UPDATE 2-Malaysia ends talks with VW, GM over Proton


(Adds quotes, analyst comments)

FRANKFURT/KUALA LUMPUR, Nov 20 (Reuters) - Malaysia and Volkswagen , the world's fourth-largest carmaker, have ended talks aimed at setting up a cooperation deal with struggling national carmaker Proton Holdings .

It was the second time in two years that VW-Proton talks over cooperation have ended without a deal, but VW said it still planned to build up a production base in Southeast Asia.

Malaysia announced on Tuesday that it would no longer look for a foreign partner for the ailing Proton for now and added that state investment firm Khazanah Nasional had stopped its talks with both VW and U.S. rival General Motors .

"The circumstances have changed," Second Finance Minister Nor Mohamed Yakcop was quoted by news agency Bernama as saying. He said rising domestic sales and exports should help tide Proton over its current difficulties.

But an industry source said the government's sudden change of heart could be due to other factors, including fear of ceding management control of Proton to VW and intense lobbying by Proton rivals who fear VW could flood the market with VW cars.

Analysts doubt that Proton can survive without a strategic partner.

"My initial reaction is one of disappointment," said fund manager Gerald Ambrose of Aberdeen Asset Management, adding that there had been hopes VW would transform Proton in the same way it had overhauled Czech car-maker Skoda.

"I think they (Proton) are going to find it difficult to go on their own, simply because of the volumes required in order to be profitable with your own marque in the global car manufacturing business," he said.

In early September VW had said it would step up its efforts to reach a deal, and the group's production boss, Jochem Heizmann, said at the beginning of this month he expected to reach a conclusion in the first half of next year.

"The Volkswagen group and the Malaysian government have decided not to further pursue for now joint discussions about a cooperation or an equity stake in the Malaysian carmaker Proton Holdings Bhd," VW said in a statement.

"Volkswagen will now independently examine other possibilities to enter the ASEAN market and further strengthen its sales operations in the region including Malaysia," it added.

Volkswagen has long been interested in strengthening its position in Southeast Asia and first agreed to a long-term strategic partnership with Proton in October 2004, only to say in January 2006 that it had scrapped the plans after Malaysia ruled out VW taking control of Proton.

The loss-making Proton, set up in 1983 by then Prime Minister Mahathir Mohamad, was for a long time state-protected due to affirmative-action policies aimed at giving extra business and employment opportunities to the country's majority ethnic Malays, and it sold at one point more than half of all new cars in Malaysia.

But ever since barriers to competition started coming down, Proton has lost market share, not just to international rivals but also to domestic carmaker Perodua.

The government said on Tuesday Proton aimed to increase its domestic market share to 40 to 50 percent from 31 percent currently through the introduction of new models.

Last November, the government announced it had decided to consider giving approval for VW to take a controlling stake in Proton's manufacturing operations.

The Malaysian government had also held talks with PSA Peugeot Citroen of France , as well as VW and GM, but all have proven to be futile. (Reporting by Christiaan Hetzner in Frankfurt and Mark Bendeich and Jalil Hamid in Kuala Lumpur, editing by Will Waterman)



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