KUALA LUMPUR (NewsRise) -- Malaysia agreed to give DRB-Hicom's unit Proton Holdings a soft loan of 1.5 billion ringgit ($384.9 million) that comes with strict conditions and monitoring by a special panel tasked to turn around the sagging fortunes of the former state-run car maker.
The aid comes as Proton battles persistent financial losses and shrinking market share in a relatively small, but protected domestic market.
Malaysia is also concerned that Proton's failure could reverberate across the manufacturing industry, where livelihood of tens of thousands of workers are linked to producing components for Proton cars and related-services.
Analysts welcomed the move as it would ease Proton's immediate cash flow problems and reinforce the government's commitment to the company but raised doubts over the company's long-term prospects.
"We are positive on the announcement," said Hong Leong Investment Bank's analyst Daniel Wong. "The soft loan grant will be able to recapitalize Proton's depleting war chest for transformation and restructuring."
Among others, Proton will be required to script a turnaround plan and prepare strategic measures to expand its market share locally and tie up with a foreign partner to assist in research and compete internationally, said Malaysia's Minister of International Trade and Industry Mustapa Mohamad.
A taskforce comprising representatives from the public and private sectors will also be formed to ensure success of Proton's transformation program, Mustapa said in a statement. "Apart from ensuring that the terms of the soft loan are fulfilled, this taskforce will also be required to study Proton's past business model, identify weaknesses and measures to overcome them," he added.
Once Malaysia's top carmaker by volume, Proton suffered a steady decline in sales as years of quality issues marred its image locally. A lack of focus on exports, meanwhile, eroded the competitiveness of its products in global markets.
At its peak in 1993, Proton made seven of every 10 cars sold in Malaysia while foreign brands grappled with high tax structure that could lift prices of their vehicles by as much as three-fold. Currently, Proton's market share in Malaysia hovers at around 15% while overseas sales remain negligible.
That left Proton's two manufacturing plants under-utilized, running at only about one-third of their total capacities. The company employs about 12,000 people directly while at the same time vendors dependent on Proton's business has about 50,000 workers, according to Minister Mustapa.
The soft loan is the latest in a slew of financial aid to Proton that amounted to 13.9 billion ringgit in grants, various forms of assistance as well as taxes forgone since its formation in 1983.
The loan will ease Proton's immediate cash flow problems, said AmInvestment Bank analyst Thomas Soon, noting that the company's accumulated losses of 2.5 billion ringgit could wipe out 33% of DRB-Hicom's shareholders' equity of 7.57 billion ringgit.
"However, we question if it will be adequate to stem the losses amid falling Proton sales, particularly in the absence of a plan that involves the entry of an incentivized equity strategic partnership with a foreign brand that can utilize its excess capacity," he noted.
Through the past decade, Proton had discussed tie up opportunities with potential foreign partners including Volkswagen AG of Germany and France's PSA Peugeot-Citroen before talks collapsed, largely due to differences over shareholding. In January, Proton signed an agreement to start producing new vehicles developed jointly with Suzuki Motors before the end of this year.
DRB-Hicom, which assembles vehicles ranging from Honda motorcycles to tanks developed by Turkey's FNSS Savunma Sistemleri, took over Proton from state investment fund Khazanah Nasional Bhd in 2012.
Shares of DRB-Hicom ended Monday unchanged at 1.09 ringgit while the benchmark FTSE Bursa Malaysia KLCI closed down 0.2%. The stock has lost more than 10% so far this year even as the KLCI gained 1.4% year-to-date.