Proton’s fight for survival

National car company at its lowest ebb, looks to Suzuki for change in fortune

JAGDEV SINGH SIDHU, THOMAS HUANG, THE STAR

NEXT Tuesday, Proton will be 30 years old. For most car makers, it’s a day of celebration, signifying progress made during its time in existence.

For Proton, it will be that but also a lot of reflection. Part of it will look at how Proton has produced 4 million cars but at the same time, production has been languishing way below its optimum capacity.

It will look at the successes it has had with some models and the failures of others.

But more importantly, for chairman Tun Dr Mahathir Mohamad and CEO Datuk Abdul Harith Abdullah, it’s about the future of the struggling national car company.

“It’s been a difficult journey for us. It’s been rocky and smooth at different times,” says Harith.

The disparate fortunes of Proton of the past has brought the company to almost its lowest ebb in its three-decade history.

Having lost its number one rank to rival Perodua, Proton’s market share of the auto industry has steadily slipped to about 17% of the industry, a pale shadow of its past when one of every two cars sold was a Proton.

Sales have slipped so much that in April, Proton for the first time found itself ranked fourth in the best seller list, trailing behind Perodua, Toyota and Honda. It jumped back to its second position in May after the hiccups of the GST implementation was smoothen out.

Both Dr Mahathir and Harith did not point figures at others for the predicament Proton is in. Yes, there could be have been more help from the Government and the National Automotive Policy could have been more favourable to allow Proton to beef up its business before allowing competition to flourish.

But both chairman and CEO says help starts with itself, and Dr Mahathir is cognisant of its problems.

“Currently, we are not doing so well, for various reasons. But that is what normally happens to automotive companies. Even the biggest automotive companies go through a period of downturn, then they will recover,” he says.

The recovery plan has been drawn up and the collaboration it will enter into with Suzuki is a big part of that. The dealer network will be streamlined by the end of the year and vendors will need better financial strength. Proton will also introduce three new models next year.

Dealing with perception

One of the biggest problems Proton is grappling with is perception. The quality of the cars it makes is questioned by many these days to a point the company is painfully aware of making sure that does not become the talking point with the new models it will launch.

“People don’t forget. Bad things they don’t forget. Good things they forget,” says Dr Mahathir.

“This perception is the problem. I don’t know what else to do. We give good car, good price. Better car than other cars.”

Dr Mahathir says part of that problem was its own doing. One example is the Preve, where the car was launched before the car was fully ready, resulting in a litany of complaints from buyers. He feels that sales of the Iriz is also affected by perception even though the car is packed with safety and electronic features comparable with what other manufacturers are installing in their cars.

But that Proton says is the past as the company is taking such issues much more seriously. Dr Mahathir, who is very much hands on with the Proton, says there are quality stations today where the car is checked throughout the assembly process at many intervals. If parts or assembly doesn’t meet quality standards, it’s sent back for rectifying.

In the past, just one out of 40 cars were tested once it was out of the assembly plant. Today, all cars are tested and driven to check on the quality of the finished product.

Getting quality up to mark is important for Proton given the three new models it will launch next year.

The first will be the new Perdana that will be sold to the public. “We will have a lot of new models next year, up to three,” says Harith.

Filling up capacity

The new models in just part of Proton’s plans to increase production capacity. The company produced around 120,000 cars last year but capacity at its plants in Shah Alam and Tanjung Malim is 370,000 units.

“We need to fill that up otherwise cost will become very high,” says Harith.

“Filling up our current capacity in the next 3-5 years is a must. The total number people directly related to Proton is 77,000. We have to do everything within our ability to be successful.”

Proton is banking on the new models to be sales winners that can boost production, and profitability. But it’s also aware that the best sales year it ever had was around 250,000 cars that won’t be enough to fill up its capacity.

That where the collaboration with Suzuki comes in. The idea is for between 60,000 and 100,000 Suzuki cars to be manufactured by Proton, and exports will be part of that deal. Proton is looking at increasing exports of its cars to South-East Asia.

Proton and Suzuki proposed its strategic collaboration and partnership with Suzuki last month where the deal would encompass four main areas, which are products, technology, people and market.

The collaboration would allow Proton to gain access to the models, platforms, power train and automotive technology of Suzuki.

“Suzuki is not small. They produce 3 million cars a year and have been number three in Japan for seven consecutive years, after Toyota and Honda. They have chosen a different path, going into developing countries instead of developed countries. They are big in India producing 1.2 million cars and 800,000 cars in Japan,” says Harith.

“To be successful, you must have a high level of cost effectiveness and this is what we want to learn. This is part of the journey for Proton to decide where it wants to be.”

The decision to find a strategic collaboration partner is also a necessity for Proton as it was during its partnership with Mitsubishi that it found its greatest success.

It was hugely profitable during that time but decided to veer away from that business model to venture on its own, designing and producing its own cars.

But going solo has not brought riches to Proton and seeing how rival Perodua has flourished with its collaboration with Daihatsu made Proton realise that having a partner is important in future business plan.

Proton will however chart its own course in parallel with its deal with Suzuki. It will still design and make its own cars and have a range of cars that its will produce with Suzuki. Suzuki will assist in building a small car for Proton that it can use to penetrate and snatch market share from Perodua.

But Proton is aware that will take time, if it can do so. There is no chest thumping declarations of overtaking Perodua, as Harith says that just having the same 30% market share as Perodua is success enough.

“Put pride aside. That can come later,” he says. The collaboration is seen to also help rebuild customer confidence in Proton.

Dealing with its financials

Proton’s 30 years has seen the company develop a huge domestic eco-system for the auto industry. In the past 20 years, it says investments have totalled RM20bil and has grown the dealer and vendor network in the country.

But its poor sales have brought cracks to some parts of its linkages with the industry that it needs to fix.

The first is the dealer network. Harith says there are around 400 dealers right now and Proton really needs about half of that.

Furthermore, it wants its dealers to modernise and establish more 3S centres that not only sell cars but stock spare parts and services its automobiles.

What it wants most out of its dealers and vendors is financial independence.

“We have 400 dealers and that doesn’t work. There are no economies of scale for the system to work. There are even problems within the vendor system. In order for Proton to compete, our supply system has to meet the highest requirements,” he says.

“Dealers must have money to buy the cars from Proton. We are not a bank and we can’t loan you the money to sell our cars. We have to focus on model development and these two years we are spending RM2bil on model development.”

Cash is tight at Proton as the company isn’t really concentrating on making a profit now. Cashflow is more important than the bottomline at the moment and Harith says Proton has enough cash coming in to run its own business and develop its own cars.

“Obviously you cannot depart from making a profit. Today, cash is king and the most important thing is cash instead of profit. It’s about survival.

“For shareholders, it is about the long-term business sustainability.” There is no issue about losing money today when there is long-term viability, he says.

What is hurting also is the business environment.

Manufacturers are engaged in heavy discounting of cars to move stock plus bank approvals for auto loans is not helping Proton as about four out of 10 loans are approved by financial institutions.

The weak ringgit has hit its vendors as 50% of its suppliers are exposed to the US dollar.

Harith doesn’t mince his words about the challenges ahead for Proton. What it has now is a partner and new cars to introduce.

“Now its about executing our plans. Time is not with us. We should have done this five years ago,” he says.