Can Proton Deliver?

After roaring back from the brink, the company faces stiffer competition

Stepping into a cavernous high-security garage in the Kuala Lumpur suburb of Shah Alam, Tengku Mahaleel dramatically flicks on a bank of overhead floodlights. Then he whisks a black slipcover off a clay model of a sporty sedan that Malaysian auto maker Proton plans to introduce soon. The low-slung car, code-named the New GX, is designed to hug the highway like the Batmobile, and boasts headlights that arch like a pair of well-plucked eyebrows. Yet it's still large enough to carry the family. "If you saw this car in your rearview mirror, you'd get off the road," quips Mahaleel, CEO of Proton, short for Perusahaan Otomobil Nasional.

About 100 kilometers to the northwest, in the town of Tanjung Malim, a small army of construction workers scrambles in and around five hangar-size factory buildings sprawling across a 500-hectare site dubbed Proton City. This is the company's new $400 million plant, scheduled to open by yearend. It will produce four new models, including the GX, at a rate of 150,000 cars a year, increasing Proton's manufacturing capacity by 60%. The highly automated facility will allow the company to abandon an obsolete, labor-intensive assembly line near Kuala Lumpur dating from the mid-1980s.

It's Proton's phoenix moment. Five years ago, Proton appeared close to death, despite strong backing from Malaysian Prime Minister Mahathir Mohamad. Since its founding in 1985, the company has made Mitsubishi Motor Corp. cars under the Proton name--and has been protected by heavy tariffs on imports. Even with the playing field tilted in its favor, though, Proton was in trouble. In late 1996, the company shelled out $81 million for 80% of British sports-car maker Lotus Group International Ltd. That money was badly missed when the Asian crisis hit, cutting Proton sales in half, to just 87,500 cars in 1998. Profits plummeted by 80% to $25 million in 1999.

Now, Proton is making a U-turn. Since Mahaleel took over in early 1997, he has focused on cutting costs and raising the standard of engineering. Sales exceeded 220,000 cars last year--12% above their pre-crisis peak. The company is expected to earn $250 million on $2.8 billion in revenue for the fiscal year ending this March, compared with $299 million in profit and sales of $2.7 billion last year, according to UBS Warburg Ltd. Despite the recent profit dip, investors like the story: Since August, 1998, Proton's share price has quadrupled, to a recent $2.25.

So far, so good. But from here on out, Mahaleel is in for a bumpy ride. In three years, as part of an agreement with the Association of Southeast Asian Nations, Malaysia is expected to remove many of the tariff barriers that have helped Proton gain 60% of Malaysia's car market. On Jan. 1, 2005, the government says tariffs will drop from 42% to 20% on imports of sedans from ASEAN countries. Meanwhile, Malaysia is expected to increase excise taxes on Protons this year to make up for a shortfall in government revenue due to the tariff cut. That means prices for Malaysian-made cars will rise, and Proton will be forced to compete for the first time on a more equal footing. "If tariffs genuinely come down, Proton's market share will drop dramatically," says Graeme Maxton, managing director of Autopolis, an auto-industry consultancy in Singapore. How far? "To perhaps 30% to 40%."

Worse for Proton, the world's largest carmakers have spent the past decade building modern plants in Thailand and Indonesia with an eye toward exporting to a free-trading Southeast Asia. That means Proton's sedans will face off against such global winners as the Toyota Corolla, Honda Civic, and Ford Laser. A four-door, 1.8-liter Corolla today costs nearly $32,000 in Malaysia, compared with just over $20,000 for a similarly equipped Proton Waja. Without tariff protection, the price difference would shrink dramatically.

One clue to the true competitiveness of Proton's cars can be seen in its exports: Proton now sells just 5% of its cars outside Malaysia, half the level it achieved in the mid-1990s. "If you let Honda and Toyota compete on a level playing field with Proton, it's good night," says Michael J. Dunn, head of Automotive Resources Asia Ltd., a Bangkok consultancy.

Mahaleel insists he's ready for the challenge. A veteran marketing executive for the local Nestle and Royal Dutch/Shell subsidiaries--and a former national champion race car driver--Mahaleel says the cars he will produce at Shah Alam will be as good as any on the market. And, he says, his new macho, highway-hugging designs will appeal more to Malaysian tastes than imports. "Jan. 1, 2005, will be just another day," he says.

Design and efficiency are the new bywords across the entire company. In 1999, Mahaleel set up Proton's first modular assembly line, where robots install preassembled doors, dashboards, and other parts in car bodies, resulting in better quality control. The automation also triples the profit margin per car. At the same time, Mahaleel invited international parts suppliers, including giants TRW, Lucas, and Clarion, to set up shop in Malaysia. Today, they supply 70% of the carmaker's components, allowing Proton to focus on higher-margin design and assembly.

Meanwhile, Mahaleel has tried to turn the Lotus deal to his advantage by bringing in teams of Lotus sports-car designers and engineers from Britain to train their counterparts at Proton. They are supplementing the Mitsubishi technology that Proton has used since 1985. And Lotus designers have given Proton cars more pizzazz. For instance, the Lotus-designed Waja sedan, introduced in 1999, features a sleek body, small racer-style steering column, and rigid chassis for better handling. The Lotus folks are also helping with Proton's new 1.3- and 1.6-liter engines. "Mitsubishi was a good partner, but Lotus gave us design and engineering capability," says Mahaleel.

Clearly, Proton is more competitive than it was five years ago. But some suspect there may be another motive behind the makeover: getting the company ready for a sale. Although Mahaleel declines to discuss "shareholder issues," analysts and auto insiders say that at least one global player--DaimlerChrysler--may be interested. DaimlerChrysler already has a controlling stake in Mitsubishi, which owns 8% of Proton. Mitsubishi says it has no plans to buy a larger share in the company, but Proton's brand name, new plant, and dealership network would be a valuable addition to any outsider eyeing Malaysia, which accounts for nearly half of the 1 million vehicles sold in Southeast Asia each year. Last year, Daihatsu Motor Co. took a 51% stake in Malaysia's second carmaker, Perusahaan Otomobil Kedua, or Perodua--a deal widely seen as a dress rehearsal for a sale of Proton.

For now, Mahaleel is pursuing his reforms as if Proton will be independent forever. "Everyone loves to mock national car companies," he complains. Just wait, says Mahaleel, until those sleek new GX models hit the showrooms. Then the skeptics will see what Proton can do. If he's right, the new model may have to be renamed the Vindicator.

By Michael Shari in Shah Alam, Malaysia

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