THE massive reorganisation of Proton unveiled by its CEO, Tengku Tan Sri Mahaleel Tengku Ariff, carries a loud message: Proton is not going to sit around and be a lame duck allowing all and sundry to take pot shots at it; and its competitors, market share.
What the Proton CEO and the board are saying is: If Proton has to compete in the global marketplace, it will fight.
The reorganisation (Mahaleel doesn't want to call it restructuring) gives the national carmaker greater flexibility in forging strategic alliances and partnerships.
Under the current structure, where Proton is the holding company as well as the manufacturing firm, it is difficult for Proton to enter into any strategic alliances or partnerships as the partner, be it local or foreign, will have a stake in all of Proton's operations, i.e. manufacturing, marketing and distribution, engineering, etc.
Under the proposed reorganisation, a Newco assumes the listed status and Proton becomes the manufacturing subsidiary of Newco, while other core operations such as distribution and marketing, engineering services, Proton City, and the Tanjong Malim manufacturing plant (which is located in Proton City) are placed under Newco as subsidiaries.
Current shareholders of Proton will become shareholders of Newco through exchanging their shares on a one-for-one basis.
This new structure allows each of the subsidiaries to forge strategic alliances and partnerships without affecting the other subsidiaries.
For example, Proton (as the manufacturing subsidiary) can strike up a partnership with Ford, while the engineering subsidiary can have a joint venture with Toyota, and the Tanjong Malim plant, apart from making Proton cars, can assemble European cars for the local and export markets.
And all the time Newco remains in Malaysian hands. It, therefore, takes the political and emotive element out of the equation. In other words, there are now firewalls, where previously there were none.
Currently, two Mitsubishi companies have a combined 15.8% stake in Proton. Under the new structure, it is possible for the Japanese partners to give up their stake in Newco in exchange for a greater stake, say, in one of the Newco's subsidiaries or their joint ventures. Alternatively, Mitsubishi can be a joint-venture partner with some of Newco's subsidiaries without affecting its stake in Newco.
I understand Proton (soon to be Newco) is already in serious discussions with a number of parties on strategic alliances and joint ventures. Finance and leasing are among the top priorities.
The reorganisation, announced on Tuesday, must be viewed in the larger context of what Proton under Mahaleel has been doing quietly during the past two years to prepare itself for the competition of globalisation.
Although Proton was given some reprieve when Malaysia got the Asean Free Trade Area (Afta) liberalisation measures for the car industry to be delayed by two years to 2005, the fact remains that competition is already hotting up.
Look at the prices of the new Toyota Vios and Honda City, which are selling at a couple of thousand ringgit higher than Proton's top-end Waja; not to mention the new South Korean cars making inroads into the local market. And of course you have Perodua; and it's planning to enter the 1,300cc segment as well. That would be cutting into Proton's turf. I can't imagine Proton will not respond.
There are many critics and competitors (some of whom double up as critics) who love to bad mouth Proton and spread the word that the national carmaker cannot compete under Afta and World Trade Organisation liberalisation.
As I have said before, I disagree. Proton has more than a reasonable chance of survival in the globalised world. It's going to expand rather than contract. That's what the planning of the past two years is all about.
(Getting Khazanah Nasional Bhd as its controlling shareholder, instead of Petronas, and making Proton Edar, a fully-owned subsidiary, instead of Edaran Otomobil Nasional, EON, as the sole distributor help in the plan.)
Mahaleel told journalists visiting the Tanjong Malim plant recently that the new plant is designed for high volume and efficiency, using lean manufacturing processes and new technologies compared with the current plant in Shah Alam.
The Shah Alam plant (sitting on prime land) is near its maximum capacity of 230,000 cars a year. The Tanjong Malim plant (on cheap land) can have a capacity of one million cars.
Take the new Proton car that is scheduled to make its debut at the end of the year. It will be as good as any Japanese car, probably even better, and will be priced just as competitively.
Here, all the three elements the completion of the Tanjong Malim plant, the Lotus-designed Campro engine and the body works must be synchronised and ready for production. So far, the programme is on schedule.
Cost is critical in car making and a Proton car can only be as cheap as the sum of the cost of its components.
These are supplied by many vendors.
Proton must insist and every one of its vendors has to appreciate that they must be able to produce their components as cheaply and as good as those of their overseas competitors.
Japanese carmakers like Nissan, Honda and Toyota are currently doing very well in part due to drastic cost cutting undertaken in recent years, including relocating their plants in, and sourcing components from, lower-cost countries like Thailand, Indonesia and China.
The market appeared to like the news of Proton's reorganisation. The company's shares rose 65 sen to RM8 yesterday, a gain of RM1 over two days.
But at this price, Proton is only trading at a price-earnings (PE) ratio of under 4 times which is very low (meaning cheap). PR is calculated by dividing the share price (RM8) by earnings per share (RM2.07).
Part of the reason for this low PE is investors' perception that Proton will have difficulty surviving globalisation in its present form.
Mahaleel is sanguine about this.
Proton does not need to raise cash in the market as it already has a huge cash hoard.
Mahaleel says he is not out to impress the market, only to prove Proton's critics and competitors wrong.
And he is going about it the right way.
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