Puzzling
prescription puts Proton in a pickle
By Ioannis Gatsiounis
KUALA LUMPUR - The history of national car maker Proton has mirrored
Malaysia's. In its fledgling days in the 1980s it dared to dream big. In the
1990s signs of success bred pride, then complacency. More recently, foreign
competitors have clouded its future with potholes and question marks.
In both cases, worries have been put off with life support - through an import
tariff scheme for Proton, and an affirmative-action program for the majority of
Malaysians - while reality has become harder to ignore: success will depend on
making shrewd changes, some no smaller than overhauls.
Proton's domestic market share dropped from 60% in the mid-'90s to less than
half in 2003, and to 43% this year. Moreover, the car maker has had little luck
tapping foreign markets. In their diagnosis for the company, analysts - once
hailing Malaysia as the Detroit of Asia - have been prescribing nothing less
than a foreign tie-up.
Last week the prescription appeared to have been filled, with Proton and
Volkswagen announcing a long-term strategic alliance. Under the plan, Proton
will produce two VW models for Southeast Asia. The German car maker will give
Proton access to VW's global distribution network, which Proton will use to
boost exports. Proton will also be able to use Volkswagen engines and other
forms of technology, according to representatives on both sides of the deal.
If what is being hailed as a "deal" actually goes through: technically it
is currently no more than a memorandum of understanding (MoU). It's worth
remembering that Proton had a promising MoU with Rover not long ago, only to
see it fall through.
Herbert Keppler, head of alliance and partner relations at Proton, admits that
the VW-Proton MoU is "broad", with "many contracts to sign". But he's confident
many of those will be squared away in the next four to six months.
Assuming the alliance is inked as planned, though, many ifs will still loom -
particularly whom the deal will benefit most. Volkswagen may be Europe's
biggest car maker, and it may be moving more cars in China than any other car
maker, but it has yet to get a foothold in Malaysia's crowded market.
"This gives us a base from which to service and distribute without making an
extensive capital investment," a spokesperson with VW AG in Singapore said of
the deal. An equity stake for VW is not part of the plan, and some see this as
necessary to produce long-term benefits for Proton.
But with or without equity, Proton sees the deal as having a win-win outcome.
It hopes to use some VW platforms to build its own cars. Keppler said the
possibility of producing a joint vehicle is likely and may hit the road in a
few years.
For now, however, it looks as though Volkswagen will be the first to gain.
Besides building 15,000 VW units in Proton's production facilities by next
year, it will soon begin using Proton's distribution channels.
The tie-up is confusing to some. "What's puzzling is that Proton wants to sell
and distribute Volkswagens," said Chips Yap, editorial director of Autocar
ASEAN magazine. "Doesn't that distract you from your national mission as
national car maker?"
Proton executives don't see it that way. They emphasize that the deal could
boost its exports - essential, say analysts, if Proton is to produce the
economies of scale necessary to bring costs and sticker prices down to a level
competitive with Japanese and Korean imports, which have steadily been eating
away at Proton's domestic market share, despite Malaysia slapping a 100% excise
tax on all imported cars. (Under the Association of Southeast Asian Nations
Free Trade Agreement, Malaysia is required to create a near-level playing field
by 2005, but the government said it would not reduce duties to the required
level until 2008.)
"Could" is the operative term. Spokespersons on both sides of the deal said the
chances that Volkswagen will assist Proton in, for instance, accessing China,
the world's fastest-growing auto market, are slim.
Even if VW did, it's unlikely the hand-holding would get Proton very far. By
the company's own admittance, according to one report, it will need to produce
20 new vehicles over the next six years to penetrate most foreign markets.
Proton has suffered, even domestically, because it has been slow to introduce
new models.
Proton's reputation, and its export potential in turn, has been further damaged
by unreliable quality and poor customer service over the years. Though Proton
has resolved some points in these areas, Volkswagen's presence is expected to
help.
Quality-wise, as Keppler points out, there's bound to be some transfer. "We
really can't have two quality standards in one plant," Keppler said. "They will
incorporate their quality into ours and make our cars more competitive for
export."
Proton will need to be more competitive if the 35% government-owned car maker
expects to maximize the partnership and pierce foreign markets. According to
the MoU, VW says it will allow Proton to be part of its global purchasing
network, so long as Proton reaches sufficient quality and cost benchmarks.
If it's not careful in the pending deal, Proton will give a lot away, and gain
little. It can't underestimate its task: it is currently producing only about
200,000 vehicles annually for local consumption, and a mere 1,000 for export.
Pending deals won't change that fact. Nor will false hype; as Malaysia's former
autocrat and current special adviser to Proton, Mahathir Mohamad, said last
year, Proton "has become a success. Proton cars have been exported to England.
We also export to Turkey, Egypt, Lebanon and many other countries."
At best, the MoU can be viewed as a good start down a long road.
Ioannis Gatsiounis is a New York native who became a freelance foreign
correspondent for various US dailies after moving to Indonesia in 2000. He has
since co-hosted a weekly political/cultural radio call-in show in New York and
resettled in Malaysia.
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