Tuesday, January 17, 2012

DRB-Hicom to Buy Khazanah Stake - The Proton Saga Continues

Yes, the secret is out. DRB-Hicom is buying out Khazanah's stake in Proton.

Was it such a big surprise? Not really. It was bound to happen.

Proton needs to be weaned off its "subsidies" or rather the protection it receives from the Government that causes the rakyat to pay more for cars.

But Proton is still a national project with a local vendor ecosystem, which means its control needs to remain in Malaysian hands.

And since Khazanah is not in the business of running a car company, it must hand it over to a capable Malaysian car company or a company whose core business involves manufacturing or assembling and selling cars.

So, in comes DRB-Hicom and out goes Khazanah, in spite of the fact that some argue that DRB-Hicom would overstretch its finances if it does go through with the deal.

In any case, the deal or any deal that puts Proton largely, if not exclusively, in private hands is long over due. It should have happened way back when Proton's existence began causing huge distortions to the Malaysian car market.

But instead of quickly letting go of Proton with a view to making it the catalyst for huge foreign direct investments in the automotive sector, Proton was protected even more. As a result, the car market was distorted so badly that, at one point in the early 1990s, you could sell a first generation Proton Saga for the same price you had bought it when it first came out in the the early 1980s, if not more.

I remember CNN making a special report back then about Malaysia being the only place in the world where second hand cars appreciated in value. A reason for taking pride in the national car project? No. Absolutely not.

The actual causes as to why Proton became the market distorting, highly uncompetitive giant has been debated to the point of nausea. So, instead of focusing on that, let's focus on when the punitive taxes on imported cars would be removed (whatever form these taxes may take).

This is the 'elephant in the room' that no one is really talking about and, perhaps, for good reason. Removing Proton's special protection in Malaysia's car market remains a sensitive issue, such that no private investor would want to take control of Proton in the sorry state that it is in right now if market protection did not remain, at least in the short to medium term.

Still, the DRB-Hicom/Khazanah deal is as good as done. So, let's just get straight to 'elephant in the room'.

DRB-Hicom would be obligated to engage Proton's local vendors that form the local automotive ecosystem. But targets must be set.

Those that cannot or will not help Proton become competitive by a certain period must go, because it is simply a question of survival in an open market now. Lest, there would be consequence from Malaysia's neighbours in ASEAN who are pressing for the Malaysian car market to be opened up.

If Proton continues to be protected without any regard for free trade in the ASEAN region, our neighbours will retaliate. Proton's share prices will then take a nose-dive at the very least - the fact that Proton would also then become a hot issue for the Opposition goes almost without saying.

Well, let's hope Proton's saga would continue in a way that would make all Malaysians proud in earnest. The company must be allowed to go on its way without anymore hand-holding or molly-codling by the Government because, in the end, that is the only way to make it truly competitive both domestically and internationally, and the only way to make the national car project a real success.

There is really no point in holding on to a symbol of an era gone by if Proton cannot do its part in generating economic growth for Malaysia that would be comparable to the growth of leading emerging economies like China and India.

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