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Monday, June 26, 2006

Tengku Mahaleel speaks up on Agusta issue

Former Proton CEO Tengku Tan Sri Mahaleel Ariff today spoke out in defence of the purchase of MV Agusta, which was carried out when he was CEO of the company, as well as questioned the sale of the Italian motorcycle manufacturer. He explained at a press conference this morning that the purpose of his action was two-fold: firstly, because Proton’s board had decided not to respond to questions earlier posed [concerning the Agusta sale for one euro] by Tun Dr Mahathir, who is Proton’s advisor, and by himself and secondly, to respond to allegations that his decision to purchase Agusta was a bad one which had put Proton at risk.

"By not replying in itself is a transparency of falsehood contrary to the wishes of the Government and transparent for all to see," he said, referring to the issues that had been raised earlier, namely the process of the sale of Agusta, that the sale had been part of its divestment of non-core assets, and that Proton’s current losses are being attributed to losses of Agusta. Tengku Mahaleel said that his statements at the press conference today were also shared by Tun Mahathir who was unable to attend as he was overseas. In continuing to seek answers from Proton, Tengku Mahaleel explained that it was a matter of public interest since Proton is a national company and ‘for the sake of good ethical practices’.

By his calculation, the sale of Agusta for just one euro had lost Proton 69.999 million euros plus fees to consultants and Italian court administrators which added another 6 million euros for a total loss of 75.99 million (RM340 million). “For this money, 11,000 Malaysian fisherman could each have been given a boat,” he said.

The former CEO then went on to provide an insight into Proton’s internal management processes and control systems and questioned if the processes were followed prior to selling off Agusta. He also wanted to know the positions taken by certain board members who had earlier approved the purchase of the Italian company, and why they had seen reasons to sell it off.

Recalling that it took some 14 months to deliberate on the purchase of Agusta, Tengku Mahaleel expressed surprise that selling it off took just two months to decide. According to him, the 14-month period began in December 2002 when Agusta was identified for acquisition. When asked if Tun Dr Mahathir had, at that time, been briefed on the intention to make the acquisition and whether he was positive about it, Tengku Mahaleel said he had been told all the pros and cons and the risks and had been agreeable as well.

Tengku Mahaleel also questioned the declaration by Proton’s board that Agusta was a ‘non-core business’, hence the need to sell it off. In his view, Agusta should not be seen as a mere ‘motorcycle company’ but as an automotive company which has the full scope of activities of any automotive manufacturer. Therefore, in selling off Agusta, he sees it as having sold off a core asset of Proton.

On why he had supported the decision to buy Agusta (and obviously still supports it), he said that it was ‘a strategic acquisition to ensure Proton’s future’ particularly as that future seems uncertain with auto policies that are inconsistent and sometimes not transparent.

“With the changing Malaysian auto policy, Proton’s future cashflows will not be sustainable as its domestic market share falls below 30%. Shocking as it may be, Proton’s Q2 operating profit is a negative (-RM7 million) well before the forecast of 2008 of severe competition,” he said. “So it is even more urgent that it has to find ways of gaining new profits to maintain its level of operations and R&D investment. This means the combination of Lotus and MV Agusta is crucial for Proton.”

He said that the combined income – from 2008 – would be able to fund Proton’s need of RM500 million annually to maintain its level of investments for new products and market expansion and that around half of that had been forecast to be contributed by Lotus and Agusta.

"Of course, this also depends on Proton’s management skills to turn around and introduce new products quickly," he added.

To support his forecast that Agusta could actually become a profit centre for Proton, he revealed the 2006 earnings forecast prepared by Price Waterhouse Coopers, an independent accounting firm, which was said to be a ‘conservative’ one. In the forecast (before tax), Agusta could be making RM73 million this year (best case) and even in the worst case, RM31 million. The forecast for 2010 was RM228 million.

The key technologies which Agusta already has have been presented as one of the important reasons for acquiring it and he again emphasised them with more elaboration than before. Being a motorcycle manufacturer, Agusta has the expertise to make small yet powerful high-tech engines and could develop 850 cc and 1000 cc engines for Proton models at 50% what it would cost Proton/Lotus to develop. Such engines would be RM2,500 cheaper than the engine currently used in the Savvy, and on a production run of 250,000 Savvys over 5 years, it would thus be possible to lower production costs by RM625 million. This figure, he pointed out, more than paid for the 70 million euros which Proton had paid to buy over Agusta.

Tengku Mahaleel also revealed that Agusta had a concept for a RM10,000 car using unique manufacturing methods and also had a patented airflow system which was going to be used for the Campro engines. The Italian company also has a very unique gearbox which would be valuable to Proton.

Returning to the financial issues, he revealed the purchase conditions which were agreed upon when Proton bought over Agusta (or more accurately, acquired the MV Group through a share injection of 70 million euros). The conditions related to the settlement of Agusta’s debts with specific terms over a 4-year period, and he claimed that even prior to purchase, Proton had managed to reduce the debt level to 68 million euros.

Crucial to the survival of Agusta, which was on the brink of bankruptcy, was getting working capital and to address this quickly, it was decided that the unused credit line of 9 million euros available through Proton UK would be utilised. Also, group purchasing of Japanese parts worth 12 million euros was carried out, optimizing buying power.

Having made a case for a turn-around strategy, Tengku Mahaleel said that it made no financial sense to sell off the company for one euro and that ‘the Proton board’s action and intention is difficult to comprehend’. He revealed that the CEO and CFO of Agusta had attempted to discuss the matter with Proton’s board but had difficulty doing so and more puzzling was why the Proton board had chosen to cut off Agusta (financially) when financial advisors had recommended financial support to continue at least for the 2005/2006 annual management plan and then decide what further course of action should be taken.

When asked to comment on the statement by an analyst that Agusta's creditor banks were on the verge of foreclosing and if that had happened, Italian law would have held Proton responsible for all Agusta’s contingent liabilities, he replied: “You can always negotiate [on debt repayment]. The key point on negotiation is whether you are on target. Banks would love to lend money to you when they know you have a backer, but when the backer pulls out, the banks pull out.”

The final part of his presentation aimed to show that Proton’s losses in Q1/Q2 of its financial year (not the calendar year) are not wholly due to Agusta – and also nothing to do with him since he had already departed from Proton. He noted that Proton’s reports of loss during the two quarters were due to provisions of RM137 million and RM161 million, respectively, and drew attention to the fact that the provision for Agusta was only RM45 million in the first quarter. In other words, Proton’s losses could not be blamed entirely on the Agusta issue.

An interesting fact he produced was that unsold stocks at the end of October 2005 were 25,000 units which, if valued at RM40,000 each, amounted to RM900 million. While he said he could not recall what the stock position was at the beginning of 2005, he did say that he had understood that there were at least 30,000 units of unsold stocks now and lamented that 18,000 units of those were 2005 models which would likely have to be sold at a discount since they are old models.

In wrapping up his presentation, he provided an overview of the management performance ‘before and after’ which were very interesting:

GROWTH BETWEEN 1996 ~ 2004
Turnover : from RM5 billion to RM12 billion
Assets: from RM1.7 billion to RM5.6 billion
Cash/equivalents: from RM450 million to RM2.6 billion
Profits: no losses reported

Waja development : RM817 million
Gen2 development: RM500 million
SRM development: RM445 million
Savvy development: RM467 million

USPD (which became Proton Edar) : RM384 million
Proton Commerce: RM125 million
Lotus: RM503 million
MV Agusta: RM364 million

Tg Malim plant project: RM1.8 billion

Given the strategy that he and his team had formulated, which included the anticipated revenues from Lotus and Agusta – from 2008 - Tengku Mahaleel said that Proton would have been able to fully repay its government loan of RM800 million (which was given when Proton began business) by 2007. However, in view of what has taken place since the new management took over, he believes that ‘the sale of Agusta has placed risk on the company’s future, reduced its ability to increase engineering capability and also reduced its access to new markets through the Agusta network and products’.

As a closing statement, he stated that both he and Tun Dr Mahathir wish to register their interest to buy Lotus for one British pound, or more than one pound, if and when it is for sale. Their rationale is that a precedent has been set (through the sale of Agusta for one euro).

Tengku Mahaleel certainly had the right to speak up on the history and process by which the decision was made to acquire Agusta since it was done when he was CEO. Understandably, he is disturbed that public opinion has been influenced by various commentaries that his decision was a bad one, thus putting his performance as CEO in a negative light. However, his situation is no different from that of Carly Fiorina (former CEO of HP), Jurgen Schrempp (former CEO of DaimlerChrysler), Bernd Pischetsrieder (former CEO of BMW) and Jac Nasser (former President of Ford Motor Company), all of whom were forced to depart from their respective companies under controversial circumstances. These CEOs had all been ‘bright stars’ and seemed to do no wrong, were given a free hand to buy up other companies and spent billions to execute what they believed to be sound business plans. Like Tengku Mahaleel, they too defended all they had done as being ‘the best strategy’ for their companies; surely none of them would admit that he or she had made a bad decision?

It is also reasonable to question the motives of Proton’s board in selling off Agusta but then again, seeing that the company’s profits and market share were declining, they had to act and in their mind, Agusta may have been a burden the company could do without. They may have a different perception of the value of Agusta and the route Proton needs to take to survive. Can anyone be so certain that his strategy is The Right One? Only time will tell whose move was the right one because predicting the future with certainty is a skill which humans do not have.


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What is the main factor for you to buy a Proton Car?
Low price and no other choice due to budget
Good resale value
Low maintenance cost
Ride & Handling is good
Reliable parts, chasis and engine
Good Styling exterior & Interior
Patriotism (I support Made in Malaysia Products)
Follow others (Follow Majorities should be the best choice)