While such choice pleases consumers, it's a source of anxiety at the two giant auto plants operated by Proton Holdings. Proton is the government-controlled company that has long had a hammerlock on the Malaysian car market. As late as 1999, 66% of the cars sold in the Southeast Asian nation were made by Proton, and this year it will still sell 36%.
Proton is at a crossroads. The government of Prime Minister Abdullah Badawi is rolling back tariff protections as Malaysia honors its obligations under the ASEAN Free Trade Area (AFTA). Tariffs on Southeast Asian-made cars sold in Malaysia were a stiff 50% two years ago -- but are 20% today and will fall to just 5% by 2008. That puts in jeopardy 10,000 jobs at Proton, plus 90,000 in the parts and component plants that supply it.
What is Proton's future? The company's boosters argue Proton makes quality vehicles and, with AFTA in place, its market isn't just 26 million Malaysians but 500 million Southeast Asians from Hanoi to Jakarta. Skeptics insist that Proton has no future as an independent company. "Proton is an anachronism in the automobile industry and it's not going to survive over the long term," says Graeme Maxton, Asia analyst for consultancy Autopolis in Hong Kong. As a marginal producer with falling market share even in its home market, he says, Proton lacks the scale it needs to compete against bigger rivals.
As the debate goes on, foreign suitors are lining up with a notion either to buy Proton or to use its facilities to increase their production in the hot Southeast Asian market. Late last year, Proton signed a cooperation agreement with Volkswagen, which allows the German auto maker to use Proton's plants to assemble VWs for sale in Southeast Asia. In exchange, VW will provide tech assistance to Proton. But VW execs are keen to cement the deal with an equity stake, say sources at Proton.
For now, Proton is not selling. "It's too early to talk about VW or any other partner taking an equity position in Proton," says Azman Mokhtar, CEO of Khazanah Holdings, Malaysia's state investment arm, which owns a controlling 43% stake.
Citigroup Smith Barney (C
) says 520,000 cars will be sold in Malaysia this year. That's up from 343,000 in 2000 and makes Malaysia the biggest car market in Southeast Asia. Even with high tariffs on imports, Proton hasn't been keeping up. It sold 170,000 cars in Malaysia last year -- although its factories have a capacity of 380,000. Exports were a measly 17,000. Given its protected status, Proton has always been profitable. But earnings are down, from $301 million for the year ended in March, 2003, on revenues of $2.45 billion, to $213 million for the year ended last March, on revenues of $2.23 billion.
Like so much else in modern Malaysia, Proton was the brainchild of ex-Prime Minister Mahathir Mohamad. His government founded the company in 1983 as a joint venture with Japan's Mitsubishi Motors Corp. (which no longer has a stake), and Mahathir is now an adviser to the board. By all accounts, Proton has produced a serviceable stream of sedans and compacts over the years, but its Mitsubishi technology is outmoded and it has rarely upgraded its design. Even Badawi admits that the company would not be viable if protectionist barriers were suddenly dismantled. It needs "to improve its quality and capability so it can compete," he says.
Current management, however, has resisted change. The now-retired Mahathir has fought the idea of reducing tariffs for years. "Korean and Japanese carmakers were protected for 40 or 50 years," Mahathir told BusinessWeek in a recent interview. "Why should we open our own small market after just 20 years?" The company's board, after a shakeup by Khazanah last year, recently censured CEO Mahaleel Ariff, a Mahathir appointee and loyalist, for publicly criticizing the tariff reductions. Mahaleel declined to comment.
Lately the company has revved up a bit. Last month it launched a new 1.2-litre compact Savvy -- the first new model in 16 months -- and aims to roll out at least two more new models this year. In recent years, Proton has set aside tens of millions of dollars for research and development, and its execs hope that collaboration with VW will improve the quality of both its systems and its cars.
Time is of the essence. With tariffs on the decline, a dozen companies, including China's Geely, are looking to establish a beachhead in Malaysia. For Proton, the imperative is to get its managerial act together -- or watch the advantage it enjoys in its home market wither away. By Assif Shameen in Kuala Lumpur