Proton likely to announce foreign strategic partner soon

Proton’s plant in Tanjung Malim, Perak. Reports say the national carmaker has shortlisted three foreign companies to be its strategic partner, with due diligence expected to be done on the interested parties this month.

THE clock is ticking for Proton Holdings Bhd as its quest to find a foreign strategic partner reaches a fast-approaching deadline.

Based on reports, the national carmaker, which has until the end of this quarter to find a strategic partner, could be making an announcement on this matter by as early as February.

Citing Proton chief executive officer Datuk Ahmad Fuaad Kenali, reports say three foreign carmakers have already been shortlisted, with due diligence expected to be done on the interested parties this month.

The three parties are believed to be China’s Geely Automobile Ltd, as well as French carmakers Groupe PSA and Renault SA.

With a strategic partner virtually on the cards, does this mean that the financial woes of parent DRB-Hicom Bhd will soon be over?

Proton has been a drain on DRB-Hicom’s earnings. The latter marked its fourth consecutive quarterly loss, reporting a net loss of RM267.55mil in its second quarter ended Sept 30, 2016, compared with a net profit of RM52.67mil in the previous corresponding period.

Revenue during the quarter dropped to RM2.64bil from RM3.25bil in the previous corresponding period.

According to Kenanga Research, its automotive division sustained a loss of RM207mil due to losses at Proton, volatility in foreign exchange rates and weak consumer sentiment.

It says the outlook for DRB-Hicom remains challenging, given the tough operating environment of lower sales of motor vehicles amid stiff competition as well as weak consumer demand.

DRB-Hicom’s automotive operations comprise over 30 companies and include the manufacture of Proton, Honda, Mercedes-Benz and Isuzu.

What a foreign strategic partner can offer

Finding a strategic partner was one of the conditions set by the Government in return for a RM1.25bil soft loan given to Proton in March last year to turn around its business.

The party selected is expected to assist Proton in research and development for it to become a global player. In return, the partner would be given a stake in the national carmaker.

One analyst says Proton needs to develop new technology to remain competitive and win back lost market share.

“Proton’s lack of economies of scale is a major issue, as it faces the uphill task of not being able to bring down the per unit price of its models because its development costs are spread across a smaller number of units compared with its foreign competitors.

“This results in uncompetitive pricing for its vehicles.”

He adds that the best way forward for the national carmaker is to collaborate with a credible foreign partner to develop new models.

One industry observer points out that the national carmaker should consider introducing a new model within the compact sports-utility vehicle (SUV) segment.

“SUV is the fastest growing segment in the world and Proton should consider introducing a model within this sub-segment.

“This trend is growing not just in the US but also in Asia. A lot of companies are pushing for SUVs. Case in point is Honda – they had the CR-V and it was one of their best selling models. They were smart to cash in on this model early.”

He points out that the subsequent launch of Honda’s HR-V and Mazda’s CX3 was also very popular with Malaysian buyers.

Another analyst says Proton’s tie-ups with Honda and Suzuki (which led to the production of the new Perdana and Ertiga, respectively) was not enough for the national car company to fast-track its position in the local automotive market.

“Having a foreign strategic partner will allow Proton to do this.”

Having a foreign strategic partner can also help bring about a “culture of success,” says one industry observer.

“A good strategic partner can improve Proton by invoking a culture of success. This would mean improvements in terms of mindset, working systems and procedures as well as attitude. These help to define a successful company.”

He admits that changing the culture of a company that’s been around for three decades won’t be easy.

“It won’t be easy to change a culture. But you can’t just expect to sell high-cost consumer products without putting in the right systems, mindset and procedures to enable this.

“It’s not just about surviving. If you want to thrive and prosper, you need to change.”

He adds that the automotive business is brutal.

“Standing still is tantamount to death. Your product might be successful today but in a couple of years, if you don’t update and refresh, your competitor will come out with a better product and you’ll be left in the dust.”

Proton has been losing market share year after year. According to statistics by the Malaysian Automotive Association, its market share dropped to 13% on sales of 35,727 units in the first half of 2016, compared with a market share of 15.6% and 50,205 units sold in the previous corresponding period.

According to its audited financial statement for financial year 2015, the company’s net loss widened to RM646.3mil from RM461.6mil previously. Its distribution cost of RM260.7mil was more than its gross profit of RM147.9mil in 2015.

As at November 2016, Proton sold 65,067 units – placing it in third position of total industry volume. Leading the pack is Perodua with 182,485 units, followed by Honda with 80,369 units.