Wednesday, January 14, 2009

Pride & Proton

It was a couple of interesting days for Proton. First, Proton chairman Nadzmi Mohd Salleh told the New Straits Times that it had been approached by US and Japanese carmakers looking to expand overseas as their domestic markets shrink. The firm may sign collaborative agreements, or ask them to buy a controlling stake, he said. 'If they buy a stake in Proton, they can get the 29 per cent (shareholding) that Proton has. They know what they want. It is up to shareholders to decide if they want to sell Proton,' Mr Nadzmi reportedly said.

'If Proton is a problem child, we have to let it go. But if you want to enhance Proton's capability and also the viability over a period of difficult times, then the collaboration with the foreign carmakers has to take a different form.' Mr Nadzmi said Proton may also strike a partnership with an Indian car company.

The government has urged it to forge a partnership with a foreign automaker to give it the expertise and economies of scale that it needs to survive. However, talks with Volkswagen and General Motors have collapsed, with the stumbling block reputed to be demands for a stake in Proton.

The very next day, the company clarified that "oops, that's not the case", and that Proton Holdings Bhd has no intention of asking interested carmakers to buy a stake in the company. The retraction added that it is only open to "collaborative agreements" in relation to potential product developments between Proton and the collaboration partner. Referring to a Business Times report "US, Japan carmakers show interest: Proton" published the previous day, the company clarified that there are no plans to offer shares for sale for the time being, and any decision lies on its controlling shareholder, Khazanah Nasional Bhd.

Obviously Khazanah was miffed that Nadzmi said what he said without first going by Khazanah. Seriously folks, Nadzmi said the one thing I have been dying to hear for a long time. Proton is a venture that never should have started. Many years back, the powers to be wanted to emulate the dizzying success of South Korea by having mega-production industries, and auto was targeted. We should know where our strengths are and leverage on them, not go and start something where we lack certain critical success factors.

a) Scale& Critical Mass - Almost all successful car makers need to have a substantive critical mass in domestic demand especially when starting a new car company. as it is a government controlled entity, may tax breaks and measures could be added to jump start the industry. Malaysia does not have critical mass from day one. Thailand might have had a much better chance of succeeding. Even Vietnam would have. You need at least 60m-100m in population to bring down the average cost in distribution, design, , etc. From day one we were doomed. Thats why the still standing car makers came from the US (barely surviving), South Korea, Japan, India, Europe and China.

b) Inherent Advantages - You may still succeed without scale and critical mass, but you must provide something else - superior design, superior patented performance, superior handling. I don't know about you, but our engineering and design talents have never been terrbly well-known or outstanding. We do not have any patents that I know of. We don't even have the capacity to build our own engine. We basically adopted a plug and play software/hardware approache. We took the knockoff designs from some car maker, took some car maker's engine, tweaked the design that unfortunately re-emphasised its a cheap car (must say that the newer models of Proton are better designed though). We basically hit the ground running a lot further behind the success curve. You can be small and successful like Porsches, Maseratis, or even build specialty trucks or very compact cars that run on specialty fuels or something that can carve you out a niche... but no, we had to build a car that is mass market and can seriously compete with only the Skodas and Ladas.

c) Make The People Pay - To support Proton, Malaysians have been paying over the top for cars. We are easily the top two most expensive places on earth to buy cars, and that is to protect Proton. The billions that Proton made basically came from the public. Every single Proton that was sold outside of Malaysia is always cheaper than those being sold in Malaysia, where is the logic? I don't mind paying higher car prices, if in the long term the industry creates something of value which boosts our per capita income... but we are nowhere in the top 20 and yet we are in the top 2 places on earth to buy cars. How much spending power was lost to sustain the profits of Proton?

d) AFTA - It is only with the pressure to go for AFTA that we are slowly coming to our senses that the protective measures and high taxes for all cars have to come down. All things being equal, do you think Proton can still be viable? Pride is one thing, foolish pride is just plain stupidity.

e) Globalisation - Khazanah of all people should realise that we are in the middle of a very huge globalisation movement which has enveloped us for the past 10-15 years. Outsourcing is the biggest theme and the trend is not going to stop. If you wish to operate in manufacturing... be it steel, cars, etc... you need to be big. We need to all match the "China price of producing goods and services". You produce steel, well, you need to match Mittal's capacity and very very low average cost of production. Take your medicine and sell Proton.

Proton has a net cash position of RM1.14bn. On just a paid up of 549m shares, the net cash per share is already RM2.07. The fact that the cash per share is more than the market price of Proton tells you that the company is worth more being sol
.d off or liquidated. Do not be stubborn and think we can turnaround the thing unless we can seriously get the few "critical success factors" I have just mentioned.

Lastly, the lesson on globalisation is that if you are not an efficient producer of a certain kind of product or services, and you can buy cheaper from another producer, then there is no need to produce it in your own country. Pride must be counter balanced with economic sensibility. If we can get cement of steel bars cheaper from Indonesia or Thailand or Cambodia, why produce locally. That is a mighty inefficient allocation of resources. These are not critical industries we must have. There are certain industries (such as power, telecommunications) that we cannot be held hostage to in the event of political disputes or wars or skirmishes with out countries which might affect the supply of certain goods and services - auto is definitely not one of them. Sell the bugger already.

If its the jobs you are worried about, then strike an agreement that layoffs will have to be gradual over a period of time, e.g. not more than 10% in the first 12 months and no more than an additional 10% over the following 12 months. Its better to redeploy and retrain than keeping digging a deeper grave.

p/s photo: Nabila Syakieb


TsuChong said...

Great stuff. Simple economics explained. Allocative efficiency - produce what you do best. Not distort the market!

Pat said...

I drive a Proton Wira currently. 9 years old. Some non critical parts of my car have already fallen off and I;m not going to replace them, purely because I'm not going pay premium prices for sub-quality products. The driver's seatbelt is almost dead (can't retract properly). Have changed the power window's motor 3 times since. The "leather" on the steering wheel has peeled off.

Comparing "this thing" with my mum's good old Toyota Corolla (same mileage as mine)..boy, has Proton got a long way to go!

grahamsmun said...

How to sell proton ?
Share Price Rm 2.00.
Cash per share Rm 2.07.
NTA Rm 10.00.

Certainly we would not consider at Rm 2.00 ie. 20% of The NTA ?!.

Then with the current environment no one is willing to offer a good price.

What need to be done to create value ?
1) Distribute cash
2) Share buyback upto 10% at Rm 3.00 & below and cancel the share.
4) Dispose some of the assets like land at Shah Alam and move to Tanjong malim 100%
5) Colloborative arrangement with oversea manufacturer.
6) Lastly consider disposing manufacturing capacity after item 1 to 5 is done !

see said...

You hit it spot on & i'm sure the boys in Khazanah is aware of it, its just non-business reasons why Proton is a walking dead today. But its wrong timing to try to sell when most car makers are in trouble, GM may not exist in future & Toyota made first loss in donkey years.

Btw, am driving a 10 year old Iswara not only don't wanna pay high price for substandard car but also don't want half of what's paid going to government in form of taxes.

easystar said...

Hi Salvatoire, your opinion, what are the niche that Malaysia can engage in?

I think palm oil being one, but for value added industries, it is kinna lacking the capability. Even Singapore growth is mainly reliant on FDI, its home grown value add industry is again, limited.

Eric How, said...

My first car is the second-hand Proton Iswara(Fresh Grad. low $ first job) After finished 2yrs loan. I buy a Toyota's VIOS then till now.
After then, I dare to say Proton is far behind on the Q.standard! My dad is driving Wira & many of my hometown friend are Waja & Perdana.
The Q. is terrible! Go test drive Toyata Camry & Perdana. U'll know wat I mean then

yj said...

My prediction: Proton will be taken private before end of the year.

Jason said...

Since foreign car manufacturers are at dirt cheap prices nowadays, Proton should consider taking up stake in these companies with its cash and those from Khazanah to maximize return and technology transfer just like Porsche acquire VW provided Proton knows what it is doing.

Tony said...

Proton should buy Volvo which is up for sale. Then they will have Volvo's technology and reputation as the safest car in the world.

grahamsmun said...

Proton have already own Lotus, no point buy into more manufacturing company.
One area need to be address is the issue of 'national car' in Msia there is 3 (ie Proton, Perodua and Naza) perhaps a merger of the 3 into 1 national car will create synergy and add value

KoSong Cafe said...

Yj's idea of privatization cannot be ruled out, with Nadzmi at the helm. Asset-stripping seems the best solution for some, given the chance.

Dali has got all the right points, so we have only small points to point out.

The new Saga BLM (Back Looks like Mercedes) continues to have power-window problems (despite all the complaints and promises to correct them, maybe we are better at rocket science, that's why) and the fuel consumption for the AT model is shocking! My friend complained and it was confirmed by service personnel, and correct me if I'm wrong, confirmed by the recent advertisement! The two figures given in the advert. work out at 63% higher consumption compared to its MT! I can still remember a figure of 17% higher consumption (AT vs MT) in Wira's brochures before.

Sir sc said...

couldn't agree more; why make proton locally when I have to pay double when TopGear said Proton is utterly rubbish LOL.
great stuff.
Maybe we should just tell this to BNM & Tun Dr Mahathir

umar said...

Proton was a blunder from 1984. It killed many auto companies like Champion Motors, Orchard Motors, Warne Brothers, Borneo Motors etc. They were selling models like; Opel ,Volswagen,Audi, Austin , Fiat,Renault... They had to wind up to make way for proton.
It was Mahathir's love for Look East Policy.
They put a few Bumis to enrich themselves. They were CEOs at the same time had their own vendor companies supplying parts. Good business. Eric Chia ( EON ), Nazmi, Tan sri Yahya , Tengku Mahlil . Lotus joint venture was a joke. Expanding to Tg.Malim was another joke. Augusta too. Then we had Petronas as major shareholder.

I replaced my power window unit four times. now i have to open the door at every toll booth. Very embarassing indeed !
They chased away the white man then. Do you honestly think Volswagen or anybody want to embrace proton now ?

Yue Kwong said...