Lofty targets
The entry of Zhejiang Geely Automotive Co into Proton Holdings comes with high expectations it will revive the national automotive company. Will it work?
ABOUT 10 years ago, the decision on whether to sell a controlling stake in Proton’s manufacturing business to Volkswagen AG (VW) was nixed at the last minute. The decision confounded many who expected the decision of pairing Proton with VW to be a formality but a final political manoeuvre killed the deal, and that directly sealed Proton’s fate.
Khazanah Nasional Bhd has since proceeded to sell its stake in Proton to DRB-Hicom Bhd and the tribulations of an unforgiving market on Proton’s market share began to erode the financial health of the national auto maker.
On Wednesday Proton took a vital step in resuscitating the company.
This time, however, it was not doing so in a position of strength. When the merger with VW was called off, Proton believed it could make a success of itself without the help of another party. Since then, Proton’s fortunes have been sliding. Its market share plunged. It has many models in the market but can’t breach sales of 80,000 a year and worse yet, its net assets of the end of March this year was a razorthin RM29.5mil.
Another quarter of horrendous financial loss, which Proton has been experiencing for some time, would have plunged the automaker into insolvency. Getting money then from banks would be near impossible and creditors could have pulled credit lines if that had happened.
In picking Zhejiang Geely Automotive Co Ltd (Geely) as its foreign partner, Proton made the best of a terrible situation. There were many options between the shortlisted candidates that had put in bids for Proton through an international tender.
It was Geely that ticked all the boxes and then some. Its willingness to get Proton back on track as fast as possible swayed the decision in favour of the China company.
Geely’s proposition
Analysts briefed by DRB-Hicom’s management after the head of agreement between Geely and Proton was signed have estimated that Geely would pump RM170.3mil and grant the licensing rights for Proton to produce Geely’s Boyue SUV at a minimum cost of RM600mil as the basis for it paying for a 49.9% stake in Proton. That would mean that Proton was valued at RM1.54bil.
Geely was not interested in the vast tracts of land Proton holds in Shah Alam and Tanjung Malim and had valued the Tanjung Malim plant at a discounted cash flow basis. It’s objective is clear: it wants to sell cars and use Malaysia as the launch pad to South-East Asia.
Maybank Investment Bank in a note says the partnership can provide Geely with tax-free access to Asean by producing in the region.
“This is in keeping with its inter- national expansion plans. Accessing the lightweight chassis technology held by Proton-owned Lotus may also generate synergies.
“In the longer term, we believe it can facilitate Geely’s and its new car brand Lynk & Co’s overseas expansion. Geely’s parent will likely hold the asset and provide its plants for Geely’s international expansion.”
Geely’s proposition to DRB-Hicom as a partner is multi-fold. Its track record as an investor gives Proton assurances that growth and investment are the two pillars of what it will provide in line with the revamp undertaken in Volvo and Londan Taxi Cab (LTC).
Geely, apart from taking control of Volvo and LTC, has invested large sums of money to revitalise and modernise production of the two cars. The results have since paid off and in the case of Volvo, sales grew by 6% to 534,332 vehicles in 2016, the highest in the company’s history. Profit wise, Volvo’s return to profitability too has been remarkable. It made a profit of RM5.4bil in the last financial year.
What will encourage the regulators in Malaysia is that employment at Volvo too has grown from the time Geely took over the Swedish manufacturer in 2010 for US$1.3bil.
In the presentation, Geely executive vice-president and chief financial officer Daniel Li says it intends to keep Proton as an automotive brand with research and development (R&D) capability, with design and production in Malaysia.
The China auto company will also make available to Proton global resources, knowledge and management skills. Both companies have agreed that Geely’s expertise would be utilised in the maufacturing side and the company would bring to Malaysia top talent within its group to handle that operations.
Li also says Geely intends to revitalise Proton, make available its R&D centres from around the world, and thrust the car maker to become the No.1 Malaysian brand and leading marque in South-East Asia.
With Geely intending to hit sales of three million cars and 500,000 Proton vehicles in South-East Asia by 2020, there is every likelihood that more models apart from the maiden SUV will be made available for rebadging by Proton.
“In our view, Proton will likely adapt Geely’s cars and rebadge them under its own brand for launch in Malaysia. This could provide upside to Geely’s two million car-sales target by 2020. Other potential benefits for Geely include Lotus’ lightweight technology which may help to improve its overall fuel efficiency amid tightening requirements in China,” says Maybank. Geely will take a controlling stake in Lotus after the British car maker and engineering company was sold by Proton.
In terms of execution risks of the deal, Maybank Investment Bank notes that Proton is loss-making. “We see the execution of its new business plan as its key risk as Geely’s parent is only acquiring 49% of Proton, short of a controlling stake. In addition, manufacturing in Malaysia may not be as cost-competitive as in other regional countries.”
“Still, the deal is being executed at the parent level and we see Geely potentially capturing upside without financial commitments at this stage.”
Proton’s challenge
With Geely taking a stake in Proton, the challenge for the national car maker is to ensure that it sells more cars. With Geely to be rebadged as Proton cars for the Malaysian and possibly the Asean markets, the task ahead is to make sure it sells those cars.
Perception issues have bogged down Proton’s ability to sell cars and despite the company introducing new models, sales have headed south. The next challenge for Proton is to ensure that the rebadged China cars it will sell receive the market acceptance it hopes.
Proton, in the deal with Geely, will take responsibility for distribution. Distributing margins tend to be higher than manufacturing margins as seen in the days when Edaran Otomobil Nasional Bhd was selling the cars Proton manufactured.
The problem that awaits Proton is public acceptance of China-made cars. Last year, the best-selling China passenger car marque was Cherry, which sold 441 cars. Those numbers won’t cut it for Proton and Geely who have much higher aspirations for the Malaysian and Asean markets.
DRB-Hicom group managing director Datuk Seri Syed Faisal Albar admits that is an issue Proton needs to tackle head on. He says Proton will need to spend heavily on advertising and promotion to win over Malaysian consumers so its sales can improve.
The burden will be heaped on Proton Edar. With Proton still keen on pursuing its own vehicle development programme, analysts think Geely’s entry will only help in that respect.
“The partnership offers Geely an expedited route into growing Asean markets and access to weight-saving technology and engineering at
Lotus. Meanwhile, Geely brings a strong suite of production expertise, best practices, ready-made models to leverage off in the shortterm, including an effective distribution and after-sales business model,” says RHB Research Institute in a note.
What DRB-Hicom, which will still retain control of Proton, will gain from the entry of Geely is the ability to develop land at around the Tanjung Malim plant and the Shah Alam facility.
“The main property assets nclude the land on which the Proton factory is located in Shah Alam and the Proton City in Tanjung Malim (4,200 acres). The business plan includes the relocation of the Shah Alam plant and facilities to Tanjung Malim within six years coinciding with the expiry for existing models produced there,” says RHB Research.