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DRB Hicom pins hopes on Chinese input for real profit

Malaysian automotive conglomerate banks on Geely to turn Proton around

DRB Hicom says Proton's financial and operational performance will gradually improve based on the technology sharing and product development from Geely.   © Reuters

KUALA LUMPUR -- Despite swinging to a profit recently, Malaysia's DRB Hicom is not exactly celebrating, but is looking instead to Chinese input to turn around Proton Holdings, its 50.1%-owned national automaker, and to give a further boost to Pos Malaysia, its postal services unit. 

The conglomerate's earnings returned to the black in the July to September quarter, with a net profit of 736 million ringgit ($180 million), compared with a net loss of 310 million ringgit in the same period last year, thanks mainly to a one-off gain in the form of a 1.1 billion ringgit research grant from the government to Proton. Not counting the grant, the group recorded a wider core net loss of 218 million ringgit in the fiscal second quarter, said CIMB Research in a note to clients on Friday.  

A glimmer of hope for a more sustained recovery has appeared, with the group banking on the two partnerships its has formed recently with Chinese companies Zhejiang Geely Holdings Group and Alibaba Group Holding. DRB Hicom said Proton's financial and operational performance would gradually improve based on technology sharing and product development with Geely, which holds the remaining stake in the car maker.

Proton's CEO Li Chunrong, the Chinese national that Geely headhunted from another Chinese automaker Dongfeng Motor Group, has identified Proton's main problem as having poor customer service. "Half of our group's sales dealers know how to sell cars, but not [how to] service cars," said Li in Chinese at a business forum recently.

To set things straight at Proton, Li has proposed several changes, starting with the basics. He wants Proton's name in Chinese to change from "puteng" to "baoteng", to reflect the company's importance in Malaysia and pride in its brand. 'Bao' means treasure, a stark difference from 'pu', meaning normal. The name-change is meant to appeal to the affluent ethnic Chinese in the country, many of whom gave up on Proton to buy other makes. 

He has also set a time frame of two weeks, instead of two months, for Proton's management to improve on the quality of the food at the headquarter's staff cafeteria, with Li hoping that a simple formula of better food input will be reflected in better manufacturing line output. 

Through such changes, including a requirement for Proton's dealers to offer after-sales services, Li said he wanted to drive Proton to its past glory -- when it was a symbol of national pride and industrialization. At its peak in 1993, the automaker sold seven out of every 10 cars on Malaysia's roads. Market share, however, has eroded to 15% in the first 10 months of 2017. 

But Li, who assumed his current position in October, said sales were rebounding, illustrated by a year-on-year increase of 18% in the second quarter. Being largely an unknown brand outside Malaysia, reviving Proton is the "most challenging" job he has had so far, said the automotive industry veteran who began his career at Dongfeng in the 1980s. Working as a foreigner in Malaysia and facing cultural barriers can be tough, he added. Li has made a request to Proton staff to follow four key principles in their work: mutual trust, professionalism, transparency and compliance.

Public Investment Bank said earnings of DRB Hicom's automotive division, which also assembles vehicles including Mercedes Benz, Honda and Isuzu, will improve going forward based on lower losses accrued at Proton now that Geely is a major stakeholder. 

Apart from Geely, DRB Hicom is also relying on e-commerce conglomerate Alibaba Group to drive its logistics business led by Pos Malaysia. The postal agent is one of the key operators of the Digital Free Trade Zone, an e-fulfillment facility that includes warehousing and customs clearance set up by the government in partnership with Alibaba. 

Located in Kuala Lumpur International Airport, the DFTZ gives Alibaba a platform to extend its e-commerce business to Southeast Asia, capitalizing on the region's economic integration. Pos, which is 22% owned by DRB Hicom, is expected to benefit from growing courier volumes, said Kenanga Research recently. The DFTZ is undergoing a second-phase expansion carried out by Cainiao Smart Logistics Network, a wholly-owned unit of Alibaba's logistics arm.

While DRB Hicom's partnership with Geely may provide Proton with much-needed impetus to generate profits, some analysts are wary of the lack of product offerings. Li had said in October that there would be no new model launches for 14 months in order to allow his team to focus on improving quality and building the sales network. PublicInvest Research downgraded DRB Hicom's stock on Monday from 'outperform' to 'trading buy' due to near-term uncertainties.



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