Proton’s vast unused assembly capacity and its strong distribution network in Malaysia are attracting renewed interest from overseas vehicle manufacturers, writes Tony Pugliese, as our man in Asia takes a closer look at recent developments in the ongoing saga of the country’s national automaker.

Alado Bumi – the Malaysian importer and distributor of China’s Chery cars, represents the latest addition to an expanding list of overseas car companies seeking a tie-up with Malaysia’s struggling first national car assembler.

Last week General Motors CEO Richard Wagoner confirmed that his company recently resumed acquisition talks with Malaysian government-owned Proton, although he was quick to point out that these were still at a preliminary stage.

Malaysia’s financial minister, Nor Mohamed Yakcop, confirmed that GM and two other foreign carmakers, PSA Peugeot Citroen and Volkswagen group, are currently actively negotiating a strategic partnership with the Malaysian automaker.

Three local companies are also said to be interested in acquiring Proton, although it remains to be seen what a domestic company could offer Proton that the Malaysian government hasn’t already tried. Two are vehicle distributors, the Sime Darby and Mofaz groups, and the third is the Naza Group, Kia Motors’ assembly and distribution partner in Malaysia. The latter is the most likely among the domestic suitors, provided it can depend on the support of Hyundai-Kia.

Proton above all requires a strong global partner capable to supplying advanced product technology in an increasingly competitive domestic market, something that is not available from a domestic company. Naza group’s founder, Tan Sri SM Nasimuddin SM Amin, however, is confident of being able to turn around Proton by revamping its products using resources currently available to Proton and to the Naza group and with a renewed export push into some of the major Asian markets, including India.

Alado Bumi’s interest in Proton is understood to be restricted to sub-contracting assembly of three or four Chery models for sale in the Malaysian market and possibly also for export to other Asean countries. Initial volumes would be in the region of 2-3,000 units annually at the budget end of the market – not something Proton will get excited about and may possibly view as a threat.

Proton has been losing money from its export activities in recent years and this is unlikely to change in the foreseeable future, whether as part of the Naza group or as an independent entity. It would also be surprising if Hyundai-Kia would allow a company it did not own to supply major markets overseas. This begs the question as to whether Naza’s involvement represents a veiled bid from Hyundai-Kia, and/or whether there is an understanding that Hyundai-Kia would become the senior partner later on.

Proton has been losing market share at home at an alarming rate, from 65% of the new passenger car market in the late 1990s to 32% last year, when it was overtaken by the country’s second national automaker, Perodua. Proton’s largely in-house Gen2 model has also failed to lift exports significantly and overall output last year is estimated to have been less than 130,000 vehicles, split between half a dozen models. The company has an assembly capacity, when fully staffed, of over 600,000 units annually between its two plants.

The three foreign automakers are among the global top 10 with the weakest presence in south-east Asia. The only exception to this is GM, which has a strong pickup truck business in Thailand. Hyundai-Kia, too, has failed to build a significant presence in the region, with the exception of Malaysia (through its partnership with the Naza group).

Proton last week announced that the three-month joint feasibility study launched in September with PSA Peugeot Citroen has been completed and that the two parties are now “in the process of evaluating the findings”. Areas covered in the study include the supply of technology in the form of engines and other parts to Proton, which would help reduce its R&D burden, as well as the supply of complete new products to help reverse Proton’s shrinking domestic market share. The issue of PSA taking a stake was not a part of the joint study, as these are matters for each to consider separately.

GM tried to acquire a stake in Proton several years ago, as did Ford and other foreign car companies, but failed to agree terms. The government’s reluctance to relinquish control of the domestic automaker and issues such as the future of the Proton brand where the main reasons why the talks failed. The government was also firmly against selling one of Proton’s two assembly plants separately.

That was under a government controlled by Mahathir Mohammed, the man behind the creation of Proton back in the early 1980s – in his early years as the head of the government. The current Prime Minister, Abdullah Ahmad Badawi, has perhaps less of a personal attachment to Proton but is nevertheless unlikely to sell off more than what is necessary to a foreign buyer.

Nevertheless, the renewed interest in Proton comes as unconfirmed sources suggest that the government is prepared to let more than 50% of the equity in Proton fall in to foreign hands and with it majority control of the national car maker. This is thought to be behind the renewed interest from PSA, GM and Volkswagen.

“The Malaysian government is under increasing pressure to find a solution to the Proton problem”, said Kavan Mukhtyar, head of Frost & Sullivan’s transportation division in Kuala Lumpur, Malaysia. “Malaysia is committed to opening its automotive market under the ASEAN free trade agreement as well complying with WTO regulations by 2010”.

With Proton’s losses mounting and with competition in its domestic market and elsewhere strengthening month by month, the government is clearly under pressure to find a lasting solution. ”As I understand it, the government is currently reviewing its position with regard to Proton, with a view of making a decision on a strategic partnership by the second quarter of 2007”, added Mukhtyar.