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This article first appeared in The Edge Malaysia Weekly on February 26, 2018 - March 4, 2018

BETWEEN Proton Holdings Bhd’s move to overhaul its vendor ecosystem and Pos Malaysia Bhd’s ongoing negotiation of a collective agreement (CA), DRB-Hicom Bhd will certainly be hoping for the general election to be over as soon as possible.

While the management has to worry about walking a tightrope, the stock market appears to be relatively bullish on DRB-Hicom’s prospects — the counter is up 44.8% since last December, closing at RM2.65 last Friday.

The group has already seen the sudden resignation of Mohd Shukrie Mohd Salleh as Pos Malaysia’s group CEO last December. It is not a coincidence that the resignation took place mere months before the ongoing negotiation of the CA was due to conclude.

His departure seems even more curious after it came to light last week that he would be joining AirAsia Bhd’s relatively young logistics arm, Redbox. Why would he leave the high-profile post of Pos Malaysia’s chief executive?

For one, the timing of the CA is challenging. The new agreement, which will determine the wages of some 23,000 mostly unionised employees, is expected to be finalised after the group’s financial close at end-March but before the Hari Raya break when bonuses are paid.

Separately, Proton’s new management, led by CEO Dr Li Chunrong, faces an uphill battle to overhaul its vendor ecosystem as it has seen strong resistance from vendors and bumiputera associations such as The Malaysian Association of Malay Vehicle Importers and Traders (Pekema).

Li came under intense pressure after Second International Trade and Industry Minister Datuk Seri Ong Ka Chuan told the press that vendors will have to slash prices by as much as 30%.

Keep in mind that Li has other deadlines to meet as well. Proton has indicated plans to launch its new SUV by the end of the year, courtesy of technology from its new 49% shareholder, Zhejiang Geely Holding Group Co Ltd.

But forcing vendors to cut prices is an unpopular move, and one that will take more than resolve by the Chinese alone. It will take political will from the government.

Mohd Shukrie is said to have faced similar obstacles.

While fund managers and analysts saw him as a positive agent of change that could streamline the national postal service company, Mohd Shukrie was viewed cautiously by Pos Malaysia’s seven unions.

Barely two months before his resignation, he publicly said that Pos Malaysia’s workforce was too bloated and needed to be reduced.

Channel checks reveal that under his leadership, a number of non-performing staff were let go. While these dismissals adhered to company protocols — including probation, counselling and retraining — it was still a highly contentious decision.

Dismissals at Pos Malaysia were rare, even for underperformance.

In fact, Mohd Shukrie’s drive for higher efficiency may have come to a head when bonuses were paid out on a performance basis last year.

One high ranking union leader tells The Edge that the move had not been popular with employees. Pos Malaysia previously paid a fixed bonus to all employees, regardless of performance levels.

It is interesting to note that the 9th CA negotiation was supposed to have been concluded last year, between June and August. However, it was postponed to after the conclusion of the financial year ending March 31, 2018.

The union leader stresses that the unions maintain a good relationship with Pos Malaysia’s management. However, the unions cannot stay silent on issues raised by their members, he says.

The typical pay increment from a CA is about 5%. However, it is typical for a union to ask for more — as much as 12% more — to compensate for the rising cost of living, he says.

It remains to be seen how Pos Malaysia’s new CEO, Al-Ishal Ishak, will navigate these negotiations. They will not only affect the company’s profitability but also DRB-Hicom’s, which owns a 53.5% stake.

For the quarter ended Sept 30 last year, Pos Malaysia contributed about RM1.08 billion to DRB-Hicom’s revenue — compared with RM657.48 million the year before — making up 32.29% of the group’s overall revenue.

Over at Proton, Li does not have much room for error. The partnership with Geely hinges on the ability of Proton to reinvent itself on the back of the new SUV. The last thing the group needs is a political battle that forces up production costs.

The good news is that things are not as bad as Pekema has made it out to be. The bulk of Proton’s vendors are not solely dependent on the car maker.

“Many of Proton’s vendors also supply to Perodua. They have to comply with the stringent requirements of the Japanese (Toyota), both in terms of cost and quality,” explains one industry executive.

In other words, with a little investment, the existing vendor ecosystem should be able to play catch up and supply to Proton on Geely’s demanding terms.

Overall, Proton is expected to work closely with the vendors to ensure that most will be able to invest in new equipment that will allow them to remain cost-competitive. While margins are certainly expected to be thinner, the difference should be made up in volume on the back of a stronger Proton.

“The Chinese have big ambitions to leverage Proton to expand in the region. Vendors that are able to meet Geely’s tough standards have the potential to ride this path to growth,” the industry executive explains.

Keep in mind that Geely also holds other big brands such as Swedish automaker Volvo and the London Taxi Company, which produces the iconic black cabs.

But until the election is over, it will be tough for both Pos Malaysia and Proton to make decisive moves that are unpopular. In the case of Proton at least, there is one saving grace for DRB-Hicom — there is strong public support for the company to finally bite the bullet, buckle down and work towards becoming a competitive car maker.

 

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