Proton and GM: An Ungainly Union?

The U.S. giant is looking at a stake in Malaysia's Proton. The two carmakers have one thing in common: they're both losing market share

It's hard to guess what's on the minds of GM leaders these days. You'd think they have enough problems at home, but now the company has said it's considering a stake in the Malaysian carmaker Proton. It would seem the last thing GM needs is to invest in an ailing company 8,000 miles away.

And while the tie-in is anything but a done deal—GM's Chief Financial Officer Fritz Henderson merely told reporters in Dearborn on Jan. 16 that the company is "legitimately" interested in buying a stake in Proton—it's difficult to gauge where he sees the upside to such a partnership. Peugeot and Volkswagen are also possible suitors for Proton.

GM and Proton do have a couple of things in common: they are both steadily losing market share. At its height in the mid 1990s, Proton sold two out of every three passenger cars in Malaysia. Now its market share has shrunk to about 24%. "They badly need a foreign partner," says John Bonnell, a research analyst at Automotive-Resources Asia.

Cosseted Carmaker
Looking to the outside for help marks a huge about-face for Proton, which was a major upholder of Malaysia's industrial policy of going its own way. Proton was the pet project of former Prime Minister Mahathir Mohamed, who had dreams of building a national car that would hold its own against global brands. But while generous government subsidies and tariff barriers ensured Proton a commanding lead, the company remained a cosseted carmaker turning out mediocre products.

Proton's biggest competition has come from its own backyard. Local carmaker Perodua linked up with Japan's Daihatsu in the early 1990s and allowed Daihatsu to take a 51% controlling stake in 2001. Although Proton had a deal with Mitsubishi that enabled it to license Mitsubishi technology, that ended in 2004, when any thought of selling a stake in Proton was still considered too politically sensitive.

By selling what are essentially locally assembled Daihatsu cars with Malaysian names, Perodua has cashed in on the Japanese reputation for quality. That has helped catapult it to market leadership in passenger cars, with a 31.5% market share during the first 11 months of 2006. In 2005 it launched the four-door Myvi—costing as little as $8,000—that "has been such a runaway success that it has left other cars launched by Proton behind," says Annuar Aziz, auto analyst at Credit Suisse in Kuala Lumpur. He says customers have been turned off by quality control problems with Proton's recent new, entry-level Savvy compact car, as well as the more upscale Gen.2 sedan.

Competition from Kits
Things went from bad to worse for Proton in early 2005, when Malaysia finally agreed to lower barriers on imports in keeping with the country's commitment to the ASEAN Free Trade Area (AFTA). That paved the way for duty-free imports of CKD [completely knocked down] kits from Thailand, which has built up the strongest auto manufacturing facilities in the region thanks to liberalized policies that attracted huge investments from Japanese carmakers. In 2006, the price gap between the Proton and its competitors narrowed further when the government standardized the excise taxes that previously favored Proton.

In the first half of fiscal 2006, Proton lost $88 million on sales of $769 million, compared with a year earlier loss of $43 million on sales of $1.07 billion. UBS auto analyst in Kuala Lumpur Colbert Nocom is forecasting a full year loss of $127 million on sales of $1.9 billion.

Now, even Mahathir, who is still an adviser to the company, has acknowledged that things are badly in need of a fix. "It is quite obvious that this management team has destroyed Proton completely," he told a press conference on Jan. 8 in Malaysia. "Foreign, local, whatever." The government still owns a 59 % stake in Proton Holdings, mainly through the state-owned investment arm, Khazanah which has a 43% stake.
It remains to be seen what GM can offer Proton. With just three imported models by Chevrolet: Spark, Aveo, and Optra; selling a combined 146 units in the first 11 months of 2006, GM's brand is not well established in Malaysia. UBS's Nocom reckons that with cars like the Golf and Polo in its lineup, Volkswagen would "be a better fit."

"GM has problems globally, and I don't think Southeast Asia is the solution," he says, noting that GM was late into the region [it opened its plant in Thailand in 1999], losing out to the Japanese and to Ford who have built up strong domestic and export sales in Thailand. Thailand also boasts a strong network of suppliers whereas Malaysia's supply chain leaves much to be desired.

Source: Business Week