management has held talks with Volkswagen and other foreign vehicle manufacturers (including General Motors, PSA Peugeot Citroen and Ford) on several occasions in the past. Each time these have failed due to disagreements over asset control, with Proton’s management reluctant to agree a deal that would hand over control to a foreign company. It has been a highly politicized issue, with the previous government under Dr Mahatir Mohammed directly involved in the establishment of the company.

Whether this time around will be any different remains to be seen, but there are reasons to feel a bit more upbeat about the prospects of a deal. Jason Yap, auto analyst at AFFIN Securities in Kuala Lumpur, says “the fact that the shareholders now are involved directly in the talks is a positive indication. Proton management has already presented to Volkswagen their ten year Road Map and it could move on from there”.

The “Ten Year Road Map” includes the launch of the Gen2 saloon model variant in September and the Iswara replacement due out in the first quarter of 2008. Others models, including an MPV, are scheduled to follow. But Proton is struggling to keep these expensive new product development programmes on track and does not have the economies of scale to sustain them on a long-term basis. It produced little over 120,000 vehicles last year, split between a half dozen models.

“Proton’s shareholders are increasingly under pressure to find a way to save Proton” says Mr Yap “especially as the company continues to bleed money”. In the year ending on 31 March 2007, Proton Holdings made a consolidated net loss of MR591.4m, equivalent to almost US$160m. And the prospects for this year are no better, with sales continuing to fall further.

“The current government is increasingly prepared to give up control of the national car company, under the right circumstances, more so than the previous government. As the company’s main shareholder, it is reluctant to provide further finance to Proton and has yet to finalise its policy on subsidizing Proton’s R&D programme,” says Jason Yap.

Tony Pugliese