Bailout Alert in Malaysia

The national car project that former Prime Minister Mahathir Mohamad nurtured against the advice of most of his advisers, all of his critics and common sense appears finally to be nears its demise, unable to achieve the economies of scale that would allow it to survive – unless once again the government bails it out.

Perusahaan Otomobil Malaysia Sdn Bhd, or Proton, has vainly been seeking a foreign partner to save it from going bust ever since Abdullah Ahmad Badawi took over from Mahathir in 2003 and began cutting away at many of Mahathir’s favorite projects. Proton has been talking to a number of potential foreign players, including US car giant General Motors (GM), Volkswagen and, PSA Peugeot Citroen.

But nobody calls, nobody writes. Despite reports that Proton was in talks with the German carmaker Volkswagen as long ago as 2004, Abdullah Badawi was recently quoted in the local media saying that he was still waiting for the CEO of Volkswagen to negotiate a deal. Nothing more has happened.

Proton is more than just a national car. It was the focal point of Mahathir’s dream to turn Malaysia into an industrial powerhouse built on the country’s considerable natural wealth of rubber, palm oil and crude. The car was one of a flock of mega-projects that Mahathir forced onto Malaysia in the 1980s and 1990s, creating steel mills, the US$475 million Petronas Twin Towers in Kuala Lumpur, a US$5.5 billion Putrajaya administrative capital, the US$2.4 billion Kuala Lumpur International Airport, the US$15 billion Multi-Media Super Corridor which was supposed to eclipse Silicon Valley. The Bakun Dam in Sarawak was to generate enormous amounts of electrical power to be piped through 1,500 kilometers of underwater cables to West Malaysia. A vast network of highways was flung across the country.

Certainly the country is far different today than when Mahathir first became prime minister, to a large extent because of his vision. The highway system has transformed travel. Kuala Lumpur is a gleaming, modern Asian capital, crisscrossed by excellent expressways, its people far more prosperous than anyone would have dreamed 25 years ago. But huge amounts of money also have simply been wasted or lost to corruption, raising profound questions over whether Mahathir took the right development path.

Perwaja Steel, designed to spearhead Malaysia’s industrialization, lost US$800 million and its chairman was arrested. The Petronas Towers have been superseded as the world’s tallest buildings after contributing to a real estate glut in KL. Petronas, the national oil company and perennial cash cow for bailouts, occupies one entire 88-storey tower. The super corridor has fallen far short of its goal of turning Malaysia into an IT powerhouse as the tech boom has bypassed the country and largely gone to India. The Bakun Dam, considered a major white elephant because there is nowhere to sell the power it would generate, has yet to be built.

But Proton will probably end up as Mahathir’s biggest failed legacy unless something so-far unexpected happens. It is unknown how much taxpayer money has gone down the drain. Some analysts put the figure between US$2 billion and US$$3 billion. Certainly the opportunity to consumers was staggering, as tariffs up to 200 percent on competing carmakers kept them out of Malaysia’s markets.

Japan’s Mitsubishi Corp., which persuaded Mahathir to retool an even-then ageing Lancer in 1985 and put an Islamic star and shield on the hood, quit in 2004 and sold its 16 percent stake back to Proton Holdings Bhd, the holding company for Perusahaan Otomobil Nasional, the parent company.

After Mitsubishi pulled out, the absence of newer models and the inability to find a reliable and technically sound foreign partner meant that sales began to decline. Although Proton had more than 60 percent of the market in 2002, that fell to 30 percent by 2006 and has continued to decline. 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 market share.

Analysts say Proton’s cash reserves plummeted from around 2 billion ringgit at the end of 2004 to less than 500 million ringgit today. A recent Wall Street Journal-Asia report suggests that as Proton burns up about 300 to 500 million ringgit annually, the company will go into the red by the end of 2008.

General car sales figures released recently by the Malaysian Automotive Association (MAA) point to a sluggish consumer market, with sales of all new cars down nearly 13 percent in April of this year. The number of cars sold was considerably lower year-on-year compared to April of 2006. The MAA has blamed the decline on a lack of consumer confidence, difficulty in getting hire-purchase loans and poor resale value of used cars.

The lackluster sales market is proving to be a deadly blow for Proton, prompting an association of Proton car dealers to launch an appeal for the car company to find a strategic partner quickly. There have also been offers from local Malaysian conglomerates well established in the automotive industry such as DRB-Hicom Bhd and the Naza group of companies.

The Proton Edar Dealer’s Association Malaysia (PEDA) – ethnic Malays who were given preferential treatment to become dealers and distributors – are putting out an SOS, saying they have averaging monthly losses of about 20,000 ringgit per dealer. These dealers, who cashed in during the good days are now in dire straits as the government is less willing to continue extending protectionist policies.

Even with today’s tariffs, Malaysia now has an influx of cheaper, newer and higher-quality cars from Korea and Japan. Nissan and Hyundai are popular options and have chipped away at Proton's market share by introducing locally produced models at competitive prices.

The chances of Proton of being snapped up by a foreign partner are slim, although the prize for any potential partner would undoubtedly be Proton’s new 2 billion ringgit production plant in Tanjung Malim north of Kuala Lumpur, which is severely under-utilized. 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.

A potential tie-up with a foreign partner could very well increase that production capacity to around 350,000 units a year and lower production costs as well as provide inroads to the Asian market, particularly into India and China. The Malaysian parliament was told recently by a senior member of the cabinet that the government was still exploring possibilities with overseas car makers and would only talk to local partners after that.

But there is the problem of the increasingly furious Mahathir, who was appointed a special advisor to Proton after he left the premiership.

"If you sell to a foreign company, it will no longer be a national car,” he said. “They have to sell to a local company."

He has had public clashes with its present management, which seems to be in favor of positioning Proton to compete in an eventual open market. The political wrangling is sending negative signals on Malaysia’s willingness to cede control of the national car maker to foreign interests.

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.

Even the local distributors and dealers are in favor of a change of direction for the ailing car maker. PEDA in its statement said that “the foreign partnership will expedite future model variants for these different market segments and improve quality”.

The government is committed to exposing Proton to market forces. Its new automotive policy, which aims to enhance competitiveness in the local automotive sector as well as reduce import duty on cars in compliance with its trade pact obligations, is under intense scrutiny and pressure.

The issue is tricky. Proton has around 12,000 employees and in an election year the government would be hard pressed to cut jobs. Mahathir has hit out at the policy, warning that the government could soon “kill Proton.” Thus, the situation is delicate for Abdullah Badawi in introducing reforms without attracting blame for demise. Ironically, the only solution to the problem may be a return to the old ways of the Mahathir era – a bail-out, something the government has so far refused to consider.