Proton gets a new owner: A breath of fresh air or the beginning of the end?

Chinese carmaker Zhejiang Geely has taken on an almost half share of Proton in a deal which will give them easy access to growth opportunities in ASEAN member markets.

By Francesca Ross

Malaysia’s national carmaker has finally found a buyer willing to rescue it from crashing sales and an ailing reputation.

The Chinese electronics manufacturer turned automobile giant Zhejiang Geely has taken a 49.9% stake in the Malaysian operation. The purchase ends a long period of speculation about Proton’s future after several years of declining sales.

“With a strategic partner, Proton would be able to elevate the brand value and consumer confidence, have access to the latest technology, achieve higher economies of scale and have the ability to access bigger markets beyond Malaysia,” said Second Finance Minister Datuk Seri Johari Abdul Ghani.

Proton’s networks provide easy access to the ASEAN market

Proton currently has two production facilities which are equipped to produce 150,000 vehicles a year. It also has a significant national supply chain and dealer network. These are currently underused thanks to falling vehicle sales. The company’s sales volume made up little over 12% of the Malaysian market in 2016.

Geely’s executives plan to turn this around.  “Our target is to produce three million cars by 2020,” said Chief Financial Officer and Vice President Daniel Donghui Li. “We will have potential of half a million cars in Malaysian and ASEAN markets by working with Proton,” he said.

The early mention of access to ASEAN seems highly important. Geely has a reputation for turning around companies in difficulty and expanding their market reach. Geely also bought the European carmaker Volvo when it was making pre-tax losses of US$653 million. The company has since made record one-year profits of US$1.25 billion.

Proton’s current model is to rebadge cars made by other manufacturers. This has been part of the problem for the company – the quality of these products has not been high. Under the Geely deal Proton’s facilities will now produce Volvos. It has been confirmed this will include a new SUV model which should safeguard jobs and keep the orderbook of its national suppliers healthy.

“With its low-cost production capability and Volvo’s technologies, Geely could build cost-competitive cars for ASEAN market with Proton’s plant,” said a representative of Singaporean investment bank, UOB KayHian. “There is huge potential for Geely to penetrate the mid- to low-end segments occupied by Korean brands.”

Geely will need to invest heavily, and effectively, to turn Proton around

This must be the core motivation of Geely’s purchase. No sensible business takes on a loss-making operation without a plan. Proton’s network allows the Chinese company access to the ASEAN free trade arrangement (AFTA) which will mean the company can export products into other member countries without paying entry tariffs. The opportunity will not come cheap – huge investment will be needed to upgrade the Tanjung Malim plant and improve production quality.

The sale of the company into private hands is a relief for Malaysia. Proton has long demanded the government’s attention – and financial support. In April 2016, it received 1.5 billion ringgit (US$351.9 million) in government aid. It has had US$3 billion over the course of its lifetime.

Current Prime Minister Najib also blames Proton for the country’s under-developed public transport systems. He says networks were never integrated before he took office as the former leader Mahathir Mohamad was “too obsessed with Proton and the national car.”

The move away from entirely national ownership will also remove the need for the protectionist policies which artificially inflate the cost of foreign cars imported into Malaysia. The deal shows Najib will “tackle previously untouchable items. It also enables a clean break with [company founder and former leader] Tun Dr Mahathir Mohamad,” explained Oh Ei Sun, senior fellow at the S. Rajaratnam School of International Studies’.

Malaysia’s policymakers will be glad to see the sale complete

Government funding to the carmaker remains controversial. DAP MP Tony Pua pointed out that Najib’s government will inject RM1.1 billion (US$258.1 million) into the company as a final pay-off. This is in respect of money already spent on research and development.

It is reported that Zhejiang Geely will pay just RM170 million (US$39.9 million) in cash for their share of the company. Pua asked “To date, there has been no mention at all of any commitment or additional investment by Geely into Proton in order to turn around the beleaguered ‘national’ car maker.”

He questioned whether this meant the Government will again step in again to keep Proton alive if Geely fails to resuscitate the company.

Proton is a high-profile scalp and could set a precedent for further sell-offs

The sale is the best possible deal the government could have hoped for. Manufacturing automobiles is a costly process which requires economies of scale best supported by cross-border operations. European manufacturers have already proven the multi-country model and the injection of existing technology and models may quickly take Proton off life support.

The bigger picture is that this may become just one of Malaysia’s crown jewels sold into foreign ownership. Industries such as oil, gas or manufacturing would also benefit from this model. Proton’s sale is the end of an era that ushers in an important new age. Malaysia works in Malaysia’s interest; national pride is a price that can be ill-afforded.