KUALA LUMPUR DRB-Hicom has taken quite a beating in the four years since it reacquired Proton Holdings, Malaysia's embattled national carmaker, and the automotive conglomerate is now running out of time -- and money -- for a turnaround.
The government has thrown the company a lifeline in the form of a 1.5 billion ringgit ($362 million) soft loan, but it is conditional on DRB-Hicom finding a foreign partner willing to invest in Southeast Asia's sole indigenous automotive marque by March 2017.
"TURNING POINT" Syed Faisal Albar, DRB-Hicom's group managing director, sounded a confident note at the launch of the latest Saga model, a 1.3-liter sedan, on Sept. 28. "Today is the turning point where the future of Proton turns in our favor," he told the more than 1,000 guests at the event.
The Saga, Proton's best-selling model, is in its third incarnation and has sold over 2 million units since it was rolled out in July 1985. But the latest version comes at a time when car sales are declining and consumer confidence is depressed. Moreover, the car's new body and improved powertrain sit atop a second-generation platform -- evidence of Proton's inability to invest enough to innovate.
DRB-Hicom's share price has risen 45% since April and hit 1.48 ringgit on Sept. 29 after the government promised the loan, which is to be used to pay vendors. Although the stock is at its highest since November, it is still well short of the 3.17 ringgit reached in February 2012 when the acquisition of Proton was approaching completion.
DRB-Hicom posted a loss for the year through March, which it blamed on unfavorable foreign exchange rates and stricter hire purchase guidelines affecting its automotive division. The net loss of 991 million ringgit on revenue of 12.17 billion ringgit was a sharp reversal from the previous year's net profit of 300 million ringgit.
The automotive division accounts for 76% of DRB-Hicom's revenue, of which Proton contributes 51%. Prior to the Proton acquisition, the conglomerate was relatively profitable. It has significant state contracts to assemble armored vehicles for the military and maintain police aircraft, and also has stakes in the local units of Honda Motor, Isuzu Motors and Mitsubishi Motors.
Reviving Proton is DRB-Hicom's foremost concern. With a new management team headed by Ahmad Fuaad Kenali in place since April, Proton said it is confident of improvements. The focus is on three models launched this year and cost optimization. Kenali joined DRB-Hicom in 2013 from Astro Malaysia Holdings, a pay TV company where he was chief financial officer.
MATTER OF PRIDE DRB-Hicom started life in 1980 as the state-owned Heavy Industries Corp. of Malaysia, or Hicom, with a mission to lead national industrialization and reduce economic dependence on agriculture and tin mining.
Mahathir Mohamad became prime minister in 1981, and Proton was launched to develop a "national car" two years later as a prestige project, with Hicom holding 70% of the new company. The remaining stake was held by Mitsubishi Corp. and Mitsubishi Motors, which provided technology, know-how and key components.
The government subsidized Proton by providing tax breaks and research grants, and shielded it where possible from competitors. The company listed in 1992 and has focused primarily on sedans for the domestic market. At its peak in 1993, seven out of every 10 cars sold in Malaysia were Protons, but that dominance has been eroded to a market share today of just 15%. The fall since 2012, when it still held a 25% market share, has been particularly sharp.
Proton's decline in the early 1990s was partly due to the presence of another national carmaker, Perodua, which was created in 1993 as a joint venture with Daihatsu Motor and Mitsui & Co. to produce compact cars. Additionally, liberalization in the ASEAN Free Trade Area made cars imported from elsewhere in the region more affordable.
THIRD TIME'S A CHARM? There have been three major attempts to reverse Proton's decline. Still on the rebound from the 1997 Asian financial crisis, Hicom merged with Diversified Resources Berhad (DRB), Malaysia's national motorcycle and truck assembler, in 2000.
At that time, state oil company Petronas and later sovereign fund Khazanah Nasional took controlling stakes in Proton to lighten DRB-Hicom's burden. This freed DRB-Hicom to focus on the assembly of Mercedes-Benz, Volkswagen and Mitsubishi Fuso vehicles for local distribution. But even with the financial clout of Petronas and Khazanah behind it, Proton failed to regain steam.
The second attempt came in 2012, when Khazanah sold its 42.7% stake in Proton back to DRB-Hicom for 1.3 billion ringgit. DRB-Hicom, which had been controlled by local businessman Syed Mokhtar Albukhary since 2006, promised to "steer Proton into the future" and to strengthen the conglomerate's presence globally, but none of this transpired.
Mokhtar was one of the ethnic Malay entrepreneurs trusted to lead strategic companies under the Mahathir government's privatization drive. Sime Darby, a state-linked plantation company, had also put in a bid for Khazanah's Proton stake. But Mokhtar came out the winner after Mahathir, who by that time had stepped down as prime minister, openly supported DRB-Hicom's bid.
"DRB-Hicom is quite well-run," Mahathir said in an interview at the time. "This company also belongs to the AlBukhary Group, which has a lot of other businesses, including port operations. They seem to be able to do business."
But as these domestic maneuvers failed, the government looked for yet another option. In April, it declared the existing Proton business model "unsustainable" and told DRB-Hicom to find a "strategic foreign partner" by early 2017.
Mitsubishi Corp. withdrew from the joint venture in 2005 after Petronas and Khazanah stepped in. In the years that followed, Proton found itself unable to improve its products and after-sales service, and the government concluded that a global automaker would have to become involved. There have been reports that Germany's Volkswagen, Japan's Suzuki Motor and France's Renault are interested, but DRB-Hicom has said only that five foreign companies have expressed interest. There were reports that Geely Automobile Holdings might be among them, but the Chinese company denied this at a press conference in August.
On Sept. 28, Albar told reporters that Proton is looking for a partner with a regional sales network, suggesting that exports are intended to play a role in the recovery strategy.
Analysts agree that Proton must tap foreign capital and engineering, and CIMB Research also sees a serious downside risk for DRB-Hicom if the cash-strapped company fails to forge a new partnership. Its cash and short-term funds were down to 1 billion ringgit as of March 2016, compared to 6.4 billion ringgit five years earlier, before the Proton reacquisition.
There is also no guarantee DRB-Hicom can retain the profitable government concessions it enjoys in its other operations, many of which date from the time when Mahathir still wielded influence.
After stepping down as prime minister, Mahathir stayed on as an adviser to Proton and assumed the chairmanship two years ago in hopes of gaining more state support. He resigned from that position in March, however, after a serious falling-out with Prime Minister Najib Razak and his government.
"Mahathir's era of political interference has come to an end," Najib declared upon the former's resignation. "At times," he continued, "there was a sense of hubris that Proton could do anything because the government would always back it."
Mahathir's departure could make the issue of foreign ownership less sensitive. Talks with Volkswagen failed in 2007 when it emerged that the German carmaker expected to take a substantial stake in Proton, something Mahathir advised against.
If DRB-Hicom loses its majority stake, it could be the end of the Proton marque, which has negligible international brand recognition. Foreign carmakers with a small presence in the region might, however, see value in Proton's underutilized manufacturing facilities to tap into Southeast Asian markets, said BMI Research, a unit of Fitch Ratings.
Though Albar said DRB-Hicom will remain a substantial shareholder of Proton "without a doubt," he stopped short of saying whether it will remain the majority shareholder. New possible shareholding structures, he said, are "still up in the air."
Proton has continued to enjoy its "national" car status despite being privately owned for some time. Now, Malaysia finally seems determined to put profitability before national pride.