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Bumpy road for
Proton
By Anil Netto
PENANG - The departure of the chief
executive officer of Proton Holdings Bhd suggests
that Malaysia's national car is set to make some
radical changes to stem its slide. Mahaleel Ariff
was strongly backed by Proton advisor and former
premier Mahathir Mohamad, who felt he had done a
commendable job in keeping Proton profitable and
cash-rich despite a rising influx of cheap and
technologically advanced imported cars. But in the
end, Mahaleel's service contract was not renewed
by the Proton board after he was offered terms
that he found unacceptable. Proton is now
controlled by Khazanah Nasional Bhd, the
government's investment arm, which holds a 42.7%
stake in the company.
Whatever Mahathir
may have thought of Mahaleel's achievements, no
one can deny that Proton was rapidly losing its
once-commanding share of the domestic market.
Mahaleel's departure puts an end to a bitter
boardroom tussle that had drained the energy of
the firm and stalled radical action to revamp
Proton. He was also seen as an obstacle to
Volkswagen, which had entered into a strategic
alliance with Proton last year, assuming a
significant stake in Proton.
Mahathir has
said that he is against Proton being owned by a
non-national. Whither Mahathir now? He has been so
closely allied to Proton that the departure of the
CEO he had backed must have been a major blow. And
indeed, he sounded bitter and even sarcastic. "I
think the removal of Tengku Mahaleel must result
in improvement; I am sure now sales will pick up,
and no more cars are too small for people to get
in," he said. When asked about talk that Proton
might even appoint a foreign CEO now, Mahathir
responded, "Actually, Malaysians are not capable,
therefore, we should get foreigners, including
[for] running our country also. We can have a
foreigner as a Prime Minister ... why not, if he
has the brains ...?"
Mahaleel's departure
is the latest twist in an explosive saga that has
spilt out in the open. Earlier, Minister of
International Trade and Industry Rafidah Aziz,
once a staunch supporter of Mahathir, openly
exchanged views over the tens of thousands of
licenses to import foreign cars (known as
"approved permits" or APs) for sale in the
domestic market. Mahathir had complained that the
influx of imported cars and the abuse of the
permits had undermined Proton, which has long been
accustomed to a protected domestic market,
achieving only limited success in overseas
markets.
Introduced in the name of
affirmative action to support indigenous
bumiputera entrepreneurship, APs are widely
seen as a tool of patronage, enriching a small
coterie of well-connected individuals and firms.
The permits themselves are much coveted and have
been traded for a tidy profit of up to 30,000
ringgit (US$7,900) each. The AP controversy has
since assumed a life of its own with critics
slamming the allocation of thousands of such
permits to a few chosen individuals.
But
lost in the uproar over APs was the issue that
started it all - the viability of Proton in the
coming months in an increasingly open and
competitive domestic market. Malaysia slashed
import duties to 20% on ASEAN cars on January 1 as
it tried to comply with the ASEAN Free Trade
Agreement (AFTA). But it has delayed further
slashing duties to the required level of below 5%
until 2008.
Mahathir himself had drawn
attention to the challenges facing Proton during
an extraordinary session earlier this month when
he basically pointed to external factors to
explain the numerous challenges that Proton faces.
Apart from complaining about competition from
imported and under-declared cars, he grumbled that
cars with a lower local content than Proton's had
also received the "national car" status. What's
more, he added, Proton had to use locally sourced
components as a form of national service to
support local component makers, so it was unable
to be as competitive as its rivals, which could
source cheaper components from elsewhere. "Fair
competition means Proton should be [relieved] of
the burden imposed upon it by the government," he
said.
But his public outburst raised some
valid questions. "When you are an ex-prime
minister and you say certain things should have
been done, you should expect that the first
question that others would ask is why you did not
do the things you want done now when you were
prime minister," said P Gunasegaram in a column
for the Edge Daily business paper.
These
outbursts, the boardroom friction and the AP
controversy wasted valuable energy at a time when
Proton had to come to terms with serious
challenges ahead of AFTA. And the folks at
Khazanah knew that drastic action had to be taken.
Though Proton recorded a 59% rise in net profit to
RM810 million for the financial year ended March
31 on the back of increased production and sales,
it is likely to find it harder to maneuver through
the bumpy road that lies ahead. More and more
foreign cars from Japan, Korea and China are
penetrating the local market as import duties are
lowered. Some of these cars are cheaper, have
better features and are technologically advanced.
The writing was on the wall for Proton.
Last year, Proton's market share slipped to 44%
from 48%. And in the first half of 2005, Proton's
share in the passenger car sector slid further to
40% though total vehicle sales in the country was
forecast to rise by 7% to 520,000 for the whole
year. To further rub salt in Proton's wounds,
rival national carmaker Perodua's market share
inched up from 30 to 32% over the same period.
In a way, it was always going to be tough
to have the man who was behind Proton's birth to
be still in the driver's seat 20 years on. Though
Mahathir is in theory only the "advisor" to
Proton, his opinions carried enormous weight
within Proton and it would have been the brave CEO
or director who would openly disagree with him. "I
own no shares in Proton and I am not being paid a
single cent in Proton as an adviser," said
Mahathir. "I am doing this out of love which some
people may not understand." The truth is Mahathir
was battling to save his legacy, his pride, to
prove that he was right in his vision to see
Malaysia build a domestic auto engineering
industry from scratch. That dogged determination
could have blinded him to the reality that Proton
faces an awesome struggle ahead. Or perhaps, he
realized Proton was on the ropes and chose to come
out with guns blazing.
Some say Mahathir
was the last person to understand the demands of
surviving in a competitive market. "Instead, he
understands crony capitalism," political economist
Andrew Aeria told Asia Times Online. "If after
nearly two decades Proton is not ready for free
trade, when will it be? Thus, under his watch, I
don't see Proton going anywhere once AFTA kicks
in. Even now, Proton is looking more like a
national liability than a corporate winner in the
global car manufacturing sector."
Critics
had pointed out that Malaysia, with a population
of 26 million, simply did not have a large enough
domestic market to achieve economies of scale. It
needed to sell at least double its current
production level of over 150,000 cars. Skeptics
felt that Malaysia did not have a solid auto
engineering and design base to ensure that Proton
got off to a running start. Thus, it was always
going to be heavily reliant on foreign technology.
While Mahathir may have been sincere in wanting to
create an indigenous auto engineering industry,
the reality was that the country simply did not
have a comparative advantage, a competitive edge
or a large enough domestic market to sustain the
venture.
For a while, Proton's alliance
with Mitsubishi worked as fairly reliable Proton
cars, with significant imported content and
technology, rolled off the production lines into a
heavily protected market. But Mitsubishi soon ran
into its own problems, and new Proton models did
not come out fast enough to keep up with market
expectations. Much of the initial buzz surrounding
the national car faded as newer Proton models
looked decidedly dated and distinctly similar to
the models of yesteryear. The expected transfer of
technology was not taking place quickly enough.
Mitshubishi, having freed itself from the
shackles of Proton earlier this year, has now
returned to add more misery to its former trainee.
It is back with a vengeance in the Malaysian
market with familiar models such as the Lancer and
Colt, which once flooded the streets of Malaysia
in the 1980s, in addition to its Evo IX. Proton is
also facing competition from other local cars such
as Perodua (partnered with Daihatsu), which
recently launched the well-received Myvi, and
Naza, which has an even lower local content.
Though Proton has a huge pile of cash
reserves, these are being used up for research and
development, some of it via its Lotus design arm
in the UK. Such R&D costs have to be spread
over a relatively small production output, raising
the cost per unit. Up against global giants,
Proton also faces huge problems in penetrating
foreign markets and meeting exacting standards. In
the past, it has had to sell its cars at close to
cost to try and gain a foothold in these markets.
As one industry expert said, "The number one
indicator of a successful auto industry is
exports."
Ever since its Mitsubishi days,
Proton has been plagued with niggling finishing
problems - the most well known being its
unreliable power windows. Such bugs have not
helped Proton's image, especially at a time when
there is a growing perception that its rival at
the smaller end of the range, Perodua, offers
better value for money. In truth, one of the
biggest problems Proton faced was its image as a
"national car" drenched with patriotism and the
politics surrounding it. This prevented decision
makers from selling off a substantial or
controlling stake in the company for fear of
losing national pride or to save Mahathir's face -
until now.
But mustn't Proton have been
doing something right to earn those profits and
pile up those cash reserves? Actually, that cash
was earned off the long-suffering Malaysian public
who had to bear the burden of higher car prices in
a protected market for years. "Malaysian taxpayers
have subsidized a car project and a company that
increasingly looks commercially unviable despite
the many years of subsidies and protection it has
received," Aeria pointed out. Not only that, there
was little incentive to improve the poor state of
public transport in Malaysia probably out of fear
that it would undermine domestic car sales -
Proton's bastion of survival. Proton now relies
heavily on easy credit. Its Gen 2 model, for
instance, is being sold at zero down payment
followed by zero installments for the first three
months.
Unless something is done - and
fast, Proton will struggle to stay afloat in a sea
of competition. For now, the carmaker is striking
back with the release of its latest model, a slick
1.2 liter Proton Savvy, with automated-manual
transmission, which touts German quality
controllers at its plant and a tough, sturdy
image. A replacement for its Renault-powered Tiara
model is also on the cards, with an eye on the
China market. But obviously, as shareholder
Khazanah seems to have realized, it will take a
thorough and deeper revamp to steer Proton in the
right direction - even if it means swallowing
gulps of national pride and allowing Volkswagen to
lead the way.
Anil Netto is a
freelance journalist based in Malaysia, covering
political and social issues. A former accountant,
he is currently joint coordinator of Charter
2000-Aliran, a network promoting press freedom in
Malaysia.
(Copyright 2005 Asia Times
Online Ltd. All rights reserved. Please contact us
for information on sales, syndication and republishing.) |
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