THE tortuous negotiations between Edaran Otomobil Nasional Bhd (EON) and Perusahaan Otomobil Nasional Bhd (Proton) that began three years ago and led to an impasse tells us one thing about the nature of the corporate environment.
Sometimes, it pays to hold out for something better.
EON did. And it finally got a Memorandum of Agreement (MoA) with Protons wholly-owned distributor Proton Edar Sdn Bhd, with the former having good reason to cheer. That's how EON and many analysts see the deal, the final shape of which will be trashed out within three months.
The landscape in the countrys automotive sector has altered drastically in recent years and this, in a way, has worked in favour of EON, at least as far as the MoA is concerned. The more challenging the environment had become for national car manufacturer, the harder it became for Proton to ignore the wide distribution network that EON had to offer,say analysts.
This coupled with marked slide in national car sales in recent months had made the signing of the MoA a lot more compelling for Proton. (Proton sales for February plunged 38 per cent from total units sold in January)
So, when one analyst says Protons compromise reflects its weakening position in the auto sector, he is by no means exaggerating. Proton was willing to compromise because EON's network is double the size of Proton Edars. It probably realised its not too easy to just build a substantial network.
Of the 214,000 units of Proton passenger cars sold last year, more than half or 128,000 units were sold by EON.
Other analysts, however, add that while Proton may have to depend on EON because of wide networks, the reverse is also true.
EON has its strengths, says one analyst, it is, after all, the largest distributor of Proton cars but EON will also have to look towards Proton for market share.
Last year, sales of Proton cars by EON fell to 127,859 from 135,578. Their market share meanwhile dropped to 36 per cent from 41 per cent.
In a negotiation, everybody asks for the best, says one industry player, but time was basically running out.
The agreement had lapsed just a few months before national oil company Petronas acquired a 26 per cent stake in Proton for RM1 billion from DRB-Hicom Bhd.
There were also negotiations between DRB-Hicom and Petronas for the oil company to acquire DRB's stake in EON as well. But that fell through due to pricing issues. It also became less appealing for Proton to acquire EON because it already had its own distribution arm.
Most notable in the MoA that was just signed is that EON got off without having to share the cost burden of research and development activities as proposed earlier which was a major point of contention for EON.
Most analysts were surprised that EON ended up not having to do this and they agree that this is negative for Proton.
Without the sharing of development costs, Proton's margins are likely to come under pressure as the cost burden of developing new marques in future rests squarely on its shoulders.
Investors were quick to react to the announcement. EONs shares rose 25 sen to close at RM8.15 following the announcement, while Protons tumbled by 30 sen to RM7.70.
Under the new agreement, EON was appointed as super dealer till Dec 31, 2009 with a minimum allocation of 100,000 units per annum.
Over and above that, EON is free to distribute vehicles of other marques. In this light, it recently acquired the local franchise rights for Audi and Volkswagen, which basically allow the company to honour its contract with other car assemblers.
A favourable position it may seem but not all are certain that Proton has gotten the short end of the stick.
There are still not much details available in terms of how much EON will get, says one analyst with a foreign house.
Basically, the agreement has been extended on existing models but not on new models. So it may seem good right now but we will have to wait for the new models to be launched to see how the new margins compare with the existing ones.
Motoring sources say because EON will not be contributing to development costs of future models, it would have to agree to a lower profit margin for these models.
Over the coming years, EON's profits may decline as current models (which carry a higher margin) are phased out to be replaced by new models (which carry a lower margin). So the immediate outlook is attractive for EON, but in the longer term, its margins for Proton vehicles will probably deteriorate.
It is perhaps for this reason that several research houses still maintain a buy call on Proton while others are keeping to their neutral recommendation. For good reason too. The new agreement is not expected to impact Protons earnings because the scenario largely remains the same as it was before.
On a positive note, the uncertainty surrounding the whole issue is now resolved and will no longer pose a distraction.
A bigger threat is of course the latest numbers coming out from the automotive sector. Sales have been coming off in the last few quarters and as the industry braces itself for Afta (Asean Free Trade Area), the outlook of the industry continues to remain fuzzy.
In addition, Proton has been losing its market share to second national car manufacturer Perusahaan Otomobil Nasional Kedua (Perodua). The launching of new models and new engines has been delayed and existing models, like the Juwara, are finding sales challenging.
Foreign competitors like Toyota, Honda, Kia and Hyundai have already begun cutting costs and establishing new plants in the region. The MoA thus signifies a new partnership, which recognises the need to retain and improve market share while taking into account EON's reluctance to pay for development of new Proton models.