The End Of A Saga

Proton is Malaysias only national car company, and was set up since 1984. For two decades, Proton had dominated the local passenger car market, mainly due to support granted by the Malaysian Government, in the form of higher tariffs and custom duties imposed on foreign car marques. Although Proton cars were not cheap by any means, its cars were the most affordable by the average Malaysians, despite poor customer service, poor quality and lack of new or innovative models. Believe it or not, Proton Saga, which was launched more than 20 years ago, is still on sale today and it was in fact the "best" selling car for Proton in year 2006! For many years during its hey days, interested buyers were not even allowed to test drive the cars! Talk about arrogance!!

Then came ASEAN Free Trade Agreement (AFTA), Malaysia has no choice but to reduce tariff on ASEAN made cars and with the aggressive marketing coupled with innovative and inexpensive models launched by popular car companies such as Toyota, Honda, Hyundai and Kia, Proton sales started to take a major dip in the last 2 to 3 years. In the face of fierce competition, Proton had little strategy, had limited new models to launch, their cars remained to be of poor quality and low-end technology and also embarked on the wrong type of marketing plan! All these factors contribute to a significant drop in market share, to the extent of losing the market leadership position to Perodua for the first time in history and incurred huge losses. As if these are not bad enough, Proton even suffer from negative cash flows! Many car dealers and local automotive suppliers were forced to close down or downsize as a result of this "catatrosphe"!

As expected, the Malaysian Government tried to rescue Proton from their worst disaster or even closure. First they replaced the Top Executive, followed by acting as the intermediary to initiate a strategic alliance with a foreign car maker, with the intention to seek transfer of technology and expansion of market base. Fair enough, but surely the Government had to offer something significant in return. Few foreign car makers come and go, all in all, there is only one genuine and serious party involved, being VolksWagen (VW). The German car maker has long wanted to expand into South East Asia, and Malaysia appears to be an ideal market base to be in, given that Malaysia has the largest automotive market in South East Asia. In addition, Proton fits the bill to be a suitable partner or target, given Protons state-of-the-art facilities (but hugely underutilized) in Tanjong Malim. For the matter, Proton have only less than 50% utilization of its capacity! So the negotiation started in October 2004, which was more than 3 years ago! It was indeed a long drawn saga, having gone through a series of go, no go speculations. It is widely believed the complication arises due to Malaysian Governments reluctance to forgo management control and majority equity ownership.

Lets look at the the other side of the spectrum, what can VolksWagen bring to Proton? First of all, VW is a global brand and is the fourth largest car maker after Toyota, General Motors and Ford. It also owns other global brands such as Lamborghini, Bentley, Skoda and Audi. For the record, VW has successfully transformed Skoda from a loss-making entity to a profitable one in a matter of few years. Also, VW can certainly bring to the table state-of-art technology in automotive engines, and its vast marketing network and plan.

So the Malaysian Government has vowed that Proton needs a foreign partner to salvage its pride and rekindle its sales and marketing direction and in fact has set a clear deadline to finalize the negotiation. With all signs point to an agreement by end of the year, the event took a major U-turn yesterday as the Government announced the end of all negotiations. What has led to such dramatic U-turn after such a long negotiation?

Lets look at recent events from Proton. Proton launched a new model (named Persona) in August 2007 and its sales to date were encouraging (having achieved bookings of about 22,000 units since). Proton also clinched a couple of car deals and entry into China and Iran. In addition, Proton has improved its car quality and also plans to have further new launches in 2008.

It is for the above reasons that the Malaysian Government ended talks with VW. In my opinion, it is indeed a short sighted view from the Government. Do they really think Proton can conquer the market on its own? Think again! First of all, Proton still lack the platform for long term growth. They still do not have a formidable brand name, they still lack quality if compared to other popular brands, they still do not have the economies of scale (in production and sales), they still do not have a powerful engine to compete with the rest of the world, they do not have sufficient funds to spend on Research and Development, and even if they do, money spent does not necessarily deliver results (just look at Protons Campro Engine)! In addition, their export market is still small, and so far only managed to penetrate mainly less developed or developing countries. What about marketing plan? History has suggested that they are simply not good enough to compete with the best! So if the Government thinks that such short-term rebound can deliver long term sustainability, they are again making the biggest mistake!

Malaysian local banks have sought foreign strategic alliance, such as AMMBs alliance with ANZ, Affin with Bank of East Asia, etc. In telecommunication, Digi is run by Telenor and is hugely successful! In fact, Digi was the most profitable (by returns) in Asia Pacific in 2006! At the end of the day, everyone is a winner, if only the Malaysian Government adopts the same philosophy in the case of Proton and the local automotive sector!

So instead of raising the bar and potentially becoming a regional champion, looks like Proton will remain mediocre or at best, the local champion or in Malay, the "Jaguh Kampung"!