This article first appeared in Corporate, The Edge Malaysia Weekly, on April 18 - 24, 2016.

WHEN former premier Tun Dr Mahathir Mohamad talks about national car company Proton Holdings Bhd, he generally uses first-person pronouns. This could stem from the fact that he had founded Proton and was its adviser from 2003 and its chairman from 2014. Indeed, Dr Mahathir was seen as the driving force behind the company.

This will no longer be the case following his resignation as chairman — with immediate effect — on March 31.

In an interview with The Edge last Tuesday, there were times when Dr Mahathir seemed to be distancing himself from Proton, referring to his association with the company in the past tense.

But old habits die hard and it has only been slightly over two weeks since his resignation. So it was not surprising to hear Dr Mahathir talk about Proton at length and to see him visibly saddened by the plummeting sales numbers.

“…Nobody is buying, as if they are afraid to buy a Proton, we don’t know why. We can’t understand it, but this is what is happening,” he says.

Proton has been losing market share year after year, dwindling to about 15% of total industry volume (TIV) of 130,000 units in the first quarter of this year. In its financial year ended March 31, 2015 (FY2015), the automaker’s operating cash flow was in the negative.

According to Malaysian Automotive Association (MAA) data, Proton sold 102,175 units last year. In 2014, it sold about 115,000. The drop in sales pushed Proton’s finished car inventory value to more than RM1 billion in FY2015 compared with RM553.5 million in FY2014.

An automotive industry official says Proton’s sales had plunged to around 5,500 cars in March while its market share was around 12% of TIV.

Dr Mahathir says Proton needs to sell between 8,000 and 10,000 cars a month to break even. Clearly, based on its current sales condition and financial standing, the writing is on the wall for Proton.

Thus, the requirement for government support, although Proton is owned by DRB-Hicom Bhd, which is 55.92%-owned by Tan Sri Syed Mokhtar Albukhary. After much speculation on whether the government will throw the beleaguered car maker a lifeline, shortly after Dr Mahathir’s exit, Minister of International Trade and Industry Datuk Mustapa Mohamed announced a conditional soft loan of RM1.5 billion for Proton, mostly to settle amounts owed to vendors.

Mustapa said the loan hinged on Proton securing a foreign strategic partner for R&D purposes as well as formulating a new business model to convince the government of its overall viability. He also cited the fate of Proton and its vendors’ 60,000-odd workforce as a reason for the government’s stepping in.

Dr Mahathir, however, says government support for a country’s automotive industry is a given. “Every country, when they get into the automotive industry, they protect the industry. They protect it in many ways, sometimes through taxes, sometimes through non-tax conditions,” he explains.

But after more than 30 years and billions pumped into Proton, critics are questioning the viability of its business. Although the car maker has played a key role in the industrialisation of the country — the national car project sprouted a network of automotive parts manufacturers, some of which have gone on to become top tier suppliers to foreign car companies — isn’t 30 years of support a little too much? Furthermore, Proton is no longer government-owned.

“The government has to support the industry. Everywhere in the world, the government supports R&D costs. That is the duty of the government because the private sector contributes to the development of the country,” says Dr Mahathir.

However, the government seems to disagree. In his 19-point statement on April 1 on the current condition of Proton, Mustapa said the government cannot continuously protect the automotive industry.

The statement was issued amid talk that Proton might face problems in securing a RM1.5 billion soft loan from the government as long as Dr Mahathir remained its chairman. However, the former prime minister denies that his resignation on March 31 had anything to do with the RM1.5 billion soft loan.

With a small domestic market, Proton’s fortunes are tied to the export market. However, it has had little success in penetrating foreign markets, contributing to the under-utilisation of its two plants — at just 35%.

“The Malaysian market is small, so there have to be exports. We don’t have the volume, so a lot of innovation and creativity is required, and you have to understand the marketing issues … the car has to be priced right, there is a need for positioning,” says Proton’s former managing director and chairman, Tan Sri Mohd Nadzmi Mohd Salleh, in a separate interview.

Nadzmi was closely associated to Dr Mahathir and led Proton in the 1990s.

Bleak outlook without economies of scale

So, is the government’s soft loan to Proton a last-ditch attempt to save the company?

And are the reasons given by Miti strong enough for the government to continue extending financial support to Proton, which is now in the hands of the private sector?

In his statement, Mustapa said since its establishment in 1983, Proton has received government assistance in various forms to the tune of RM13.9 billion. Its plummeting sales have also hurt the vendors, many of which have turned to the government for assistance.

Dr Mahathir’s response on his blog was that Proton had also given back to the government in the form of taxes and duties to the tune of RM24.9 billion.

Nevertheless, Proton has been bleeding red ink and is clearly in need of some form of support.

According to its audited financial statement for FY2015, the group’s net loss widened to RM646.3 million from RM461.6 million previously. Its distribution cost of RM260.7 million was more than its gross profit of RM147.9 million in FY2015.

The group’s current liabilities exceeded its current assets by RM167.4 million and it relies on DRB-Hicom’s continued financial support to meet its obligations as and when they fall due, the financial statement says.

DRB-Hicom has agreed not to recall the outstanding balance owed by Proton within 12 months of the reporting date of the FY2015 financials. Proton had RM865 million in borrowings, which mature no later than one year from the date of the FY2015 financial statement. (The AGM was tabled on Sept 8, 2015.)

To help Proton, a task force has been set up to monitor the implementation and success of its business recovery plan while meeting the government’s conditions. The task force, led by Performance Management and Delivery Unit (Pemandu) CEO Datuk Seri Idris Jala, consists of three representatives from the public sector and another three from the private sector.

Representatives from the public sector are Miti deputy secretary-general Datuk Nik Rahmat Nik Taib, Ministry of Finance Strategic Investment Division secretary Dr Yusof Ismail and Economic Planning Unit deputy director-general Datuk Yogeesvaran Kumaraguru.

Symphony House Bhd founder, executive chairman and group CEO Tan Sri Azman Yahya, Celcom Axiata Bhd CEO Datuk Seri Shazalli Ramly and Maybank community financial services head Datuk Hamirullah Boorhan will represent the private sector in the task force.

But with limited automotive industry participation, can the task force revive Proton?

“It’s doomed to fail when run by a committee,” says Tengku Tan Sri Mahaleel Tengku Ariff, former CEO of Proton.

“It takes 22,000 moving parts and 1.7 million man hours to design, prototype and test a car,” he adds. “The most important thing is, they must put people who know car design and manufacturing in the company.”

Mahaleel was asked to share his thoughts on Proton’s future after it was announced that the automaker will have a committee or task force set up by the government to oversee its operations.

He had served Proton from 1996 to 2005.

In his statement, Mustapa also mentioned that Perusahaan Otomobil Kedua Sdn Bhd’s business model was more sustainable than Proton’s. Perodua is partly owned by Japanese investors, including Daihatsu Motor Co Ltd and Mitsui & Co Ltd.

But Dr Mahathir firmly believes Proton should not go down that route because a foreign partner would eventually try to dominate and control the national car maker. Then, the country would not be able to develop its own technology, he says.

“Volkswagen wanted to take up Proton, own it and run it, then it would no longer become a national car. But if you want to give up our national car, then sell it. That is what the foreign investors want,” he says in an aggrieved tone.

Despite the strong national sentiment, Proton’s numbers have been disappointing.

“In the last two months, we sold only 5,000 cars a month, which had never happened before. Do Malaysians want to see Proton go bankrupt? If we continue to sell 5,000 cars a month, we will go bankrupt,” Dr Mahathir warns.

“To me, people judge [the success or failure of a company] by sales volume … Proton is now No 4, the company is seeing some difficult times, which needs to be addressed quickly,” says Datuk Seri Syed Zainal Abidin Syed Mohamed Tahir, who had helmed Proton from 2006 to 2012.

Nadzmi agrees, saying that in any business, there has to be a focus on marketing and sales and the economics of the business and whether it can cover the total cost.

In fact, Syed Zainal strongly believes that Proton has contributed to nation-building and can still be a relevant and viable business.

“[In a nutshell], the business is about having good products and economies of scale. It’s the same for every car company. You can either collaborate or you can come out with your own cars. It’s about an economic decision but you have to be consistent with policies and get the right products,” he says.

He feels that one of the issues facing Proton currently is a loss of confidence, particularly in the vendor and dealer community and this needs to be addressed urgently.

“As a result, they [the vendors] don’t invest. A lot of the vendors are saying, ‘Proton doesn’t pay, and they pay in kind [cars]’. The messages [coming out of Proton and its parent] are also not very helpful in that there have been many changes at the helm [CEOs],” Syed Zainal explains.

He adds that from what he has been told, there is lack of enthusiasm and “soul” in the people at Proton. This, he believes, has an impact on the organisation and has trickled down to the public.

“There is a need to build confidence and get the entire organisation fired up but it cannot happen overnight.”

Despite the gloomy outlook for Proton, it will introduce at least three new models this year. By the end of this month, the new generation Perdana will be launched, followed by the new Persona and its bread-and-butter Saga.

Proton is also partnering Suzuki Motor Co Ltd on assembling a small, A-segment car based on the latter’s models. This is one of Proton’s strategies outlined in its previous turnaround plan to achieve its sales target of 500,000 cars in 2018, besides ramping up its exports to 100,000 from between 10,000 and 15,000 units now.

Proton’s primary export markets are the neighbouring Southeast Asian countries, and Australia. The company re-entered the Chilean market in January this year, and a Bangladeshi conglomerate is constructing an assembly plant in the South Asian country to assemble Proton cars.

Exports have never been Proton’s strong point. Apart from some hits, such as the first-generation Saga in the UK and the Satria GTi and Arena in Australia, other Proton models have only been exported in small quantities.

Against such an operational and financial backdrop, in which direction should Malaysia take Proton? For now, the government is still extending a helping hand, albeit reluctantly, it would seem to some. But for how long?

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