Proton Insists Firm Will Find Its Niche : Malaysian Automaker Takes Uncertain Road 
International Herald Tribune
July 7, 1999
Thomas Fuller

Under the bright lights of a design studio here, engineers have shrouded the multimillion-dollar hopes of Malaysia's car industry with black cloth.

It will be several years before the veil is lifted on the finished product — the first car to be fully designed and manufactured in Malaysia — but for now the cloth covering two clay models helps maintain secrecy over one of the country's most ambitious and risky projects.

For 16 years Malaysia has nurtured its national car program, stamping out compacts and sedans based on Japanese or European designs. Now, with its plans to make a car from scratch, the country's national car maker, Perusahaan Otomobil Nasional Bhd., or Proton, is reaching a critical juncture, investing what analysts estimate is at least $250 million in one of the world's most competitive industries.

Proton declined to disclose the exact cost of the new car, but Mahaleel Ariff, the automaker's chief executive officer, calls the man in charge of the project "the last of the big spenders in Malaysia."

Given the mammoth size of most global car manufacturers these days, it is perhaps not surprising that analysts greet Proton's plans with a heavy dose of skepticism. How can a small company based in a developing country of 22 million people compete with the Fords and Toyotas of the world? And how can Proton make headway in an industry that, globally, has 15 million units of excess capacity a year?

Executives at Proton offer polite but combative smiles when asked these questions. As with many other projects in Malaysia, foreign skepticism seems to be the very fuel driving Proton's ambitions.

Mr. Mahaleel says Proton is not interested in producing a car for "every Tom, Dick or Harry." The company is looking to make a car that will find a market niche: small, sporty and affordable.

Two years ago Proton acquired good credentials in the "sporty" category. The company paid £52 million ($81.9 million) for a controlling stake in Lotus, the British company best known for its high-end sports cars. Proton has since increased its stake in Lotus to 80 percent.

"That was a quick way to acquire know-how," Mr. Mahaleel said. Several engineers from Lotus, including Andrew Hill, who serves as head of the design team for the new car, have been flown in from Britain for the project.

The acquisition of Lotus is a good start, analysts say, but just a start.

"I don't want to be pessimistic, but my comments will probably sound pessimistic," said John Bonnell, head of research at Automotive Resources Asia Ltd. in Bangkok. "In the acquisition of Lotus you've got one dimension taken care of — design. What about marketing and distribution of vehicles? What about the high cost of putting a parts and service network in place? The challenges are really monumental."

Domestically, Proton's service and distribution network is solid. The brand is ubiquitous — more than 65 percent of cars sold in the country are Protons, and for Proton owners, servicing is a cinch.

But outside Malaysia the company faces a much steeper challenge.

The car maker has exported a total of 186,000 cars to date, most to Britain, but analysts who follow Proton say the company loses money on the cars it sends overseas.

"Proton has always been very secretive about this," said an automotive analyst at a Kuala Lumpur securities firm. "But based on the numbers I've crunched their exports are not making money."

Subsidizing these exports are Malaysian consumers, who pay higher prices for their Protons than consumers overseas. A bottom-of-the-line Wira, for example, sells for about £7,000 in Britain. In Malaysia the same model sells for the equivalent of £8,300.

Proton is protected in the domestic market through high tariffs. Duties on a fully assembled imported car in Malaysia range from 150 percent to 300 percent, depending on engine size.

To circumvent those duties, many foreign car makers assemble their vehicles in Malaysia and pay tax on the parts they import. But Proton retains an edge even over those locally assembled cars, paying 13 percent duty for its imported components compared with duties of 42 percent to 80 percent for foreign car makers.

These high duties have helped give Proton a remarkably strong balance sheet. The company has cash reserves of about 1.2 billion ringgit ($315 million). And Proton will soon have access to even deeper pockets: Malaysia's substantial oil reserves.

The government-owned oil company, Petroliam Nasional Bhd., or Petronas, is negotiating to buy a controlling stake of Proton from the car maker's heavily indebted parent company, HICOM Holdings Bhd.

That deal, which HICOM says will be sealed by the beginning of next year, will effectively nationalize Proton, bringing the government's stake to just over 50 percent.

That will bring the Proton full circle: back under the control of the man who helped found it. It was Prime Minister Mahathir bin Mohamad who pushed through the project in the early 1980s as part of a broader goal of industrialization and acquisition of technology for Malaysia.

Throughout Proton's 16 years of operations, the prime minister has remained closely involved in the project. The car maker's close cooperation with the government shows in its management: Decisions at Proton are made with the national interest in mind.

"The things that we do in some ways do not make commercial sense," Mr. Mahaleel says, offering the company's employment policy as an example. "Being a national company you try to employ as many Malaysians as possible. When the economic crisis struck we could have laid off 30 percent of our work force. We could have chopped heads. But we didn't. We didn't lay off a single person."

Mr. Mahaleel defends this approach by saying that Proton is more than just a car maker for Malaysia. The company helps spur other related businesses in the country, creating jobs and transferring know-how. "We are out for technology," he says. "I can spin this off to many different industries in the country. If we ignore technology, we will always be paddy-planters and rubber-tappers."

Mr. Mahaleel says Proton's day of reckoning will come in 2003, when tariffs on automobiles are scheduled to be progressively phased out across Southeast Asia as part of the regional agreement between governments.

Analysts agree.

"It's going to be an uphill battle all the way," said the analyst at the Kuala Lumpur securities firm. "With all the global mergers of big automakers I don't see how Proton can actually compete with these big boys."

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