The Proton Saga

Yesterday’s announcement that the Malaysian Government’s 42.7% stake in Proton Cars is to be sold to the auto-manufacturing and all-round conglomerate DRB-Hicom was not a huge surprise to anybody. It had long been known that Proton was being stalked by a number of meaningful parties and the very vocal support of Proton founder and ex-Prime Minister Dr. Mahathir bin Mohamad, favouring DRB-Hicom’s bid was an endorsement that couldn’t be ignored.

Whilst Proton may not be seen as a major brand here in Europe, the potential of this tie-in could be considerable. The broad ASEAN market hosts a growing population of over 500 million and the combined production capacity of the two will now be in the region of 350,000 cars per annum.

For their part, DRB-HICOM bring a wealth of experience, contacts and borrowed cash to the venture. They already assemble cars for the VW group, Mercedes, Suzuki and Westfield, and are also keenly building a portfolio of EV and hybrid technologies. They’re serious players and can count some of Malaysia’s leading industrialists and bankers amongst their backers, notably the influential billionaire Syed Mokhtar Al-Bukhary.

The two businesses are also not unfamiliar. At inception (as a part of the Malaysian Government’s National Car Project), Proton was managed by Hicom Holdings, which was later merged with Diversified Resources Berhad and others to form a unified industrial group. However, heavy losses at Proton led to it being taken under the wing of another government corporation in the shape of Petronas before finally being passed onto the national investment company, Khazanah Holdings.

Principles and Principals

For many though, the question is not “why DRB-Hicom?” but rather, “why?”

Recent results shed light on serious issues at Proton. Revenue for the six-months ending September 2011 was almost £1bn yet profits were just £4m, a drop of nearly 87%. Costs and investment have simply spiralled out of control, and at a time when politicians are waking-up to the need for state-supported businesses to become internationally competitive. So simply shifting the stock over from one entity to another does not address what is actually going wrong. After all, Khazanah controls significant and diverse assets in more than 50 companies, totalling over £25bn. Perhaps it’s not Proton’s home that needs changing but those responsible for its direction.

Malaysia is a beautiful yet complicated place. Its politics and national industries have long been tainted by nepotism whilst the country endures a strange harmony between the desire to create national and personal wealth in a culture founded on strong Islamic virtues. Contradictions are rife and characters colourful, but change is coming.

In a way, this is almost Shakespearean.

There is a Prime Minister, Najib Razak, who endures a daily battle with corruption, liberalisation, equality and freedom of speech, and all before he tackles the serious issues of reform.

Then we have the former Prime Minister Mahathir, the man who set-about the economic liberalisation programme and who is still very keen not to let go.

Next, there is Proton Chairman, Nadzmi, a man who was once at the helm, left and then returned. He made his own bid but was rejected, possibly because the reforms that he has stated he would introduce (should he have tenure) ought to be being pushed through anyway, and who critically lost the support of the banks to;

Lukman bin Ibrahim, a Proton man for 17 years but now Chief Operating and Financial Officer at . . . DRB-Hicom

In the middle we see Khazanah Nasional’s managing director Azman Mokhtar, a man who must balance national endeavour with meeting the challenges of global markets.

And finally, the men in the shadows; Anwar Ibrahim and Tony Fernandes. Fernandes has made no public gesture towards becoming embroiled in this saga. He upset many in Shah Alam with the costly battle over rights to the “Team Lotus” name last year, a fight which, spectacularly, only the lawyers won. Nevertheless, his ascendancy in Khazanah’s “group of friends” is ongoing and his ownership of the Caterham brand could easily see him brought into play.

Most importantly though is the effect that Anwar Ibrahim makes. The former Deputy Prime Minister is, for now, finally free from the burden of imprisonment and contrived allegations that have shackled him for years. As leader of the opposition, he is well positioned to assert his influence (and ultimately, authority) on a country struggling to find its voice. Unlike the coalition, Anwar is not afraid to battle his demons and his stance on the importance of social freedom in a culturally diverse Islamic society may well gain him the support needed to take power in elections due to take place by the end of next year (but possibly much sooner). If this happens, it is clear that the man who was once Mahathir’s deputy will seek to make sweeping changes through a network that he once described as corrupt and detestable.

So whatever is said now, there is still much to be decided.

The Lotus Position

Intriguingly, despite the very vocal reservations that have been made over the negative impact that Group Lotus and Dany Bahar’s 5-year transformation plan have made to Proton’s bottom-line, one of the statements made yesterday was that DRB-Hicom will not be selling any Proton asset. Now it can very easily be argued that Group Lotus are not an asset but a clear liability to many in Asia and it’s probably for this very reason that nobody will be in a hurry to take action. There are just too many people involved.

For quite some time now, Bahar has acknowledged that the synergy between Proton and Lotus just isn’t there and that in his ideal world, a tie-in with someone like VW would have far greater merit. However, a recent US judicial ruling means that VW are now free to merge with Porsche and neither German dynasty will see the need for wasting significant funds on a speculative venture in a sector that they already dominate. So Proton and Bahar might have to look to elsewhere (possibly China) for a white knight and this won’t please the Lotus man; his funding isn’t questioned, it’s a capable technical partner that he needs. Ironically, Proton is in a similar position.

The End Game

What we witnessed yesterday wasn’t a serious attempt to deal with any of the issues facing the Malaysian auto-industry; it was more a “re-shuffling of the pack”. As it stands though, the following is clear:-

* Proton has great potential but needs to be focussed and modernised.

* DRB-Hicom has access to the markets and technology partners, and can offer spare production capacity, but is burdened with debt and faces the challenge of the growing Sino influence in key export areas.

* The Malaysian Government will face rapidly increasing pressure from Anwar Ibrahim’s opposition. Change to governance, banking and industry are all likely.

Where this leaves Group Lotus is hazy yet clear. The haze is a simple uncertainty that the future is now in the hands of men who probably have no future. The clarity comes from knowing that this is a time where good house-keeping will be seen to be the order of the day.

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