New beginnings for Proton • Partnership with China’s Geely will open regional doors

Partnership with China’s Geely will open regional doors

DRB-Hicom’s recent definitive agreement signing with China’s Zhejiang Geely Holding Group (Geely) is perhaps the biggest gamechanger in the auto sector this year.

As Geely takes 49.9 per cent equity in Proton, many viewed this as a positive move which will likely open more doors for Malaysia’s first carmaker.

In a media release, DRB-Hicom highlighted that on the same day, the group also sold its entire stake in Lotus Advance Technology Sdn Bhd (Lotus) to Geely and Etika Automotive Sdn Bhd.

This strategic move could not have come at a better time for the flailing national carmaker.

According to AmInvestment Bank, Proton is in especially dire straits, having seen six consecutive months of either zero or negative growth on a month on month (m-o-m) basis to April.

“It has been a passive player in the auto sector despite seeing a consecutive drop in numbers for its passenger cars since November last year, while the reception for the Proton Ertiga MPV (launched in late November) was lukewarm at best,” the research firm said.

“Positively, it launched a facelift of the Proton Iriz to catch the pre-Hari Raya boom.”

DRB-Hicom group managing director Datuk Sri Syed Faisal Albar pointed out that with Geely on board, Proton can now eye the huge Asean passenger car market with renewed confidence.

Syed Faisal however said that their immediate focus is to re-claim their position as Malaysia’s best-selling car.

“Proton’s status as a National Car is secure, with DRB-Hicom still a majority shareholder. Proton will now focus their efforts with Geely to gain market share domestically.

“With the joint capabilities of both companies, I am positive that we will be able to impact the market posively, by coming out with products that meet market preferences in terms of design and quality,” he added.

As for the sale of Lotus, this marked DRBHicom’s exit from the sports car segment.

Syed Faisal said the sale allows Proton to focus on passenger cars, which is a larger market.

Following the definitive agreement signing, Syed Faisal said at a press conference that Geely would inject RM170.3 million in Proton and set up a sport utility vehicle or suburban utility vehicle (SUV) platform for Boyue with an implied value of RM290 million.

In a filing on Bursa Malaysia, DRB-Hicom revealed that as part of the subscription price, Geely has granted the licence to Proton (without the right to sub-licence) to manufacture, sell, market and distribute the Boyue Model under the Proton brand for the term set out in the Boyue Licensing Agreement within the right-hand drive markets in Brunei, Indonesia, Malaysia, Singapore and Thailand (Boyue Licence) pursuant to the Boyue Licensing Agreement.

DRB-Hicom noted that the Boyue Licensing Agreement will be effective from the completion of the share subscription agreement (SSA). The group further noted that the cash subscription and the Boyue Licence total RM460.3 million.

According to DRB-Hicom, in its home country, the Geely marque sold some 760,000 cars in 2016, doubling the figures from the year before.

“The growth rides on the popularity of the SUV segment, with Geely’s Boyue SUV proving to be very popular in China,” the group said.

“Geely sold 109,000 units of Boyue in 2016, and until May this year, 103,000 units have already been sold.”

AmInvestment Bank believed that the SUV segment offers strong growth potential as neither of the national carmakers (Proton and Perodua) has produced an SUV.

Meanwhile, Public Investment Bank Bhd (PublicInvest Research) was particularly positive on the rebadging of Geely Boyue as it is the first-ever SUV line up for Proton.

“We understand that Boyue was designed by a former Volvo designer,” PublicInvest Research said.

“If it is priced competitively, we believe Boyue could gain market share from current SUV models that are available in our local market. However, the timeline for its expected launch date has yet to be finalised.”

On the other hand, the research arm of Kenanga Investment Bank Bhd (Kenanga Research) opined that while Geely is more popularly known for its successful acquisition of Volvo, the ability of Geely to assist Proton from technical and marketing perspective as well as to penetrate new markets remains a concern.

This is considering that Geely is also a relatively weak brand from a global perspective with a global market share of less than five per cent, Kenanga Research said.

“Proton still has to deal with the challenges posed by increasing competition and a weak brand perception,” the research arm added.

“The outlook for DRB-Hicom remains challenging given the tough operating environment of lower sales of motor vehicles amidst stiff competition.”

On concerns from the local car industry regarding the impact of the strategic partnership to local vendors, especially once the business restructuring of the partnership takes place, Minister of International Trade and Industry, Datuk Seri Mustapa Mohamed said in a Bernama interview that DRB-Hicom has given an assurance that in selecting Geely as its partner, it has taken into account all such issues.

“While local vendors are still expected to meet stringent quality, cost and delivery measures to ensure the competitiveness of Proton, they are also open to other opportunities created from the partnership.

“These include technical cooperation to enhance capabilities, possible participation in Geely’s supply chain and being able to export regionally,” Mustapa explained to Bernama.

As for the criticisms against this strategic partnership, Bernama was quick to point out that what is important now is that there is an economic solution to rescue Proton out of its financial mess created by a business model that was unsustainable in its early years.

Overall, Bernama noted that this partnership would not only bring about good business opportunities for both companies, but contribute to the revival of the Malaysian automotive industry and emergence of indigenous brands, regionally.

“Like many other international auto joint ventures, Proton’s partnership with Geely is a norm in the industry and purely a commercial decision that would undoubtedly serve the best interest of the company, its vendors and employees,” it opined.