Home >Industry >Manufacturing >Malaysia eyes sale of Proton as Mahathir Mohamad’s auto dream dies

London/Kuala Lumpur: Proton was supposed to drive Malaysia into the future—not into a ditch.

In its day, automaker Proton Holdings was a source of national pride and the centrepiece of a bold strategy by Mahathir Mohamad, Malaysia’s leader for more than two decades, to turn his country into an industrialized powerhouse equal to Asian Tigers like South Korea and Taiwan. The former prime minister founded the company in 1983, calling its first sedan, the Saga, an icon of “national dignity."

Mahathir’s dream is now in tatters and Southeast Asia’s first auto brand is in severe financial trouble, even after receiving more than $3 billion in subsidies since its foundation. Proton is seeking to sell a stake of as much as 51% to a foreign buyer in order to keep factories open and develop new models.

After months of talks, Proton parent DRB-Hicom’s board plans to meet this week to discuss proposals from China’s Zhejiang Geely Holding Group Co. and France’s PSA Group, a person with knowledge of the situation said Friday, asking not to be identified because the deliberations are private. DRB-Hicom declined to comment on the sale process.

Proton’s travails are symbolic of Malaysia’s broader failure to break out of what economists call the middle-income trap. Despite stacks of studious white papers and a raft of mega-projects intended to jump-start productivity, growth in gross domestic product has declined below 5%, trailing government targets, and a quarter of the population receives aid from Prime Minister Najib Razak’s government to top up low incomes.

Mahathir’s legacy

With a major part of his legacy at risk, Mahathir, who led Malaysia from 1981 to 2003, is strenuously opposed to giving foreign investors control over Proton, which was privatized in 2012. “My personal view is that it must remain a national car," the 91-year-old said in an interview in Putrajaya, the purpose-built capital outside Kuala Lumpur that was another signature project during his tenure.

“It is a national car industry. It’s not just about a car. It’s about engineering. A country without engineering skill and knowledge will never become a developed country," he said.

Proton was conceived as both a statement about Malaysian-style industrial planning—proof that a developing country could haul itself to the commanding heights of the global economy—and a practical source of inexpensive vehicles for Asian consumers. When it was launched in 1985, the Proton Saga sedan started at just under 18,000 ringgit, or about $7,200 at the time, and sold briskly in Malaysia and elsewhere in the region, as well as the UK.

Yet despite the Saga’s patriotic origins, foreign technology played a significant role under the hood. The sedan was based on the chassis of Mitsubishi Motors’ four-door Lancer Fiore, and the Japanese company provided major components for many of Proton’s later models. It would take until the late 1990s for Proton to be able to develop new cars completely on its own.

Tariff protection

For most of its history, Proton benefited from tariffs of as much as 300% on imported cars. Combined with rules that allowed consumers to spread cheap car loans over as long as nine years, the company was able to establish a dominant position in the Malaysian market.

Yet even with that home-field advantage, Proton’s success proved fleeting. At the high-water mark of sales in 1993, Proton accounted for 74% of new cars sold in Malaysia. In 2016, a decade after the government slashed tariffs on foreign-made vehicles as part of its participation in a Southeast Asian free-trade pact, the figure was 12.5%.

Aside from tariffs, analysts point to multiple culprits for Proton’s failure to compete with international automakers. For example, in its short history the company’s cars have racked up an unenviable reputation among Malaysians for quality problems. One notorious issue involved power windows that would jam shut, requiring drivers to open their doors and lean out into the road to hand over cash at toll booths.

Dismal record

Meanwhile, Proton’s record of acquisitions has been dismal. Lotus Cars, the iconic British sports-car manufacturer that Proton bought for £51 million in 1996, has since become something between a curiosity and a non-entity among consumers. In all of 2016, Lotus sold just 339 cars in its home country, according to registration data from the Society of Motor Manufacturers and Traders in London.

Another European foray, a €70 million ($77 million) purchase of Italy’s MV Agusta in 2004, ended in embarrassment. After failing to revive sales and manage its debt, Proton unloaded its controlling stake in the motorbike producer a year later for one euro.

A broader challenge: With cars becoming ever more technologically advanced, keeping up with developments from the research & development departments of globe-spanning producers like Toyota Motor Corp. and Volkswagen AG is increasingly difficult for carmakers without similarly deep pockets. The experience of smaller European producers is instructive. The UK, Sweden and Czech Republic have all seen once-proud national brands absorbed by global auto giants over the last three decades.

Fading symbol

Finding a foreign partner for Proton, which has about 12,000 employees, is a logical solution for “an inefficient, loss-making company that was a national symbol but really is deteriorating," said Peter Mumford, the head of Southeast Asia coverage at political consultancy Eurasia Group. “If the brand is preserved, and jobs are preserved, this may end up being a popular decision."

Privatized in 2012 with a sale to DRB-Hicom, a conglomerate controlled by Malaysian billionaire Syed Mokhtar, Proton’s search for a buyer began last year. With sales flagging, Malaysia’s government stepped in April 2016 to make a 1.5 billion ringgit ($347 million) loan to the carmaker, which allowed it to avoid defaulting on obligations to suppliers. The deal came with a significant catch: Proton would need to find a major new investor to put it on a more sustainable financial footing.

The shape of any investment is still up in the air. Under one scenario being discussed, Geely—which also owns Sweden’s Volvo brand—would take a large minority stake in Proton itself while purchasing a majority of the Lotus subsidiary, the person with knowledge of the situation said. By contrast, PSA Group would prefer to acquire majority control of Proton as a whole, another person familiar with the process said. Both companies declined to comment.

DRB-Hicom shares rose 12% to 1.82 ringgit in Kuala Lumpur on Wednesday, reaching their highest level in two years. Geely’s Hong Kong-listed unit climbed 0.7%, while PSA declined 0.7% in Paris.

Political feud

The Malaysian government’s willingness to cut Proton loose may have been a function, in part, of Mahathir’s ongoing feud with Najib, formerly his political protege. Mahathir has campaigned for Najib’s removal, arguing that graft scandals made him unfit to lead. Mahathir served as Proton’s chairman from 2014 until last year, before resigning as relations with the current prime minister worsened. Najib has denied any wrongdoing.

Mahathir’s position in the wilderness “may make it politically slightly easier" for a sale to take place, Mumford said. For his part, Mahathir largely agrees, claiming that “the government seems to be set on bankrupting Proton and selling it off, because I think it is regarded as my baby."

Najib’s government argues that Proton can thrive under foreign leadership, gaining capital and expertise as an arm of a larger carmaker. A partnership “will allow Proton to expand its technology and marketing base," said Madani Sahari, the chief executive officer of the Malaysia Automotive Institute, a public-sector body that develops policies for the industry. The goal, Madani added, is to “open opportunities for more exports from Malaysia’s supply chain."

Malaysian carmakers

Nor is Proton Malaysia’s only carmaker—or even, these days, its largest. That honour belongs to Perusahaan Otomobil Kedua Sdn., or Perodua, which sells Malaysia’s most popular car, the Myvi compact sedan. Yet unlike Proton, Perodua has never aspired to be fully independent. Instead, most of the major components in its cars come from Japan’s Daihatsu Motor Co., a shareholder in the company.

Still, as Malaysia tries to fulfill a national goal of becoming a “high-income society" by 2020, it’s probably time to give up on dreams of becoming an automotive power, said Bridget Welsh, a political scientist at John Cabot University in Rome who specializes in Southeast Asian states.

Neighbouring Thailand, which never adopted a national car policy and has been far more welcoming to foreign direct investment from Japanese automakers, has a much bigger auto sector. Just under 2 million cars were produced in Thailand last year, compared with about 545,000 in Malaysia.

“Mahathir’s vision of development was highly focused on traditional models of industrialization," Welsh said. “Where does Malaysia’s competitiveness lie? It doesn’t lie in the car industry," but rather in services and light, high-tech manufacturing, she said.

Dr. M

Mahathir, once a figure so dominant in Malaysian politics that he was referred to simply as “Dr. M," is convinced Proton can still be turned around. But he said he’s been barred from contacting anyone at the company since his resignation, leaving his ideas restricted to the drawing board. He said he’s even gone so far as developing new Proton concepts of his own with help from Bufori Motor Car, a niche luxury producer, and been ignored.

“We can go into the Chinese market, develop the engine, new models of cars. Proton can compete," he said. “What is the point of giving the company to foreigners? It will revert to the same situation where foreigners just assemble their cars here. We learn nothing." Bloomberg

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