Proton Holdings Bhd has appointed two top guns from DRB-HICOM BHD, Datuk Ahmad Fuaad Kenali as chief executive officer and Datuk Radzaif Mohamed as deputy chief executive officer, to helm the national car company that has an endless list of issues. The two have literally landed themselves in the hottest seats in town. In the first interview since taking over the jobs, the two spoke to WONG CHUN WAI about their tasks ahead.
Congratulations on your appointments at Proton Holdings. Proton has been the most talked-about subject recently. With the Malaysian public having an emotional attachment to Proton and watching closely, do you believe that the turnaround of Proton can be successful?
Fuaad: Thank you. I had received both messages of congratulations and sympathy! Some of my friends also joked that my appointment was made on April 1 which is April Fool’s Day and they asked me if it was real.
Both Radzaif and I are aware of the issues at hand. I am a positive person, meticulous by nature and forward looking, whilst Radzaif just wants to get things done. I believe in giving my best. God has reasons for putting us into these positions.
We are also not entirely fresh to the issues affecting Proton. Although we did not have executive roles in Proton previously, we have been members of the Proton Holdings board. I was also the chairman of Proton Edar and chairman of Lotus Cars Malaysia whilst Radzaif had been the chairman of Perusahaan Otomobil Nasional Bhd (manufacturing) and Proton Tanjung Malim Sdn Bhd.
Prior to this, we were chief operating officers at DRB-HICOM. I was heading Finance and Corporate whilst Radzaif headed the Automotive Distribution and Manufacturing Sector.
We recognise that this is indeed a mammoth task. Nevertheless, we are confident that the turnaround can be done. The key is to split the issues into manageable components rather than see it as one big problem. We must understand the difference between turnaround (which is to reverse the losses into profits) and transformation. The latter looks at creating a sustainable business in the mid to long term. Attempting to do everything without prioritising would be a recipe for disaster. We are currently focused on the turnaround mode – we need to move fast, look at the results of our actions day by day rather than month by month.
Let’s get straight to the issues. Proton founder and chairman Tun Dr Mahathir Mohamad is finally out of Proton. Will that help the management get the job done in a more professional manner?
Fuaad: Tun Mahathir has resigned from Proton and we respect his decision. We must also thank him for his contributions as he was the founding father of Proton.
I can only answer based on my experience after DRB-Hicom acquired Proton in 2012. I believe the management of Proton had conducted themselves professionally. Of course, in hindsight there would always be things that could have been improved or could have been done better. As an automotive manufacturer, there will always be a long lead time between the planning stage and realisation of these plans. Actions or decisions taken today may affect us several years from now, so our planning and execution capabilities must be rock solid.
Are you saying that you had inherited some issues prior to DRB-Hicom coming in?
Radzaif: Yes, because that is the very nature of auto manufacturing. The duration from the design of a new car to the actual roll-out on the street may take three to four years, excluding the planning phase. The design stage will take several adjustments, from the engine development to the design of the platform and body including features and safety – it involves numerous rounds of testing and validation.
The vendors producing the components will then be invited so that they can design proper specifications for the mould, dies and jigs that they need to purchase; to produce the various components of the car. At the same time, the car manufacturer will need to incur investments to develop the engine and other engineering aspects, and the body makers must get their facilities ready for body stamping to make the doors and other metal related parts.
All these take time. As many already know, Proton will be rolling out the new Perdana soon. It is a beautiful car using the Honda Accord platform but the look, features and handling will be different and better. Before going on the road, it has to undergo at least 100,000 km of rigorous reliability test. This is to ensure the components and systems work seamlessly.
And the minute we roll out the new Perdana, we will need to immediately start planning for the next Perdana model, because if we don’t, then we will not have continuity in the market. This was the situation with our previous Perdana which had utilised the same platform for almost 20 years before the current Honda Accord-based Perdana is rolled out. The investment to make one car is huge, so we cannot afford not to get it right the first time or read the market and competition wrongly.
Fuaad: Proton, over the years had rolled out too many model lines – there was the Saga, Iswara, Wira, Waja, Tiara, Perdana, Juara, Satria, Putra, Savvy, Arena, Satria Neo, Exora, Inspira, Preve, Iriz, Suprima – there were just too many with an overlapping target market. More importantly, the investment Proton had put in to develop each of these models was substantial.
If we look at other car makers, there is continuity in their model line-up; for example, Honda introduced the Civic model in the 1970s and still carries Civic until now. They will only introduce a new line after a proper detailed study had been undertaken when targeting a new segment different from their other lines. There is clarity in their product positioning. Therefore for Proton, we have to now carefully select the model line-up that we want to keep, and drop the ones that are not feasible.
But Proton does have an image problem, and what will you do about it?
Fuaad: Yes, there is some perception against the Proton brand, but most of them are legacy issues that have been rectified. For example, the power window problem had long been addressed by the previous management. The subsequent models came with life-time warranties for these power windows. Nevertheless, we must continuously improve to remain relevant in today’s competitive environment.
Radzaif: Proton had started to concentrate on safety aspects. Not many know that Proton is highly ranked in various credible auto international safety performance assessment ratings (EuroNCAP, Asean NCAP, Australian NCAP). Some of our models such as the Preve and Iriz are ranked higher than even the leading European cars.
These are publicly available information but perhaps we have not spent enough on marketing campaigns to highlight the good things that were done. But we will. We need to hire experts in rebuilding our image and brand value.
Proton posted a net loss of RM634.3mil for the year, a 40% increase in losses from the previous year. Revenue has gone down by 18.6% from RM7.16bil to RM5.83bil while your net gearing has gone up by 53.3% from 30% previously and the car industry says Proton sales will decline this year. Now the Government has just agreed to give Proton a RM1.5bil soft loan. Why has it come to this and where will the bulk of the money be spent on?
Fuaad: First of all, we wish to register our appreciation to the Government for their assistance. The soft loan comes with certain conditions and the bulk of the funds will be for the payment to our vendors. It will certainly help to alleviate some of our cash flow requirements and our vendors’ too.
Radzaif: This is important to elaborate. A sizeable portion of the fund will be used to pay for what we categorise as “vendors unmet volume”. At the initial stage of coming out with a new model (say Model A), the vendors of Proton want to know the sales projection i.e. how many units of Model A are expected to be sold. This is important as the vendors will then purchase their moulds, tools and dies based on the total units that Proton had estimated, and will price their supplies based on that.
Assuming Proton projected to sell about 150,000 units of Model A but in turn managed to only sell 75,000 units, the vendors would have recovered only 50% of their investments. In other words, they would be unable to recover the total investment due to the shortfall in volume sold. This is what “vendors unmet volume” means.
Proton has a moral obligation to make good these shortfalls in order to ensure the continuity of its future business which relies heavily on the local vendor community. Instead of paying for these shortfalls, what Proton had done over the years was to request these vendors to “carry forward” these shortfalls to future models.
The consequence of this was that the component cost of the later models ballooned and Proton was then forced to price its cars higher than what they should have been, almost equalling the prices of our competitors. The vendors unmet volumes that we still carry date as far back as Proton’s Tiara model which was launched in 1996. These unmet volume costs had been rolled forward since then.
Fuaad: This is a vicious cycle that Proton can’t afford to continuously carry. In order to achieve a successful turnaround, we must bite the bullet and settle these unmet volumes issue now as opposed to continuously carrying them to the new models.
Well and fine. But what about the setting up of the task force to monitor the implementation and success of the recovery plan. The task force is headed by Performance Management and Delivery Unit (Pemandu) CEO Datuk Seri Idris Jala and representatives from the private and public sector. With due respect, they are highly regarded people, but they have no automotive industry experiences, can they really help much?
Fuaad: The Government has made it crystal clear that Proton will not be run by a committee. This would be disastrous – during the turnaround phase, decisions need to be made superfast. The management and board of Proton will ultimately be responsible for the day-to-day management. As we have said, the RM1.5bil will be used to pay the vendors.
The Government needs to ensure that the funds will be spent for this specific purpose. We will be transparent. Having said that, the personalities on the task force have relevant operational experience with proven business acumen and we are confident that they will be there to assist rather than hinder.
What are the plans forward?
Radzaif: We have developed a blueprint for the turnaround and will stick to this. The immediate need is for us to resuscitate our sales to generate immediate cash flow. We will be rolling out new car models this year and they will be our catalyst for the turnaround. The investments that we have made in developing these new models were substantial and therefore we need to ensure their success.
In this business, there’s not much room for error. We must find ways to lower our production cost without compromising on quality, work with our dealers and vendors who are integral to our ecosystem to significantly improve our after sales service. In short, Proton needs to regain the public’s trust and confidence. There must be a mindset change in our entire ecosystem – employees, vendors and dealers – to focus on giving their best to our customers.
Do you think that Proton could have done better if it had tied up with Volkswagen AG on a partnership deal to assemble the German carmaker’s vehicle in Malaysia for sale in South-East Asia. Volkswagen had said it would not take an equity stake in Proton as part of the deal, which would have included launching the first locally-assembled VW models in Malaysia by 2005 and generating sales of over 15,000 units in 2006. Dr Mahathir has now revealed that VW wanted a 51% stake. Any views?
Fuaad: This is a hypothetical question and we are not privy to the details. DRB-Hicom took over Proton in 2012 and naturally we had inherited the historical issues. However, we would rather look forward and learn from the past.
Some said the VW deal was a missed opportunity. The reality is, we only sold less than 150,000 cars a year, hence did not have a large enough scale to spread our costs efficiently. Car makers which produce cars in the millions would find it easier to price their cars more competitively.
If we were unable to achieve the optimum scale, perhaps we should have partnered with others to leverage on their lower platform costs. From this perspective, the VW deal could have been good for Proton. But as you know, finding the right partner involves other considerations.
For example, due to their global reach and scale, the foreign partner would want to source for cheaper components outside of Malaysia and this may impact our home-grown network of vendors and their dependents. These are some of the hard questions we need to answer before making any decisions.
Is it true that Proton is facing problems entering foreign markets because of protectionist barriers?
Radzaif: The highest priority in our turnaround phase is to firstly focus on the home market because we have lost so much here. We are not saying that Proton should not be exporting but the reality is there are non-tariff trade barriers in most mature countries that would translate into higher compliance costs before we can penetrate these markets. We also need to have a competitive cost base to be able to export our cars effectively and sustainably.
What about Lotus?
Fuaad: Lotus Group International Ltd, which is based in the UK, was purchased by Proton in 1996. It had production issues in the past but we have recovered financially and the sales have improved. We recently launched the new Lotus Evora 400 and Lotus 3-Eleven where we now have more orders than we can produce, and this is a very good sign. About 48% of our Lotus sales is in the UK and EU market while 52% is in the rest of the world. We are pushing for more sales of Lotus cars in China where the premium market has expanded and there is strong demand in the luxury sports car segment.
It is said that beyond the bad news about Proton, the company has not really unlocked its land value. The Shah Alam plant, where the factory is located, is worth a lot of money and so is the huge tract of land in Tanjung Malim. Your views?
Fuaad: Our facility in Tanjung Malim was set up in 1996. At that time, Proton had billions in cash in its coffers. The fact that we are operating in both Shah Alam and Tanjung Malim means that we are not operating efficiently as a manufacturing concern. If I can recall, the idea of a Proton City in Tanjung Malim was mooted when KLIA was touted to be located north of the Klang Valley.
Most business owners and developers took risks by investing in mega development projects in the surrounding areas such as Lembah Beringin, Bukit Beruntung, etc. When the KLIA location was changed to Sepang, these developments were badly affected. We were not privy to the reasons why Proton did not move all of its facilities to Tanjung Malim but we know that in order to move, the township needs to be adequately equipped with basic amenities such as a hospital, sufficient homes, grocery stores, schools and kindergartens for the entire Proton’s ecosystem including its vendors.
Therefore, it is not just about moving the factory but also the readiness of the entire infrastructure and facilities. Looking forward, part of the transformation plan is to eventually operate under one roof in Tanjung Malim. It is a must for Proton to rationalise its facilities to be more cost competitive.
We will consider the costs of relocation and the impact to our large and complex ecosystem. Whilst we are fully aware of the development potential of the Shah Alam land, we can only unlock the value of the land after the facility has been relocated to Tanjung Malim.
Is it true that the only way to improve sales is to drop prices and if that is so, what would be its effects to Proton?
Fuaad: Reducing prices is not a long-term solution. It should only be applied intermittently for tactical purposes, for example, during festive seasons or at the launching of a new model. If an auto company applies steep discounts on a continuous basis, it will erode the confidence of previous owners who had bought the cars at higher prices, and this in turn will affect the resale values. Once the resale confidence is not there, it will be doubly hard to sell our cars. So we need to be careful with this.
Does Proton have plans to consolidate the number of vendors?
Radzaif: As part of the ecosystem, is imperative that the vendors as well as dealers are able to meet Proton’s requirements. The key to Proton’s survival is its cost competitiveness. The vendors, like Proton, will also need to achieve a certain scale to be able to provide more competitive prices and we will work closely with them to achieve this. Some of our vendors have been able to do this already as evident through their contracts with other automakers globally.
It appears that the Government is not in favour of Suzuki as a strategic partner. How does this affect your relationship with Suzuki and if another company comes in as a partner, how much control are you willing to give up?
Fuaad: As far as we are aware, there have not been any talks with the Government in choosing the right partner for Proton. We have also not been informed about the Government not being in favour of any party.
To set the record straight, Proton had previously signed collaborative agreements with a few foreign companies, and currently we do have collaborations with Honda for the Perdana platform as well as with Suzuki for our upcoming models.
I believe that working with foreign partners does add value to Proton especially in the areas of product platforms and engine technology. We will carefully study the option of inviting potential partners to take up equity in Proton; however as we had mentioned earlier, there are many factors to consider on this.
How much money will it take to re-energise Proton and can DRB-Hicom afford that?
Fuaad: As an automotive manufacturer, the level of investment required on a continuous basis is huge. We have to address the issues of declining sales due to aging product lines as well as the need to roll out new models to meet customers’ requirements. We are currently at the tail end of the current cycle and the soft loan from the Government will provide the final push for us to roll out the new models, which are key for our turnaround. DRB-Hicom had been very supportive, advancing funds for Proton’s capital needs. They have also been patient as there have been no dividend payments to DRB-Hicom. Our interests are aligned – that is to turnaround Proton as fast as possible.
The auto industry is moving forward at a very fast speed with electric cars now featuring prominently in the plans of the majors. How can Proton keep up technologically and design wise when it does not have scale?
Radzaif: Electric cars are the way forward as they are good for the environment and enable cheaper running costs for car owners. But the overall price to consumers is still high. The technology is developing at a rapid pace. But with all new technologies, there will be a learning curve and auto makers need to invest heavily in R&D.
Due to the relatively low demand and lack of scale, the cost of producing an electric car is currently still very expensive and because of this, certain mature economies are providing substantial incentives to their automakers to fund the electric vehicle projects.
Proton has been engaging with many relevant technology companies and researchers in electric vehicle development with a view to developing our own electric car platform. However, the key issue is still the high production cost and whether there is a strong enough support from policy makers globally to invest in electric vehicles.
Our engineers are keeping their eyes open on this rapid development and the key is to catch it at the right wave to avoid spending unnecessary costs.
What can you say to the general public who are watching closely on the development of this turnaround?
Radzaif: Whether we like it or not, the country has the capability to produce its own national cars. As a nation, when I was growing up, we were not sure of our technological capabilities. The Government had the foresight to send students abroad to acquire the knowledge.
I believe Proton had been one of the beneficiaries where talented local engineers and managers had contributed immensely to Proton’s capability to build its own cars. Many of these local talents are currently working with world renowned auto makers today. I believe Proton has all the ingredients in place but we just need to make sure the team puts in their best effort to make it happen, God willing. We are confident the consumers out there will give our products a chance.
Fuaad: Proton has been our national pride. Our ecosystem, with more than 400 vendors and sub-vendors, and more than 350 sales and services outlets, would all want Proton to be successful. And so would the Government.
Over the years, Proton has collected and paid more than RM24bil of taxes to the Government. We have and will continue to provide cars that will give our customers the best value for their money. Proton cars are engineered to deliver superior ride and handling in its class and we will ensure that each new model is better than the previous one.
We need to redefine Proton and change the public’s perception once and for all. We want everyone to be proud of owning a Proton again.