Merging Malaysia’s National Car Companies Hard to Justify, Analysts Say

To unite Malaysia’s two national car companies or not; that is the question, but just how seriously such a move should be considered is unclear.

Industry analysts believe a pairing of Proton Holdings Bhd and Perusahaan Otomobile Kedua Nasional Sdn Bhd (Perodua) would be awkward at best and hard to justify on several important counts.

As national companies, both auto makers have been indulged and overprotected by the government for years, safely ensconced behind a wall of tariff barriers, tax exemptions, rebates, subsidies and other special privileges. Yet, they have developed quite differently in character, composition and conduct.

The coddling has left Proton handicapped by outdated technology, a limited lineup, overcapacity and lack of scale. Its shrinking market share has slid from a peak of 57% in 1993 to 30.6% of the passenger-car segment and 27.7% of total Malaysian vehicle sales in 2009.

Perodua, in a joint venture with Daihatsu Motor Co. Ltd., a subsidiary of Toyota Motor Corp., has benefitted from Japanese management skills and modern technology, climbing past Proton in 2006 to become Malaysia’s largest vehicle maker, with 34.6% of the car segment and 31.3% of total domestic sales last year.

More than 30 non-national auto makers competed for the remaining 41% of the market.

“Perodua has adopted Japanese ways of doing things, whereas Proton operates very much like a government unit,” says Ruechuorn ‘May’ Arthapan, director, J.D. Power Asia-Pacific Automotive Forecasting.

“It is not easy to find a fit between the two companies because of their different products, cultures and work practices.”

Proton share of passenger-car segment down from 57% in 1993 to 30.6% in 2009.

Adds Hajime Yamamoto, a director of IHS Automotive: “Proton badly needs to get modern technology from a global OEM but is having difficulty finding a foreign partner.”

He cites the unsuccessful search for a strategic tie-up with several major auto makers, including Volkswagen AG, PSA Peugeot Citroen and General Motors Co., all of which failed primarily because Malaysian negotiators would not yield management control.

Proton’s off-and-on negotiations since 2004 with the German auto maker ended earlier this year, and VW recently signed a memorandum of understanding with DRC-Hicom Bhd to begin complete-knocked-down assembly of its cars in Malaysia in 2011.

Malaysian authorities now are trying a new tack, with Perodua proposed as the missing link Proton needs to be more competitive and successful. Prime Minister Najim Razak floated the idea of merging or consolidating the national car companies in July at Proton’s 25th birthday celebration.

But there are suspicions Mahathir bin Mohamad, Proton’s founder who served as the country’s prime minister for 22 years and still holds political clout, may be behind the audacious proposal.

“Proton was the first national car company, the brainchild of Dr. Mahathir, and it is obviously more Malaysian than Perodua, in a joint venture with a Japanese company,” Yamamoto says.

Details are sketchy but Arthapan believes the intention is to merge Proton with Perodua, “creating one, stronger national car company in a structure that would leave Proton in control, with access to Daihatsu and Toyota technology and knowhow.”

Two of the main principles have spoken out and opinions differ. While Perodua has serious doubts about such a union, Proton understandably favors exploring a deal.

Proton’s Managing Director Syed Zainal recently told reporters both auto makers “have a strong desire to explore collaboration and consolidation.”

But Perodua Managing Director Aminar Rashid Salleh tactfully tells the Bernama news agency he welcomes any form of collaboration, while suggesting the differing business models would make a merger impossible.

“Perodua prefers to operate alone, not help their rival, and does not have any reason to assist Proton,” Yamamoto says, following a recent trip to Kuala Lumpur. “Daihatsu wants to concentrate on making their successful joint venture more competitive and doesn’t want anything to do with Proton’s problems.”

Arthapan agrees. “Perodua and Daihatsu are not enthusiastic, since it would be difficult to find any synergies in a merger.”

In theory, at least, the Malaysian government could force through a merger, but this is not considered likely for practical as well as political reasons.

“I don’t think the government can really push that hard,” says Yamamoto. “Daihatsu would put less, not more, resources into a merged company, or might even withdraw from the joint venture. And many people feel Perodua would be finished without Japanese technology and management knowhow.”

About all Proton has to bring to the negotiating table for any tie-up is massive overcapacity, and even this has doubtful value. The main Shah Alam plant can produce 230,000 vehicles annually. The newer Tanjung Malim, built in 2003 with a design capacity of 1 million units a year, currently is equipped to build 100,000.

These numbers compare with Proton sales of 148,031 vehicles in 2009. J.D. Power Asia-Pacific estimates the company’s sales will be flat this year at 148,489 and drop to 145,498 in 2015.

“Only Proton has low-capacity utilization,” says Athapan. “Other auto makers in Malaysia are fully utilizing their installed capacity and may have to add more shifts to meet demand.”

The Malaysian Automobile Assn. says capacity utilization is 215% at UMW Toyota Motor Sdn Bhd, 202% at Honda Malaysia Sdn Bhd and 164% at Perodua, compared with 54% at Proton’s Shah Alam facility and 42% at Tanjung Malim.

Tapping into Proton’s excess capacity reportedly has no appeal for Perodua, which appears to have ample in-house capabilities. J.D. Power estimates the auto maker’s sales will climb 12.6% in 2010, compared with the prior year, to 187,764 vehicles, rising to 205,864 in 2015.

However, the combined output of both car companies is relatively small, and analysts in Kuala Lumpur dismiss claims a merger or consolidation would enhance economies of scale, reduce costs or help exports.

Proton has ambitious plans to expand exports into Southeast Asia, China, India, the Middle East and North Africa, but the competition in these regions is stiff. Plus, hitting an export target of 20% of production, up from 9% last year, will be difficult to reach.

Perodua exports are negligible, just 0.34% of production in 2009, and likely to remain so, Yamamoto says. “Daihatsu managers do not think Perodua is very competitive in global or regional markets and want to concentrate on the Malaysian market.”

Given the current health of each national car company and the difference in their prospects, analysts believe a union would benefit Proton at the expense of Perodua.

The most industry experts see materializing on the positive side might be an expansion in the working relationship between the two auto makers, which already includes Perodua’s production of up to 120,000 cylinder heads annually for Proton.

“Commonizing some parts might be looked into to give suppliers more economies of scale, but that is easier said than done, involving a lot of redesigning and re-engineering,” says Arthapan.

Adds Yamamoto: “More cooperation between the two national car companies is possible, but cooperation won’t solve Proton’s basic problems.”

And although a decision on the proposed merger or consolidation reportedly is expected by year’s end, Arthapan is skeptical. “So far, it’s just talk,” she says.

Things still are in an early stage, and it likely will take a long time for the Malaysian government to reach a decision. No one will be surprised at an announcement in December that more time is needed to study the pros and cons of the proposal.

“This is a long-term push to make Proton more competitive,” Arthapan says. “With government support, the car company can continue to operate indefinitely.”