Ailing Proton Looks to Mecca

Malaysia’s perennially ailing national carmaker Proton may try to revive its fortunes by pointing itself toward Mecca, quite literally. The company that controls the troubled automaker may seek ties with companies in Iran and Turkey to produce an “Islamic” car, complete with Muslim accessories for motoring believers.

Khazanah Nasional, the company that controls Proton, is looking for a savior since talks with German carmaker Volkswagen have been called off, according to a joint statement the two companies issued Tuesday, ending Proton’s latest search for a global partner that would give it economies of scale to help it survive in an increasingly free market.

Instead, Khazanah officials say, they may seek ties with carmakers in Turkey and Iran to produce Islamic cars using GPS to locate Mecca, and featuring compartments for storing the Koran, headscarfs and prayer rugs, Proton’s managing director, Syed Zainal Abidin, told reporters.

The idea calls up a scheme cooked up by former Prime Minister Mahathir Mohamad and then-finance minister Tengku Razaleigh Hamzah in the 1980s to create Islamic toilets by rebranding Japanese toilets that shoot jets of cleansing water up the privates at the press of a button (located on the left), as Muslims regard toilet paper as unclean. Despite visions of sales across Bangladesh, Pakistan, Indonesia and other Islamic countries, the idea did not turn Malaysia into an international toilet exporter.

"The car will have all the Islamic features and should be meant for export purposes. We will identify a car that we can develop to be produced in Malaysia, Iran or Turkey," Syed Zainal said.

That cut little ice with market analysts or the stock market. Proton’s shares promptly dived by nearly 20 percent on news of the collapsed negotiations and of another report that the possibility of a tie-up with the US’s General Motors was also off.

Prime Minister Abdullah Ahmad Badawi, who originally was inclined to kill the ailing national car when he came into office in 2003, told reporters in Singapore that Proton was "doing well," and added that no government bailout was in the works. "Proton has started turning around now," he told a press conference, arguing that the export campaign would save it.

That was a statement made pretty much for domestic consumption, in the face of considerable evidence to the contrary. The state-controlled company recently endured its fifth straight quarterly loss, of US$13.8 million. Proton lost $169 million in the 2007 financial year, beset by inroads made by multinational automakers triggered by Malaysia’s agreement to abide by the rules of the World Trade Organization.

Proton’s market share continues to slide from its onetime high of more than 60 percent in 2002 to 30 percent by 2006. Since it came into existence in 1985, the car project has lost billions of dollars, and much more in opportunity costs to consumers, who were either forced to buy it or pay staggering tariffs to buy cars built or imported by global carmakers.

The Asia Free Trade Area has mandated tariff reductions to a maximum of 5 percent by next year, which should spell a further drop in sales. As tariffs have fallen, Proton has been under attack from cheaper, newer and better cars from Korea and Japan. Nissan and Hyundai are popular options and have chipped away by introducing locally produced models at competitive prices.

But, Kazanah officials say, improving domestic and export sales, particularly from the car company’s Persona models, led to the decision to call off negotiations with Volkswagen. "The government is therefore of the view that Proton's management should be allowed to continue with its plans to further strengthen the company," management said in a press release.

“The public is taking up the new Proton models like never before. I think that’s great, it was heart-breaking to see the shape Proton and its vendors were in,” Said a Kuala Lumpur-based analyst. “Like it or not, Proton has costs us billions, so simply shutting it down is an option too hard to swallow. The question is whether or not Proton executives can get their act together and sustain a long-term recovery to profitability. Is this just a brief respite? Shouldn't they be thinking strategic global initiatives? Only an international technologically advanced partner can lift Proton."

Turkish carmakers don’t cause investors’ blood to surge. But in the face of American churlishness over Iran’s supposedly innocent plans to go nuclear for power, the country’s auto industry is doing amazingly well. With a tenth of the world’s oil reserves, Iran is home to the Middle East’s biggest car industries, building a million vehicles a year for a market that is as big as Australia’s and three times that of Indonesia, according to an article in the Sydney Morning Herald. Korea’s Kia is producing a version of its Pride in Turkey, Peugeot has a version of its popular 405 and Renault invested US $300 million with the automaker Saipa.

Talk to the contrary, there is no indication that Islamic livery would produce a buying spree amongst any but the most faithful, any more than the Islamic toilet became an export item, and it appears that the Iranians and Turks are fully capable of producing their own Islamic models. But as with everything in Malaysia, politics plays a more important role than economics in industrial policy.

Proton was the focal point of Prime Minister Mahathir Mohamad’s dream to turn Malaysia into an industrial powerhouse. But when Abdullah Badawi took over in 2003 and began cutting away at many of Mahathir’s favorite projects, Proton was in peril. But Abdullah Badawi has been forced to back away from his vows to rid the country of huge white elephant projects. As the prime minister’s political capital has been devalued by his reputation for indecision, he has increasingly backed away from the bold pronouncements he made when he came to power.

For four years, Proton has been in talks with potential foreign players, including GM, Volkswagen and, PSA Peugeot Citroen. Malaysia’s policymakers in an election year are not willing to face the possibility that as many as 12,000 jobs could be lost by the closure of Proton’s factories and ancillary marketing, advertising and other businesses. Proton’s 2 billion ringgit production plant in Tanjung Malim north of Kuala Lumpur, which is severely under-utilized, is a plum that foreign automakers have eyed sporadically. The plant, which was envisaged to churn out about 400,000 cars a year, is now only producing about 200,000, shooting the concept of economies of scale dead.

Although a foreign partner could very well increase production capacity to around 350,000 units a year and lower production costs, the old bosses of the United Malays National Organisation, don’t want to give the facilities away to foreign partners, Islamic or otherwise. Certainly the idea that consumers will feel a patriotic duty to buy local has been disproved all over the planet, and the Malaysian public is no different. Car buyers have already been worn down by unceasing complaints over the quality of Proton cars and their high price. A story on Proton that ran last June in Asia Sentinel generated 44 replies – all but two complaining about quality or the government’s misguided economic policy that produced it in the first place.

"Proton cars have been selling well locally for the last few months but at the end of the day, Proton has to be competitive globally," Kurnia Insurans chief investment officer Pankaj Kumar told AFP. "I don't think it has been that innovative. The new models are mostly re-badged versions of previous models."