April 7 (Bloomberg) -- Proton Holdings Bhd., the Malaysian carmaker that ended partnership talks with Volkswagen AG in 2007, said it’s in early discussions with Renault SA and General Motors Corp. about a technical alliance to help make new models.

Talks are “very preliminary,” said Managing Director Syed Zainal Abidin Syed Mohamed Tahir in an interview today in Kuala Lumpur. “We are just discussing how we can explore working together. An alliance is vital. We need to have scale.” An equity sale isn’t being considered, he said.

Proton needs a partner to develop a new version of the company’s Perdana luxury sedan by next year, he said. While new models helped the Malaysian carmaker, which also makes Lotus sports cars, return to profit last year, it still lacks the size to compete with Toyota Motor Corp. and Honda Motor Co. in the home market.

“If they don’t improve their economies of scale, then long term, they’re going to find it difficult,” said Kaladher Govindan, head of research at TA Securities Holdings Bhd. in Kuala Lumpur. “They’ll be depleting their cash reserves.”

Proton, which had 1.17 billion ringgit ($325 million) of cash at the end of 2008, spends about 500 million ringgit developing each new model, Syed Zainal said. Proton swung to a loss in the final three months of last year as expenses swelled.

Domestic Dependence

An alliance with a foreign carmaker may also produce other models that could be sold jointly in overseas markets, Syed Zainal said. Proton is focusing on the Middle East, China, India and Southeast Asia to cut its dependence on domestic sales. The company wants overseas sales to account for 70 percent of the total in the next decade from about 20 percent now.

“Automotive companies routinely speak with each other about any number of issues,” General Motors said in an e-mailed statement. “These meetings are generally private.” Renault spokesman Wataru Sato in Tokyo said he was not aware of talks with Proton, nor with any other Asian carmaker.

The global recession has hammered cars sales worldwide, and Proton is assessing whether it needs to make a provision in its accounts, Syed Zainal said. The fiscal fourth quarter ended March 31 was “challenging,” he said, declining to say whether Proton will report a profit or a loss.

“Showing bad numbers today is something of the norm,” he said in the interview.

Sales in the 12 months ending March 2010 may increase from the previous year, and profitability in that period will also probably improve, he said.

Industrial Emblem

Shares of Proton, controlled by Malaysia’s state investment fund, lost 0.5 percent to 1.89 ringgit in Kuala Lumpur trading today, valuing the Shah Alam-based company at 1.04 billion ringgit. The carmaker was worth six times more in 2002.

Proton, formed in 1983 by then-Premier Mahathir Mohamad as an emblem of industrialization, in 2007 ended more than 12 months of negotiations with Volkswagen, Europe’s largest carmaker, to give itself more time to turn around.

The Malaysian company then posted five straight quarterly profits after rolling out a new Saga and the Persona before slipping to the most recent loss. In December last year, Proton struck a technology pact with Japan’s Mitsubishi Motors Corp. for a replacement for the Proton Waja sedan in 2010.

As the company is focusing on developing markets, Proton is reviewing its position in Australia and the U.K., where sales are “very small,” Syed Zainal said. The company may sell its assets to a local distributor, he said.

Market Share

Proton, which introduces its first multi-purpose vehicle next week, expects revenue to be split evenly between Malaysia and overseas markets in the next five years, Syed Zainal said. In India, the company should sign an agreement with a partner by the middle of this year, he said. The company already has agreements in place in Iran and China.

“Exports means you must be operating in those countries,” he said. Assembling cars overseas is more profitable than exporting the technology from Malaysia, he said.

Proton’s domestic market share has tumbled from about 60 percent more than a decade ago to less than 30 percent, after the company lost ground to Perusahaan Otomobil Kedua Nasional Sdn., better known as Perodua, and overseas rivals.

Protons are among the cheapest cars in Malaysia. The 1.3- liter Saga, the company’s first-ever model, is driven by cabbies. A black 2-liter Perdana, with tinted windows, is favored by government officials. The Savvy compact starts at 33,549 ringgit.

To contact the reporters on this story: Angus Whitley in Kuala Lumpur at awhitley1@bloomberg.net; Susan Li in Hong Kong at sli31@bloomberg.net

Last Updated: April 7, 2009 06:01 EDT