Has Proton, Malaysia’s former national car company, finally found salvation?

The answer, in two words, is a “definite maybe.” 

Earlier attempts to negotiate an alliance or partnership with major global auto makers including General Motors, PSA Peugeot Citroen and Volkswagen failed because Malaysian officials would not cede control to foreigners.

So on Jan. 18, the Malaysian government sold its 42.7% share in Proton Holdings for MYR1.29 billion ($412 million) to Malaysia’s DRB-Hicom conglomerate, which in turn purchased 7.3% of the auto maker’s shares on the open market to acquire a controlling 50.01% share. The total amount of the purchase has not been revealed but could approach MYR3.03 billion ($1 billion).

“The government has been looking for a buyer for a long time and finally found the right partner for Proton. And ‘the pride of Malaysia’ is still in Malaysian hands,” points out Ammar Master, manager-LMC Automotive, an auto-industry forecasting firm in Bangkok.

“DRB-Hicom offers what the government wants, namely, a clear direction for Proton to follow, and it will now be more open to collaboration with a foreign auto maker and improving the quality of Proton vehicles,” he adds.

Yet there are more questions than answers about the long-term implications of the purchase, and fitting the pricey new acquisition into the buyer’s operations may not be quick or easy.

Proton is burdened by outdated technology, massive overcapacity, lack of scale, a limited model lineup, a reputation for poor quality and bad management. Critics claim costs are out of control and the auto maker’s gross profit margin has declined from 15% to less than 5%.

“Lots of synergies could be gained between DRB and Proton, but Proton still needs a massive overhaul from DRB,” says Ahmad Maghfur Usman, an analyst with OSK Holdings in Kuala Lumpur.

DRB-Hicom, owned and run by a Malaysian billionaire, has wide-ranging interests in financial services and construction as well as the assembly and distribution of vehicles in Malaysia for Mercedes, PSA Peugeot Citroen, Suzuki and VW. Output last year was about 12,000 vehicles.

While it is not yet known precisely what DRB will be able to do to or with Proton, one of the first orders of business after the sale becomes official later this month will be deciding who will run it.

The Proton management team is still in place but has not done well and probably will be dumped. 

Says Hajime Yamamoto, director-IHS Automotive, Thailand: “It is highly likely Proton managers will be replaced. New managers can take Proton in new directions, including more contract assembly and closer ties with Volkswagen.”

In October 2011, assembly of 1.8L VW Passat sedans got under way on a new line at DRB-Hicom’s Pekan plant, with production of 40,000 units planned this year, but the Proton purchase could revise the game plan significantly.

A special team of VW senior executives reportedly is re-examining a possible partnership with Proton that could include remodeling the Polo as the national car. Six years of on-again, off-again negotiations for a tie-up ended unsuccessfully in 2010, but no disputes about foreign control presumably would hamper any new deal cut for Proton by DRB-Hicom.

“Volkswagen has been looking for a production base in Southeast Asia and DRB-Hicom now has what it needs,” Master says. “Last year, we estimate Proton’s Shah Alam plant with capacity of 200,000 units was 57% utilized and the Tanjung Malim plant, capacity 150,000 units, was only 35% utilized.”

Another part of any partnership could call for VW to provide Proton with new product and production technology and possibly new platforms and engines as well. 

Should this not pan out, another deal in the preliminary stage before the Proton purchase involved the sale of up to half of the Tanjung Malim plant to GM, which is expanding operations in Southeast Asia.

“Negotiations appear to be on the back burner for now, since DRB-Hicom is still getting its arms around Proton,” Master says, but adds he is confident that “all agreements that Proton reached or was discussing before the purchase will be thoroughly explored by the new owners.”

These include talks with Mitsubishi about joint production of engines and the exchange of electric-vehicle technology, and a strategic collaboration planned with Perodua, Malaysia’s other national auto maker.

And despite the sale to DRB-Hicom, some analysts believe Proton will not lose the favorable government support and protective walls essential to the auto maker’s operations since its founding in 1983. For example, Master believes that “unofficially, Proton will continue to enjoy the privileges of a national car company.”

Yamamoto agrees, but both emphasize the Malaysian automotive market has begun to open up since the Association of Southeast Asia Nations’ free-trade agreement went into effect Jan. 1, 2010, and the advantages of being national car companies no longer are as important as they once were.

As recently as 2002, the two Malaysian auto makers held 78.6% of the domestic market, but their combined share was down to 57% in 2011– 30% for Perodua and 27% for Proton. This year, LMC Automotive foresees a further decline to 55%, with Proton’s market share slipping to 25% as more than 30 foreign auto makers compete for domestic sales. 

The Malaysian market is changing too, maturing and near saturation. Car ownership in the small, prosperous country of 28 million now is one for every four people, similar to that in developed countries. Light-vehicle sales were down 1% to 596,000 units last year, and LMC Automotive expects a 5% rise this year to 623,500.

A leaner, meaner Proton, amenable to changes of all kinds, may be forged by DRB-Hicom to make the new acquisition more competitive at home and abroad.

The overhaul and housecleaning probably will reduce or end Proton’s involvement in Formula 1 racing. And Lotus, the auto maker’s money-losing subsidiary, soon may be for sale.

“Lotus offers no benefits to Proton. It has been a drag on the company and should be sold, the sooner the better,” Master says.

Now that a savior has been found, Malaysia’s first national car company soon will start down the road to salvation. But how that road will wind and where it will lead is not clear.

“Success or failure depends on DRB-Hicom getting good new managers and a global partner for Proton,” Yamamoto says.

Master adds: “The need to improve production techniques and the quality of Proton automobiles are critical. I’m leaning toward success for DRB-Hicom’s new venture, but it will take time, probably four or five years, to tell how well it is working.”