WHY WE HAD TO SELL 49.9 PER CENT OF PROTON
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.”