Monday, January 16, 2006

What now Proton?

Some people at Proton must have been sleepless these past weeks. Everything the management and board did turn sour. The future of thousands of Proton staff and workers are at stake. Two bad news in one week is enough to spook investors to ditch Proton shares, and fall it did. It seems that small shareholders in Proton have fundamental disagreement with Proton management. The small shareholders voted with their feet, no collaboration means no future value for Proton, it would burn out its capital until no value left. The management and board want independence, because it is a national entity, while asking for support and collaboration from VW. While VW want control in decision making and operation – a takeover in short.
From the commercial point of view, the reason VW was talking to Proton in the first place was to gain a sizeable market share in a growth market - ASEAN. If VW want to build brand equity, it must churn out quality reliable product, a product that consumer can trust and the investment would be huge. As such, it is understandable that VW want nothing short of takeover. Would you invest your money now, not getting any return for the next few years, and when the project started to bear fruit in 10 years time, let someone else reap the dividend? Without majority board control, VW would run the risk of being sidelined later.
First VW announced that they are now not interested in continuing talks of collaboration with Proton then came denial of Mitsubishi that they would help Proton in any way in the future. The funny part is in the snub, yes Proton board and management was snubbed by VW, they didn’t tell Proton about their decision, but tell the media in a far away country.

Would Proton be able to compete in deregulated auto market without outside collaboration? The country’s industrial might and reputation is at stake here, and the stake is getting higher by the day. If you read industry news, DaimlerChrysler and Toyota have invested USD1.2billions each in computerised manufacturing system designed by Dassault Systeme whereby they can cut the time taken from design to prototype from 3 years to 4 months. This would involve complete collaboration between carmaker and its suppliers, because any new design, whether in shape or material has to be tested for compatibility like flexing and bending. Instead of building the component prototype and testing it, the computer system can predict and give compatibility result. So in the not too distant future you can expect to be able to design your own personal car on a company’s website, pay for it and have it delivered to your place in a few of months. The success of VW Beetle and Chrysler PT Cruiser shows that a car can be fashion statement, and this is where you get the juiciest margin.
Would Proton be able to go down this road on its own? I doubt it; its market share is just too small to justify the investment needed. Toyota churned out over a million cars each year from its plants in many countries.
The other choice is for Proton to downgrade a bit, just be contract assembler manufacturer for other car companies, but I guess there are other players in this category, Naza, Oriental and Tan Chong among others.

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