New Straits Times - - Cars Bikes & Trucks -

ARMAN AH­MAD cbt@nst. com. my

AF­TER years of floun­der­ing about with­out a def­i­nite di­rec­tion, the fate of Pro­ton was fi­nally de­cided on Wed­nes­day this week. With the 49.9 per cent ac­qui­si­tion of Pro­ton by China’s Geely, the ques­tion of who will buy Pro­ton has been fi­nalised.

Now, the ail­ing car man­u­fac­turer can fi­nally fo­cus on more im­por­tant busi­ness — which is mak­ing fan­tas­tic cars that peo­ple want to buy.

But why did it come to this? Why did we have to sell vir­tu­ally half of Pro­ton to move for­ward? Did we re­ally have to?

The an­swer to this ques­tion is ap­par­ent to any­one who is well versed with the re­al­i­ties of the au­to­mo­tive in­dus­try.

In a re­cent ar­ti­cle pub­lished by PwC’s Strat­egy&, the auto in­dus­try was de­scribed as “more chal­lenged than many peo­ple re­al­ize”.

“On the sur­face, per­for­mance is strong. World­wide sales reached a record 88 mil­lion au­tos in 2016, up 4.8 per­cent from a year ear­lier, and profit mar­gins for sup­pli­ers and auto mak­ers (also known as orig­i­nal equipment man­u­fac­tur­ers, or OEMs) are at a 10-year high. None­the­less, viewed through the lens of two crit­i­cal per­for­mance in­di­ca­tors, the in­dus­try is in se­ri­ous trou­ble,” read the ar­ti­cle.

What are the two per­for­mance in­di­ca­tors?

Firstly, to­tal share­holder re­turn (TSR). Car man­u­fac­turer TSRs are at 5.5 per cent, com­pared to 14.8 per cent and 10.1 per cent an­nual rates of re­turn for the S&P 500 and Dow Jones In­dus­trial Av­er­age for the last five years.

Se­condly, top OEMs re­turned just four per cent on in­vested cap­i­tal in 2016 — half of the in­dus­try’s cost of cap­i­tal.

In short, mak­ing cars doesn’t earn you much money, and it’s hard, be­cause it’s so, so com­pet­i­tive.

In this chal­leng­ing en­vi­ron­ment, many au­tomak­ers be­come ex­tremely cre­ative in mak­ing a buck.

They form al­liances to share plat­forms, tech­nol­ogy and give ac­cess to mar­kets that they pre­vi­ously did not have. Some­times they buy all or por­tions of each other to the same ef­fect.

The world has seen a long list of au­to­mo­tive al­liances. In re­cent years, ex­am­ples in­clude Re­nault-Nis­san, Mazda-Fiat, Hyundai-Kia and Citroen-Peu­geot, among oth­ers.

Car man­u­fac­tur­ers to­day are no­to­ri­ous for be­ing un­pre­dictable. One day they are rid­ing high, seem­ingly in­vin­ci­ble in their mar­ket dom­i­nance. The next day, they are be­ing sold to a for­eign buyer.

Pro­ton though, has been ail­ing for a long while. Pro­ton’s mar­ket share started dwin­dling with the dis­man­tling of tar­iff bar­ri­ers. Since 2006, when Syed Zainal Abidin Syed Mohamed Tahir was Pro­ton’s man­ag­ing di­rec­tor, the car man­u­fac­turer was al­ready search­ing for a for­eign part­ner.

A lot has been writ­ten about Pro­ton’s predica­ment. The most per­ti­nent fig­ure though is DRB-Hi­com Bhd’s net losses of RM991.90 mil­lion in the fi­nan­cial year ended March 31, 2016, mainly due to the poor per­for­mance of Pro­ton.

Suf­fice to say, with­out some form of in­ter­ven­tion, it was no longer sus­tain­able.

Geely’s pur­chase of 49.9 per cent of Pro­ton was nec­es­sary sim­ply be­cause there was no other way for­ward for the ail­ing car com­pany. It was in a Catch-22 sit­u­a­tion. It des­per­ately needed to im­prove sales to earn rev­enue, but it couldn’t go for­ward be­cause it needs to spend a lot of money to pro­duce more at­trac­tive models to spur buyer in­ter­est.

With Geely’s ac­qui­si­tion though, it has sud­denly been pre­sented with a way for­ward.

Fol­low­ing the pur­chase of part of Pro­ton, Daniel Donghui Li, ex­ec­u­tive vice-pres­i­dent and chief fi­nan­cial of­fi­cer of Geely Hold­ing Group, said:

“With Pro­ton and Lo­tus join­ing the Geely Group port­fo­lio of brands we strengthen our global foot­print and de­velop a beach­head in South East Asia. Geely Hold­ing is full of con­fi­dence for the fu­ture of Pro­ton. We will fully re­spect the brand’s his­tory and cul­ture to restore Pro­ton to its for­mer glory with the sup­port of Geely’s in­no­va­tive tech­nol­ogy and man­age­ment re­sources.

Re­flect­ing our ex­pe­ri­ence ac­cu­mu­lated through Volvo Car’s re­vi­tal­iza­tion, we also aim to un­leash the full po­ten­tial of Lo­tus Cars and bring it into a new phase of de­vel­op­ment by ex­pand­ing and ac­cel­er­at­ing the rolling out of new prod­ucts and tech­nolo­gies”

Jokes aside, Malaysians in gen­eral have very lit­tle com­pre­hen­sion about the scale of China’s au­to­mo­tive in­dus­try, nor do they re­alise how com­pe­tent it is be­com­ing.

Geely, which is ranked 10 in China, sold 778,896 pas­sen­ger cars last year. The top man­u­fac­turer, SAIC sold 6.4 mil­lion.

The two top lo­cal man­u­fac­tur­ers, in Malaysia Pero­dua and Pro­ton each hold 40 per cent and 14 per cent of the lo­cal au­to­mo­tive mar­ket. Even with 40 per cent of the mar­ket, Pero­dua sold 207,110 cars last year, a far cry from the top man­u­fac­turer in China. Pro­ton’s share? At 14 per cent of the mar­ket, it sold 72,290 cars.

Most of us also don’t re­alise how small Pro­ton or even Pero­dua is in the grand scheme of things.

Nev­er­the­less, Pro­ton’s as­so­ci­a­tion with Geely will pro­vide both man­u­fac­tur­ers lever­age in the chal­len­ing global au­to­mo­tive land­scape. Geely will se­cure pas­sage to South East Asia via Pro­ton’s AFTA po­si­tion, while Pro­ton will have ac­cess to Geely’s myr­iad of plat­forms and Volvo-de­rived tech­nolo­gies. Pro­ton will likely have more models to sell in Malaysia, to en­tice more buy­ers.

To­gether, they stand a bet­ter chance at mak­ing an im­pact in the re­gion, and per­haps the world.

Given the na­ture of the Chi­nese ap­pro­pri­a­tion, it would seem ap­pro­pri­ate to quote Sun Tzu, the renown Chi­nese gen­eral.

“There are not more than five mu­si­cal notes, yet the com­bi­na­tions of these five give rise to more melodies than can ever be heard.”

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