JUST a week after giving an ultimatum in terms of what Proton must do to receive more Government funding, the Cabinet yesterday approved a soft loan of RM1.5bil in which a bulk of that money will be used to pay its vendors.
The Government also says a number of conditions will be imposed on Proton to rehabilitate the company. The statement by Minister of International Trade and Industry Datuk Seri Mustapa Mohamed says Proton needs to convince the Government its new business model is progressive and competitive.
Among the fresh conditions imposed on Proton is the need to draw up a turnaround plan, a way to expand its market domestically and internationally, and a tie-up with a well-known strategic partner that will help in research and development to help the national carmaker to become competitive in international markets.
In giving the fresh funding, the Government also announced that a taskforce led by Datuk Seri Idris Jala will be set up to ensure that Proton’s transformation plan is successful. The task force will consist of six people, three each from the private and public sectors.
The public representatives of the task force will come from the Finance Ministry, International Trade and Industry Ministry and the Economic Planning Unit. This taskforce will also examine Proton’s past business model to identify the weaknesses within the company and ways to overcome it.
It is understood that the Government could give Proton a guarantee on future debts to allow the company to get fresh funding for its operations.
Mustapa says that the new measures announced were partly to ensure the welfare of 12,000 employees of Proton and 50,000 workers employed by its vendors.
The automotive sector employs more than 550,000 people. It is reported that if the sector fails, 4% out of Malaysia’s current workforce will be jobless.
Proton, in a statement yesterday, said the Government’s move will catalyse the company’s turnaround plan which includes the rolling out of three new models this year starting with the Perdana.
“With the infusion of new members of management, the company is confident of turning around,” says Proton CEO Datuk Ahmad Fuaad Kenali.
Fuaad says Proton is also constantly engaging its strategic partners to explore collaborative opportunities to improve its products offerings and time to market.
“I believe the assistance by the Government will reinforce the confidence of our partners in Proton,” adds Fuaad.
He also welcomes the setting up of the task force and looks forward to working closely with them to chart sustainable growth for Proton.
The fresh money pumped into Proton also shows just how strategic the industry is to Malaysia and dispels any notion that the Government will allow Proton to collapse.
But the conditions announced yesterday and last week shows just how serious the Government is about the welfare of Proton.
Last week, Mustapa said Proton has been told that one of condition it needs to fulfil before any more Government money is pumped into the company is to find a strategic partnership in its future business plan.
“If the Government decides to assist Proton, this would be made subject to several conditions, including: i - Proton needs to immediately identify a strategic foreign partner ii - the company must be professionally managed, iii - there must not be any interference in its business, and iv - some tough but necessary measures must be put in place for the long-term sustainability of Proton,” says Mustapa in that statement.
Just prior to that statement, Proton announced a change in its top management.
Tun Dr Mahathir Mohamad resigned as chairman of Proton prior to the Government’s ultimatum but the company had just, before announcing Mahathir’s resignation, appointed a new CEO and deputy CEO.
Fuaad is Proton’s new CEO effective from April 1. He was the DRB-Hicom’s chief operating officer (COO) (finance and corporate) and the accountant by training is expected to make some serious cuts at Proton.
It has been speculated that staff cuts could feature among the cost cutting measures.
Proton staffing is said to be big enough to support making a large number of cars but unfortunately, Proton sold 102,000 cars last year and sales have been falling. It sold 115,000 cars in 2014.
It is said that Proton needs to sell a minimum of 12,000 cars a month of break even. For the first two months of this year, it sold 7,743 vehicles in January and 5,947 cars in February.
Proton’s manufacturing capacity is said to be 350,000 cars per annum and with sales at just over 100,000 cars a year, it is operating at about 30% capacity.
While Fuaad is expected to look at the numbers and see where costs can be saved, the appointment of a deputy CEO, Datuk Md Radzaif Mohamed, is said to be the one that will look at the operations of Proton.
Md Radzaif, also from DRB-Hicom, was its COO of automotive distribution manufacturing. Radzaif began his career with DRB-Hicom in 2004 as COO of HICOM-Teck See Manufacturing Malaysia Sdn Bhd.
It was in December 2007 when Khazanah Nasional Bhd was ready to ink a deal with Volkswagen to enter the national auto company as a strategic partner. In that delicate time, there was growing resistance against a sale of a part of Proton and essentially dilution of control to a foreign party.
One of the reasons that deal failed was an improvement in sales by Proton at that time.
The then Cabinet decided it was best to give Proton a chance to improve its sales and financial performance alone.
A second bite of the cherry was said to have emerged some years later when General Motors again seemed poised to enter into a partnership with Proton. Just as negotiations seemed to have moved in a positive direction, Khazanah sold its stake in Proton to DRB-Hicom. Any hopes of a strategic partnership fizzled from that moment.
The crucial task ahead of Proton will be to find a strategic partner. In June last year, Proton proposed a long-term strategic collaboration and partnership with Suzuki Motor Corp of Japan.
Both signed a memorandum of understanding and licence agreement and the deal was said to encompass four main areas of products, technology, people and market.
The collaboration would allow Proton to gain access to the models, platforms, powertrain and automotive technology of Suzuki.
Suzuki would provide the specific technical assistance for the products and scope selected. It is reported that both companies will introduce a car for Malaysia at the end of this year.
Proton has shown an interest to proceed with a strategic partnership with Suzuki but whether the Government will be agreeable to that is not yet known.
The new taskforce appears to have a say in any strategic partnership and one of the key takeaways from its latest statement is the requirement for a strategic partner to be well-known and will assist in R&D and help nurture Proton into a globally competitive company.
An auto executive says the ideal scenario for Proton would be to find a partner that does not have a big presence in the passenger car market in South-East Asia. Suzuki sells a lot of cars in Indonesia and Thailand, many more than in Malaysia in recent years.
How effective will a strategic partnership be between both companies is what some have questioned as the feeling is that there is a preference for other auto giants that do not have a large passenger car market in South-East Asia.
The one attraction Proton has to any potential partner is ironically a source of its current problem. Proton’s production capacity of around 350,000 units and ample production space is a sweetner to any car company in Malaysia.
It was that production potential that was an attraction to previous suitors.
“The large OEMs do not want to spend a lot of money to set up a new plant. That is very costly,” says the auto exec.
“Proton can offer its factory and equipment to a foreign partner.”
Having the ready production space will allow a foreign partner to spend way less money to gain access to not only the Malaysian market but also South-East Asia.
Perodua’s tie-up with Daihatsu is reaping benefits because by having access to a factory here, Perodua spends about a third of what Proton does in terms of model development.
Proton’s cost is high because the cars it makes is proprietary to the company, and it takes a lot of money to develop a car.