Malaysia is selling the symbol of dignity to China

Proton is a celebrated embodiment of Malaysian pride and industry. A projected sale of its majority stake to a Chinese firm has stirred sentiments of a national loss.

by Oliver Ward

Car manufacturer, Proton, has been a longstanding symbol of Malaysian national industry. Chinese Automobile Holdings company, Geely, have made a bid for a 51% majority stake in the company. Geely have emerged as the dominant buyer ahead of the French firm, PSA in recent weeks. The Chinese car manufacturers have been seeking to acquire foreign targets and expand their market into South East Asia, after successfully completing the purchase of Volvo from Ford Motor Co. for US$1.8 billion, in 2010.

The deal represents a landmark acquisition for Geely.

The deal is far from settled. Geely will be anxious to press for an end to the saga as swiftly as possible. The acquisition would open up a market of 623 million people and give Geely access to the Tanjung Malim assembly plant. The plant is capable of producing 150,000 vehicles a year, however, a dip in Proton sales has meant that the plant is not currently operating at full capacity. The National Automotive Policy means that Geely will receive the bulk of the domestic Malaysian market share. Under the policy domestic car makers are exempt from high import tariffs on imports. The acquisition of Tanjung Malim would qualify Geely as a domestic car maker in Malaysia under the policy´s tax regulation.

The Chinese carmaker will want to use the Proton production line in Malaysia as a point from which to distribute vehicles tax-free throughout ASEAN. Geely want to acquire a plant within ASEAN to get access to the tax-free distribution arrangement in place across the ASEAN nations. The company has previously been unable to break Toyota, Nissan and Honda´s hold on the region. The acquisition of a plant on Malaysian soil with the tax benefits it represents could signal the rise of a Chinese challenge to the Japanese dominance in the market.

Najib is handing a symbol of Malaysian dignity over to Chinese suitors.

Najib Razak has already come under scrutiny for his cosying up to Chinese investors. His decision to sell off Malaysian energy assets to the Chinese government was slammed by his political opponents. He will undoubtedly need to justify his decision to hand over the much-loved vehicle to the Chinese. Proton was once described as “a symbol of Malaysians as dignified people” and remains entrenched in the national psyche.

The reasoning behind the decision is steeped in economics. Proton’s production fell by 25% in 2015. This led to the Malaysian government granting a loan to the tune of RM1.25 billion (US$284 million). The loan was granted on the condition that the company finds a foreign partner. The company is currently making heavy losses. The company has become a financial burden to current owners, DRB-HICOM. The company reported losses of RM991.90 million (US$223 million) in the financial year ending in 2016. The automobile production segment of the company is wholly responsible for the heavy losses. This sector registered operating losses of RM1 billion (US$224 million) in 2016. Without these losses, DRB-HICOM would have made profit.

The sale will also save the jobs of many Malaysians employed by Proton by keeping automobile production alive at the plants. Dr Jorah Ramlan, of Ramlan PointOn Consultants, hopes the agreement could save 60,000 jobs across the country.

The move could offer the company a promising future.

The government loan granted to Proton in 2015 called on them to find a foreign strategic partner to mitigate future losses. Zarina Yusof of Universiti Malaya believes that choosing Geely as a foreign partner is the best choice for the future of Proton. “With its economic advancement, China is willing to offer good technology”.

The technology under the bonnet will certainly be a boost to the Malaysian carmaker. In 2016 Proton had to recall almost 95,000 cars, its largest recall to date. This was due to problems with faulty oil cooler hoses which caused the engines to overheat. The issue cost the company RM2 million (US$476,000). Incidents like these are not isolated and have caused the public to lose trust Proton´s reliability. The cars are no longer competitive. 2016 sales figures dropped by 30% from 102,174 units in 2015 to just 72,290 in 2016. An injection of Chinese technology is essential for the cars ability to compete in the competitive ASEAN market. The current sales figures show that the Tanjung Malim plant, capable of producing 150,000 units annually, is not working at capacity. If Proton´s sales figures are able to recover, the move could generate further long term employment at the plant.

China has a vast consumer market. If Proton could break into this market it will bring significant long term dividends. The stable Chinese currency would also give the company a competitive advantage over the dollar and euro markets.

The changes will not be imminent.

Robin Zhu, an auto analyst at Sanford C. Bernstein who gave Proton’s “underperform” recommendation to Geely, said “it will take Geely at least one or two years to turn it around”. RHB research analysist, Alexander Chia echoed these sentiments. He added, “they need wholesale improvement in manufacturing scale to remain competitive in a demanding market”. He believes for Proton to break even they need to sell 100,000-120,000 cars per year, a huge increase on current numbers.

This sales deficit cannot be rectified overnight. Mahathir has already taken swipes at Najib over his “stupid” Chinese business deals. He has lamented that Malaysia is letting Chinese firms into the country when “we can’t go to China and export into China completely built-up cars. We cannot even manufacture cars there without a special licence”.

Najib’s political rivals will look to point the finger and accuse Najib of selling off Malaysian dignity to the highest bidder. However, Proton´s tumbling sales and soaring losses demonstrated that something needed to be done about the failing company. In the long-term Najib may have saved thousands of jobs, kept automobile production alive in Malaysia and taken the company to new heights. A general election is due within the next two years. It is unlikely the positive effects will have been seen by then. Najib will be hoping the public can see past the blow to national pride and instead focus on the positive future the sale represents.