Perodua, Proton in the face of liberalisation

THE total industry volume (TIV) of the Malaysian automotive industry has been seeing steady dominance for many years by national car makes Perusahaan Otomobil Kedua Sdn Bhd (Perodua) and Proton Holdings Bhd.

According to statistics by the Malaysian Automotive Association (MAA), Perodua and Proton, which sold 179,989 units and 158,657 units respectively last year, had a combined market share of about 56% of the local TIV in 2011.

But, with the looming liberalisation under the National Automotive Policy (NAP), which is expected to be announced later this year and bring about a level playing field for players within the Malaysian automotive industry, Perodua and Proton's TIV dominance could be dramatically shaken unless these two players do something about it.

With initiatives set to make Malaysia a more vibrant and attractive place to conduct business, the doors will be opened for more foreign participation which will inevitably raise the bar in terms of competitiveness.

So the obvious question is, can Perodua and Proton be ready for the impending, competitive automotive landscape on the horizon?

Perodua managing director Datuk Aminar Rashid Salleh welcomes competition and feels it's an opportunity to improve how things are done in the industry.

Both Perodua and Proton Holdings Bhd share a large number of vendors and Aminar says that's one area both companies need to engage and find the common areas where both can collaborate and get things to improve.

Perodua will wait for DRB-Hicom Bhd to take operational control of Proton before sitting down to discuss how both parties can take things forward.

“There was that proposal by the Government for us to collaborate. The merger was something that we were not looking forward to and the Government has accepted that. In the final discussion that we had with the Government, with MITI, in particular, they suggested why not both companies collaborate?”

“And we said, yeah, why not? If you look at the vendors alone (the supply chain), if you can benefit them, it will benefit the industry.”

Analysts feel both companies, given the large number of vendors they share, will sit down, throw away past prejudices and work to see how they can get their costs down.

Analysts have said the price per unit is a major competitive stumbling block for both companies but getting both set of vendors to be more cost competitive will be difficult given the differences parts and scale.

“Like it or not, they have to be ready,” says OSK Investment Research analyst Ahmad Maghfur Usman. But one would first need to determine the extent of the liberalisation, he says.

However, if the NAP is to set policies for progressive liberalisation, then both Perodua and Proton “should be okay,” he says.

But when placed side-by-side, Ahmad reckons that Perodua is likely to perform better in the face of liberalisation.

“Perodua should be ready (for liberalisation),” he says, noting that the compact car company had an established technical and technology partner in Daihatsu Motor Co of Japan.

RHB Research analyst Alexander Chia similarly concurred.

“Perodua has strong shareholders, hence their financial-backing is solid, with their core research and development (R&D) already done by Daihatsu.

“Any R&D done by Perodua mainly relates to things such as customising and styling of its models. In terms of gearing up for liberalisation, we see few issues for Perodua,” he says.

Perodua's shareholders are UMW Corp Sdn Bhd (with a 38% share), MBM Resources Bhd (20%), Daihatsu Motor Co (20%), PNB Equity Resource Corp Sdn Bhd (10%), Daihatsu (M) Sdn Bhd (5%), Mitsui & Co Ltd (4.2%) and Mitsui & Co (Asia Pacific) Pte Ltd (2.8%).

Ahmad pointed out that as Proton is a full-fledged manufacturer, all R&D costs are borne by the company.

“It's R&D is high, so they need to sell a high number of cars to see good profits (to compensate for the high costs).”

Chia says that for Proton to be able to stay competitive, it needs to be able to tap the export market.

“What Proton needs to do is come up with a product that can penetrate the overseas market. They have to try. Since the beginning, Proton has not been successful in growing exports. In the past, its products have not been competitive in the overseas markets from a cost and quality standpoint. With limited scale, its products have also not been cost competitive.”

Gone are the days when it could solely rely on the local market, Chia says.

“A new vehicle today has an average life cycle of between five to six years. Proton will not achieve sufficient scale by only focusing on the local market as domestic growth potential is limited.

“Based on the current status quo, the MAA forecasts annual TIV growth in the low single digits over the next five years. The high duty structure also means high selling prices with the market already close to saturation.”

A major development in the local automotive industry recently is that Proton now has new owners in automotive assembler and distributor, DRB-Hicom Bhd. The big question is what the latter can bring to the table that will benefit Proton.

“DRB-Hicom does not own any proprietary technological know-how. The patents, engines, transmissions, are all owned by global OEMs that DRB-Hicom partners. What DRB-Hicom could do is to facilitate some sort of partnership or tie-up with a global OEM.

“This could come either via equity participation or possibly access to Proton's Tanjung Malim plant,” says Chia.

Ahmad says Proton could leverage DRB-Hicom's partnership with German automotive giant, Volkswagen AG, a move that might help to turn the national carmaker around.

in 2 years we see liberisation; dont know what may come