When national pride is too costly

Malaysia is not losing anything with the sale of a 49.9% equity in Proton to a strategic partner 

Wong Chun Wai, The Star

LET’S be frank – it isn’t wrong to suggest that most Malaysians have long grown tired of using taxpayers’ money to keep the national car project afloat.

In other businesses, when a company is bleeding, immediate steps are taken to cut losses – either shut it down or sell it to another entity. In some cases, even firms which are making money are sold if the offer price is just too good to resist.

In the case of Proton Holdings Bhd, however, money has been continuously pumped in to keep the company alive, even when it was languishing in the intensive care unit.

We were just too afraid of offending Tun Dr Mahathir Mohamad because he is regarded as the brain behind the national car. But we need to face the truth. As much as we tried to keep Proton alive in the name of national pride, we all knew, deep in our heart of hearts, that Proton had become a national liability.

Since DRB-Hicom Bhd acquired Proton Holdings Bhd for RM1.29bil (or RM5.50 a share), it hurt the former’s earnings badly.

In the three years following the acquisition, Proton incurred RM1.93bil in after-tax losses for DRB-Hicom (as at March 31, 2015) as revenue fell on weakening sales volume.

The reality is that DRB-Hicom would have performed well if not for Proton. In the past four years, DRB-Hicom reportedly managed to almost double its Honda sales – from around 46,000 units a year to over 87,000 in 2015.

During that period, Proton’s sales declined about 33% to 102,175 units as at December 2015, according to a report.

Last week, following the announcement of the deal with Zhejiang Geely Holding Group, the share prices of DRB-Hicom shot up.

The DRB-Hicom shares rose to a high of RM1.86 early Thursday, when it resumed trading following the announcement of the deal.

The fact is this: Malaysia is just too small a market for a national car, and it doesn’t help that many Malaysians find other car brands to be more attractive than Proton.

In short, Proton’s acquisition was a huge burden on DRB-Hicom and its balance sheet. DRB-Hicom’s gross gearing – or borrowings – shot up to 0.91 times from only 0.26 times before the acquisition of Proton.

Last week, the former prime minister lamented the sale of Proton Holdings to foreigners and with some cynicism, remarking that the sale was just the beginning of having Malaysian assets, including land, sold off to foreigners.

“They say Proton is my brainchild. Now the child of my brain has been sold. Yes. I am sad. I can cry. But the deed is done. Proton can no longer be national. No national car now,” he was quoted as saying.

“Proton, the child of my brain, has been sold. It is probably the beginning of the great sell-out. The process is inexorable. No other way can we earn the billions to pay our debts. The only way is to sell our assets. And eventually, we will lose our country, a great country no doubt, but owned by others.”

Dr Mahathir must accept the reality that Malaysia is too small a market to support Proton’s growth. He cannot deny the fact that China is a huge market, selling 28 million cars a year, and with Geely’s stake in Proton, that door is now open to Proton.

The former premier is understandably sentimental about Proton, as it started with much optimism and hope. Every Malaysian wanted it to succeed, and most of us have, at some point in our lives, owned a Proton car.

But we need to look at the hard facts. Perusahaan Otomobil Nasional Bhd (Proton) was incorporated on May 7, 1983, to manufacture, assemble, and sell motor vehicles and related auto products. It produced Malaysia’s first commercial car, the Proton Saga, in July 1985.

Soon after its launch, Proton commanded the lion’s share of the local automotive market, but in the last 15 years, the market share has dropped. Last year, it fell to 12.5% of the local market share from 15.3% in 2015. Its total sales fell 29% year-on-year to 72,300 units due to deteriorating market conditions, said Hong Leong Investment Bank Research in a recent report.

We should be crying over this sad state of affairs and rejoicing that the financial burden of DRB-Hicom has now become lighter after Geely, which owns the Sweden-based Volvo Cars, agreed to buy 49.9% of Proton and a 51% stake in Lotus Cars from DRB-Hicom Bhd.

It doesn’t take a genius to guess that if the Chinese had their way, they would just take Lotus, as it is a premium brand name, surely desiring the technology from this James Bond car. But the deal was crafted in such a way that, if the Chinese wanted Lotus, it would need to take 49.9% of Proton.

It’s a clever trade off because DRB-Hicom is still the majority shareholder, and the national car remains in Malaysian hands.

More importantly, the 60,000 members of Proton’s staff and its 240,000 vendors, distributors, and suppliers, still get to keep their jobs. Surely the negotiators must be praised for pulling this off – it was not easy to do.

Ironically, the people of Sweden didn’t turn the Volvo deal into a political issue when Geely acquired 100% of the iconic car, which is a global name and, most certainly, the pride of Sweden.

The 240,000 vendors now, in fact, have a chance to provide their expertise to Volvo as well as the London Taxi Company, which produces the city’s famous black cabs, through its list of Global Sourcing Purchasing System.

That means that if Volvo in Sweden wishes to source for components producers, our Malaysian vendors will have a chance to be selected to manufacture automotive components for Volvo.

London Taxi has been acquired by the Chinese company, which recently opened a new factory in Coventry, Britain, investing some £300mil (RM1.67bil).

Were the British complaining that the black cab, a national symbol, has been taken over by the Chinese? Not at all. In fact, unless one follows the business transaction in the financial pages of the media, the average British bloke would have no idea at all.

It is really not unusual to see big foreign companies changing owners. The iconic Harrods in London is Egyptian-owned, don’t forget.

As a prominent retired official told me, the same argument can be applied to the Proton sale.

He said Proton would now grow bigger, produce more new models, sell in the Asean market, and employ more workers at its underutilised facility in Tanjung Malim, Perak.

The Jaguar, a British brand, has been owned by India’s Tata Motors since 2008. Vauxhall, one of the oldest British carmakers, was sold to the French.

Proton has the capacity to produce 400,000 vehicles but is currently being utilised at below 20%. Presently, its sales hovers around 6,000 units monthly, which is a pathetic figure.

To suggest that Proton has been sold off to a foreigner is preposterous. It is normal for any business entity to be on a 51:49% ratio.

Malaysia has lost nothing with the sale of a 49.9% equity to a strategic partner. It would be worse if we lose our sense of rationality and practicality in the name of national pride. Let’s get real.