The waiting is over and the speculation can stop: VW and Proton are no longer in discussion to form a strategic partnership. The news was announced by VW CEO Bernd Pischetsrieder when meeting analysts during the North American International Auto Show yesterday. Basically, his remarks made it clear that VW is not going to counter-propose and that any relationship that can be forged will be straight business deals, perhaps sale of engines (as with Renault Moteurs) or even providing some specialised automotive services.
“We had a very specific idea how we wanted to proceed there [in Malaysia]. Unfortunately, the Malaysian government, Khazanah and Proton had different ideas. Therefore what we wanted in the cooperation with Proton will not materialise,” Mr Pischetsrieder told investors at a conference at a hotel in Dearborn, Michigan.
Mr Pischetsrieder would have been wary of entering into a partnership with Proton in a rush after his ‘Rover experience’ at BMW. Back in the mid-1990s, he had made the decision for BMW to acquire Rover from British Aerospace and it had been a move so bad that it cost BMW very dearly, resulting in his departure from the company.
It is not that surprising that VW has made such a decision since it has been more than twelve months since it signed a Memorandum of Understanding (MoU) with Proton in October 2004. The MoU laid out the terms of reference for the two companies to explore a strategic partnership as well as to have two VW models assembled at Proton’s plant. The expectation was that the discussions would enable production to start by the end of 2005 and for sales of the models – as VW models and not as re-badged Protons – to commence in early 2006.
VW’s plan then, as presented to Merill-Lynch by its Head of Investor Relations, Mrs Gillian Karran-Cumberledge, was to use Malaysia as a base to penetrate ASEAN, without making extensive capital investments. It was thus a simple plan to grow VW volumes in the region by assembling them in Malaysia so that AFTA’s preferential tariffs could be enjoyed and the cars could be sold more cheaply in ASEAN.
Proton, however, seemed to want something more and wanted VW to become its partner, the same way that Mitsubishi Motors had been. In this scheme of things, Proton could then have access to VW platforms and therefore offer new models, something which it knew was very costly to develop on its own. Just to develop one brand new model like the Waja had cost about one billion ringgit – and even then, its platform had been adapted from the Mitsubishi Carisma (which was originally strongly denied but which has been acknowledged in the past year).
During the second quarter, Mr Pischetsrieder made his one and only statement on the discussions which was fairly neutral. On the issue of VW taking a stake in Proton, he said that it could be considered ‘only once VW finished its plans over the next 5 to 7 years’, which suggested that VW was in no hurry to become Proton’s partner and to do things like sharing platforms. After that statement, VW went quiet although to the Malaysian public, there was the perception that VW was ‘saying positive things’ when in fact they never did during the second half of 2005. Virtually every statement on the progress of the discussions originated from Proton without any complementary statement from the German company. And with each positive statement, Proton’s share value improved as well because the local investment community strongly believed that Proton’s survival was largely dependent on forming the strategic alliance. Many people just did not seem to understand the difference between a MoU – which only lays out the areas to explore – and a signed agreement and VW did not sign any agreement.
Local enthusiasts were also excited by the news because they felt that if VW was with Proton and sharing platforms, then it might be possible to buy a VW-badged as a Proton at a lower price. But that was only wishful thinking; as far as VW was concerned, they would initially build the Passat (and not even the latest generation) and a smaller sedan called the Fox. No Golf GTI or Polo, and certainly not a Touareg.
Things began to get complicated during the second half of 2005 with the AP controversy that saw an importer of VWs (Amazing Tempo) embroiled in a controversy relating to the ‘tuned-up’ nature of its products which were badged as Walds. VW made no comment on this development other than to confirm that it had no official representation in Malaysia at that time. At the same time, EON also announced that it had given up its VW distributorship (but retained Audi) which it had been obtained in late 2003, partly because VW was supposedly in discussions with Proton for something more than just making cars.
Going by a similar situation in the past, this was not unusual for Proton. In 1997, Peugeot had approached Proton to see if its cars could be assembled by Proton. It had been having some problems with its local partner and it wanted to ensure continued production. Proton was keen – but at the same time wanted to be made the distributor of the cars. At that time, according to a senior Peugeot executive this writer spoke to, Peugeot had no intention to change distributors and so it did not go further in the discussions.
Central to the issue in the negotiations with VW seems to have been the stake VW could take in the partnership. As mentioned earlier, VW was in no hurry to become a major partner but Proton might have been insistent and perhaps along the way, VW made some positive expressions which had led Proton Advisor Tun Mahathir to say that “If we want to, we can sell more than 50% to Volkswagen. They are quite willing, I think, to buy even 100%". But while this may have been so, Proton’s decision-making process was hampered by two factions – those who saw the handing over of management control to VW as the best thing for Proton’s future and those who saw such a move as being ‘the end’ for the national company.
Needless to say, the former PM, who was instrumental in getting Proton started, has been against the idea of letting foreigners own and run Proton. “Our fear, of course, is if they buy 100%, they might close the production of our national car and just assemble their cars," he warned at a press conference last year, adding that thousands of Malaysians would be out of jobs as a result because Malaysian suppliers would have to close shop.
Through all this, the Germans probably waited patiently for some clear direction to be presented. It is likely that they were also getting tired of the domestic issues that were delaying their plans. Remember that Mrs Karran-Cumberledge had told its major investors that the company would start its Malaysian assembly operations by the end of December 2005 and commence sales in early 2006. To meet this deadline meant that things had to be signed and sealed so that equipment could be moved in, production schedules established, workers trained, suppliers recruited, etc – not something which can be done in a month or two. Yet things dragged on and rather than focus on the thing that VW wanted to do most, which was to start assembling its cars, Proton was probably negotiating on other areas that were not of immediate interest to VW.
It can’t have helped either when Proton, towards the end of 2005, laid its final cards down on the table, so to speak, in order to bring the discussions to an end one way or another, stating that its stand on Malaysians retaining management control was not going to change. A newspaper report in late December quoted a source saying that VW ‘had dropped their insistence on having a controlling stake’, which seems rather questionable now in the light of the VW CEO’s remarks yesterday. In any case, Proton’s chairman told the Malaysian press that VW had been told of the Malaysian conditions of the partnership and also expected to respond within a certain time-frame.
So VW has responded – and the news can’t be good for Proton although we should remember that Tun Mahathir has often said that there are ‘many other companies keen to buy Proton’ and former Proton CEO Tan Sri Tengku Mahaleel had also declared to The Edge that ‘there are many companies that are now looking at Proton to supply technology’. So if VW is no longer going to partner Proton, is the end in sight?
Not necessarily as Proton is a national company and owned by the Malaysian government. AFTA has complicated things since it cannot just increase the level of protection for Proton to enable it to have any price advantage over others. To make such a move would incur the wrath of the other ASEAN members who were already angered by the 2-year extension Malaysia was granted for its auto sector.
Proton is not the first carmaker to go through such a situation of a potential saviour walking away. Nissan had also been counting on DaimlerChrysler to buy into it when it was bleeding red ink but at the last moment, DC’s CEO Jurgen Schrempp could not get his fellow board members to support his decision to take over Nissan and so the deal was terminated. Fortunately for Nissan, though, Renault was looking for an alliance partner and seized the opportunity to establish it with Nissan. By all accounts, it has worked remarkably well, thanks in no small way to Carlos Ghosn.
Likewise with Volvo in the late 1980s when it was almost becoming a partner with Renault, the deal was stopped by Swedish shareholders and Volvo had to go it alone. Somehow it managed to get through the 1990s, making the transition to an entirely new generation of models with front-wheel drive, and then in the late 1990s, it was bought over by Ford.
The next move for Proton is hard to determine but it is likely that the company will continue to seek a strong partner. This is the only course for survival because the reality is that Proton is too small to compete as it lacks the crucial economies of scale. New products are needed frequently and Proton cannot afford to develop them; without new products, sales will be slow and market share will decline which means revenues will fall. The car-making business is a ‘big boy’s game’ and if you don’t have the size, you just cannot make it in today’s environment.
It is possible that the potential partner will be an Asian company which will have greater sensitivity to ‘national sentiments’ unlike western companies which can be cold-blooded because it is all business. An Asian company may understand the need to allow Malaysians to have a ‘dominant’ position and accept quietly working behind the scenes instead.
It could well be a company from China as carmakers there are now embarking on global expansion plans and may see a partnership with Proton, even a small one, as a worthwhile venture to get a toehold into the ASEAN market. They may appreciate Proton’s capabilities more than the more advanced global players who already have plenty of resources so that could be a win-win situation for Proton.
Mitsubishi Motors was rumoured to also be interested but it seems unlikely as the company has already begun its own operations in Malaysia, resuming the sale of passenger cars after 20 years. The company is also not financially strong like it was in the early 1980s and would be unlikely to want to withdraw from the market again.
The Koreans? Hyundai was also rumoured to be in discussion with Proton last year and it is not clear who started the rumour which also dragged in Sime Darby, Hyundai’s distributor. It was believed that Sime Darby would buy over Proton – a politically-acceptable move which would keep it in Malaysian hands – and then bring in Hyundai. Sime Darby has refuted such a scenario and Hyundai has remained silent as well.
It’s a pity that Proton has lost the opportunity to secure a stronger future with VW because of the government’s insistence on maintaining Malaysian control and management. Had it been willing to turn over Proton to the Germans, it is possible that Proton could have become the ‘Skoda of ASEAN’ replicating the successful turnaround that the Czech company experienced when VW bought it over in 1990. With platforms supplied by VW and low cost, high-quality parts, Skoda grew rapidly during the 1990s and has been contributing as much as 9% of the country’s GDP through its exports.
Meanwhile, VW should be getting its own show going in Malaysia in the near future. It has already set up VW Malaysia Sdn Bhd and Axel Barth, MD of the company, said that all will be revealed by the time of the Kuala Lumpur International Motor show at the end of May, if not earlier. Quite likely, VW had already planned to start its business in 2006 one way or another; if it could get Proton to build its models, then it would have lower-priced models to offer as well as selected CBU models. Now it seems that it will have to do without the locally-assembled models which will limit its penetration since the imported cars won’t be cheap.
“We had a very specific idea how we wanted to proceed there [in Malaysia]. Unfortunately, the Malaysian government, Khazanah and Proton had different ideas. Therefore what we wanted in the cooperation with Proton will not materialise,” Mr Pischetsrieder told investors at a conference at a hotel in Dearborn, Michigan.
Mr Pischetsrieder would have been wary of entering into a partnership with Proton in a rush after his ‘Rover experience’ at BMW. Back in the mid-1990s, he had made the decision for BMW to acquire Rover from British Aerospace and it had been a move so bad that it cost BMW very dearly, resulting in his departure from the company.
It is not that surprising that VW has made such a decision since it has been more than twelve months since it signed a Memorandum of Understanding (MoU) with Proton in October 2004. The MoU laid out the terms of reference for the two companies to explore a strategic partnership as well as to have two VW models assembled at Proton’s plant. The expectation was that the discussions would enable production to start by the end of 2005 and for sales of the models – as VW models and not as re-badged Protons – to commence in early 2006.
VW’s plan then, as presented to Merill-Lynch by its Head of Investor Relations, Mrs Gillian Karran-Cumberledge, was to use Malaysia as a base to penetrate ASEAN, without making extensive capital investments. It was thus a simple plan to grow VW volumes in the region by assembling them in Malaysia so that AFTA’s preferential tariffs could be enjoyed and the cars could be sold more cheaply in ASEAN.
Proton, however, seemed to want something more and wanted VW to become its partner, the same way that Mitsubishi Motors had been. In this scheme of things, Proton could then have access to VW platforms and therefore offer new models, something which it knew was very costly to develop on its own. Just to develop one brand new model like the Waja had cost about one billion ringgit – and even then, its platform had been adapted from the Mitsubishi Carisma (which was originally strongly denied but which has been acknowledged in the past year).
During the second quarter, Mr Pischetsrieder made his one and only statement on the discussions which was fairly neutral. On the issue of VW taking a stake in Proton, he said that it could be considered ‘only once VW finished its plans over the next 5 to 7 years’, which suggested that VW was in no hurry to become Proton’s partner and to do things like sharing platforms. After that statement, VW went quiet although to the Malaysian public, there was the perception that VW was ‘saying positive things’ when in fact they never did during the second half of 2005. Virtually every statement on the progress of the discussions originated from Proton without any complementary statement from the German company. And with each positive statement, Proton’s share value improved as well because the local investment community strongly believed that Proton’s survival was largely dependent on forming the strategic alliance. Many people just did not seem to understand the difference between a MoU – which only lays out the areas to explore – and a signed agreement and VW did not sign any agreement.
Local enthusiasts were also excited by the news because they felt that if VW was with Proton and sharing platforms, then it might be possible to buy a VW-badged as a Proton at a lower price. But that was only wishful thinking; as far as VW was concerned, they would initially build the Passat (and not even the latest generation) and a smaller sedan called the Fox. No Golf GTI or Polo, and certainly not a Touareg.
Things began to get complicated during the second half of 2005 with the AP controversy that saw an importer of VWs (Amazing Tempo) embroiled in a controversy relating to the ‘tuned-up’ nature of its products which were badged as Walds. VW made no comment on this development other than to confirm that it had no official representation in Malaysia at that time. At the same time, EON also announced that it had given up its VW distributorship (but retained Audi) which it had been obtained in late 2003, partly because VW was supposedly in discussions with Proton for something more than just making cars.
Going by a similar situation in the past, this was not unusual for Proton. In 1997, Peugeot had approached Proton to see if its cars could be assembled by Proton. It had been having some problems with its local partner and it wanted to ensure continued production. Proton was keen – but at the same time wanted to be made the distributor of the cars. At that time, according to a senior Peugeot executive this writer spoke to, Peugeot had no intention to change distributors and so it did not go further in the discussions.
Central to the issue in the negotiations with VW seems to have been the stake VW could take in the partnership. As mentioned earlier, VW was in no hurry to become a major partner but Proton might have been insistent and perhaps along the way, VW made some positive expressions which had led Proton Advisor Tun Mahathir to say that “If we want to, we can sell more than 50% to Volkswagen. They are quite willing, I think, to buy even 100%". But while this may have been so, Proton’s decision-making process was hampered by two factions – those who saw the handing over of management control to VW as the best thing for Proton’s future and those who saw such a move as being ‘the end’ for the national company.
Needless to say, the former PM, who was instrumental in getting Proton started, has been against the idea of letting foreigners own and run Proton. “Our fear, of course, is if they buy 100%, they might close the production of our national car and just assemble their cars," he warned at a press conference last year, adding that thousands of Malaysians would be out of jobs as a result because Malaysian suppliers would have to close shop.
Through all this, the Germans probably waited patiently for some clear direction to be presented. It is likely that they were also getting tired of the domestic issues that were delaying their plans. Remember that Mrs Karran-Cumberledge had told its major investors that the company would start its Malaysian assembly operations by the end of December 2005 and commence sales in early 2006. To meet this deadline meant that things had to be signed and sealed so that equipment could be moved in, production schedules established, workers trained, suppliers recruited, etc – not something which can be done in a month or two. Yet things dragged on and rather than focus on the thing that VW wanted to do most, which was to start assembling its cars, Proton was probably negotiating on other areas that were not of immediate interest to VW.
It can’t have helped either when Proton, towards the end of 2005, laid its final cards down on the table, so to speak, in order to bring the discussions to an end one way or another, stating that its stand on Malaysians retaining management control was not going to change. A newspaper report in late December quoted a source saying that VW ‘had dropped their insistence on having a controlling stake’, which seems rather questionable now in the light of the VW CEO’s remarks yesterday. In any case, Proton’s chairman told the Malaysian press that VW had been told of the Malaysian conditions of the partnership and also expected to respond within a certain time-frame.
So VW has responded – and the news can’t be good for Proton although we should remember that Tun Mahathir has often said that there are ‘many other companies keen to buy Proton’ and former Proton CEO Tan Sri Tengku Mahaleel had also declared to The Edge that ‘there are many companies that are now looking at Proton to supply technology’. So if VW is no longer going to partner Proton, is the end in sight?
Not necessarily as Proton is a national company and owned by the Malaysian government. AFTA has complicated things since it cannot just increase the level of protection for Proton to enable it to have any price advantage over others. To make such a move would incur the wrath of the other ASEAN members who were already angered by the 2-year extension Malaysia was granted for its auto sector.
Proton is not the first carmaker to go through such a situation of a potential saviour walking away. Nissan had also been counting on DaimlerChrysler to buy into it when it was bleeding red ink but at the last moment, DC’s CEO Jurgen Schrempp could not get his fellow board members to support his decision to take over Nissan and so the deal was terminated. Fortunately for Nissan, though, Renault was looking for an alliance partner and seized the opportunity to establish it with Nissan. By all accounts, it has worked remarkably well, thanks in no small way to Carlos Ghosn.
Likewise with Volvo in the late 1980s when it was almost becoming a partner with Renault, the deal was stopped by Swedish shareholders and Volvo had to go it alone. Somehow it managed to get through the 1990s, making the transition to an entirely new generation of models with front-wheel drive, and then in the late 1990s, it was bought over by Ford.
The next move for Proton is hard to determine but it is likely that the company will continue to seek a strong partner. This is the only course for survival because the reality is that Proton is too small to compete as it lacks the crucial economies of scale. New products are needed frequently and Proton cannot afford to develop them; without new products, sales will be slow and market share will decline which means revenues will fall. The car-making business is a ‘big boy’s game’ and if you don’t have the size, you just cannot make it in today’s environment.
It is possible that the potential partner will be an Asian company which will have greater sensitivity to ‘national sentiments’ unlike western companies which can be cold-blooded because it is all business. An Asian company may understand the need to allow Malaysians to have a ‘dominant’ position and accept quietly working behind the scenes instead.
It could well be a company from China as carmakers there are now embarking on global expansion plans and may see a partnership with Proton, even a small one, as a worthwhile venture to get a toehold into the ASEAN market. They may appreciate Proton’s capabilities more than the more advanced global players who already have plenty of resources so that could be a win-win situation for Proton.
Mitsubishi Motors was rumoured to also be interested but it seems unlikely as the company has already begun its own operations in Malaysia, resuming the sale of passenger cars after 20 years. The company is also not financially strong like it was in the early 1980s and would be unlikely to want to withdraw from the market again.
The Koreans? Hyundai was also rumoured to be in discussion with Proton last year and it is not clear who started the rumour which also dragged in Sime Darby, Hyundai’s distributor. It was believed that Sime Darby would buy over Proton – a politically-acceptable move which would keep it in Malaysian hands – and then bring in Hyundai. Sime Darby has refuted such a scenario and Hyundai has remained silent as well.
It’s a pity that Proton has lost the opportunity to secure a stronger future with VW because of the government’s insistence on maintaining Malaysian control and management. Had it been willing to turn over Proton to the Germans, it is possible that Proton could have become the ‘Skoda of ASEAN’ replicating the successful turnaround that the Czech company experienced when VW bought it over in 1990. With platforms supplied by VW and low cost, high-quality parts, Skoda grew rapidly during the 1990s and has been contributing as much as 9% of the country’s GDP through its exports.
Meanwhile, VW should be getting its own show going in Malaysia in the near future. It has already set up VW Malaysia Sdn Bhd and Axel Barth, MD of the company, said that all will be revealed by the time of the Kuala Lumpur International Motor show at the end of May, if not earlier. Quite likely, VW had already planned to start its business in 2006 one way or another; if it could get Proton to build its models, then it would have lower-priced models to offer as well as selected CBU models. Now it seems that it will have to do without the locally-assembled models which will limit its penetration since the imported cars won’t be cheap.
