Win-win for Proton-Mitsubishi?

A win-win relationship is a worn out cliche but somehow it rings true in the reconciliation between Proton Holdings Bhd and Mitsubishi Motors Corp.

Announcing the product-collaboration deal last Friday, Proton said both parties had signed agreements that will lead to Proton rebadging a Mitsubishi to replace the Waja, Mitsubishi rebadging a Proton for markets Proton is not involved in and they will jointly build a new Proton car.

The deal, also, indirectly spelt out the availability of Mitsubishi technology to Proton, help from Mitsubishi to upgrade Proton’s quality and the expansion of Mitsubishi into South-East Asia using Proton as a base.

At first glance, the deal is a winner as it offers not only the tangible benefits of more models and high sales when economic conditions improve, but also addresses some of the intangibles within Proton.

It also comes at little cost to Proton as it does not have to give up equity in the company while still getting the benefits a strategic equity-based partnership would have delivered.

The deal comes at a time when sales of cars globally are slowing. The credit crunch induced global recession is seeing car companies suffer such a steep drop in sales that some of the biggest names, most notably from Detroit, are fighting for survival.

Such a backdrop might have played into Proton’s hands as the relationship with Mitsubishi, which would have been more unlikely should economic conditions had been the reverse of its terrible state now, offers it a chance to take stock of its own processes and strengths and to see how it can re-position itself once economic conditions recover.

The immediate benefit for Proton would be in sales and helping to push volumes up would be the Waja replacement model.

The now tired looking Waja has been a money maker for Proton throughout this decade and getting a new car in this C-class segment is critical for Proton, especially as it takes on the more entrenched Japanese models in the country.

Furthermore, a Waja with a Mitsubishi DNA would be a valuable commodity for Proton as it would gain additional credibility in markets in South-East Asia, and possibly in the Middle Eastern markets where Proton is trying to make a name.

Quality has been a major issue for Proton for years and although the company has made significant improvement in this aspect, such as addressing the infamous dodgy power windows, there is still room for enhancement.

Proton has hired a German with experience at BMW to spearhead the quality improvement, but having Mitsubishi in the frontline working on improving the quality of the models that the companies would be jointly involved in would be a big boost for Proton.

Another spin-off from the product collaboration might be the use of Proton’s plants as a base for Mitsubishi models into South-East Asia.

At the moment, Mitsubishi cars are mainly imported as CBU units into the Asean market and having an assembly/manufacturing operations at Proton’s Tanjung Malim plant, where there is ample capacity, would allow Mitsubishi cars to be sold at cheaper prices in this region.

The deal also has an engineering services agreement. Here, Proton, which already has Lotus for some aspects of engineering skills, would utilise and likely pay Mitsubishi for engineering services towards the development on a new Proton model.
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Automakers to decide on production cut in March

PETALING JAYA: March will be a crucial month as local automakers will decide then if they need to cut production.

According to Perusahaan Otomobil Kedua Sdn Bhd (Perodua) managing director Datuk Syed Hafiz Syed Abu Bakar, it’ll be business as usual in the short term but March will be the determining month.

“There is no slowdown for now as we’re building up stock ahead of Chinese New Year. February is typically weaker as it’s a shorter month. We’ll be monitoring the situation if we need to revise the (production) numbers,” he told StarBiz.

MIMB Investment Bank analyst Rosnani Rasul said local carmakers should take the cue from the global market as international carmakers like General Motors, Toyota and Nissan Motor were slashing production next year in anticipation of declining demand.

“I don’t see how Malaysia’s auto players could be insulated if the worldwide sector is seeing such trend. Next year’s first quarter will give an indication if they need to review production plans,” she said, adding that demand was subject to interest rates, new models and fuel prices.

Meanwhile, Syed Hafiz said Perodua was anticipated to sell 158,000 vehicles next year, down 5% from this year’s anticipated sales of 167,000 units. In 2007, it sold 162,000 units.

Total industry volume is expected to fall next year to about 490,000 units from this year’s estimated 510,000.

“We’re going back to levels last seen in 2006. The journey forward is expected to be bumpy for us due to steel prices and the strengthening of the yen against the US dollar,” Syed Hafiz said.

Nonetheless, Perodua’s models are still in good demand as they’re fuel efficient and affordable.

“People will continue to look for small cars because of fuel prices. Even though petrol prices are coming down, you’ll never know when they can go up again. People’s disposable income is also shrinking,” Syed Hafiz said, adding that Malaysian banks were not tightening hire purchase loans.

National carmaker Proton Holdings Bhd, meanwhile, expects the next two quarters to be tough.

Managing director Datuk Syed Zainal Abidin Syed Mohamed Tahir, in a recent press conference, indicated that the group had to be “more realistic” about future numbers.

“Proton would review this on a regular basis to see if there’s a need (to cut production volume),” he said, adding that it would continue its cost cutting measures as well as explore new markets.


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Bumpy ride ahead for Proton

National car maker is operationally weak entering the slowdown

PETALING JAYA: The automotive market is expected to be sluggish next year due to a slower economic expansion, but Proton Holdings Bhd appears to be operationally weak in entering into this slowdown.

It reported a small operating loss of RM670,000 in its second quarter ended Sept 30, a deterioration from the small operating profit of RM13.5mil in the preceding quarter.

This is in contrast with the other large automotive companies’ results which peaked in their third quarter (Q3) in September. This was true, for instance, for UMW Holdings Bhd’s automotive division which reported an operating profit of RM265mil, its highest quarterly profit this year.

Likewise, Tan Chong Motor Holdings Bhd announced an operating profit of RM118mil in its third quarter, also its best quarterly result this year.

It’s therefore surprising that Proton’s operating results deteriorated - its operating expenses exceeded operating revenue by RM670,000 in its September quarter. It is believed the loss from its manufacture and sale of cars was partly due to its exports - its cars were sold at a lower price overseas.

Proton’s net profit of RM43.8mil in its second quarter came largely from “other operating income” amounting to RM53mil. This is a sizeable figure for other income and analysts do not seem to have a handle as to the sources of this income.

It could be a combination of interest income - Proton had gross cash of RM1.4bil - and possibly, a write-back of a doubtful debt.

Proton said that included in its income statement is a reversal of allowance of doubtful debts amounting to RM18mil. The doubtful debt is believed to be related to MV Augusta SpA that it previously owned.

The “other income” could also have included profit from services provided by Proton.

Aseambankers expects this will be a good year for Proton which it forecast to earn a net profit of RM318mil. The forecast assumes Proton will receive another research and development (R&D) grant of RM150mil, following the RM194mil it obtained from the Government last year.

OSK Investment Research forecast a lower net profit of RM180mil for the current financial year ending March 30 (FY09). It did not include any R&D grant that might be given as it considers that to be an exceptional item.

One of Proton’s financial strengths is the cash it holds. AmResearch, however, believes that could dissipate. It stated in a note that Proton’s operating cashflow could be negative RM470mil while it spends another RM470mil on R&D and other investments in FY09. That’s a total of RM940mil.

AmResearch is cautious in believing that an increase in inventory could cause the operating cashflow to be negative. A more watchful supervision over inventories would, of course, enable Proton to maintain a positive operating cashflow.

If business conditions prove to be very difficult, the negative cashflow would erode away most of its cash reserves.

At any rate, some analysts have surveyed the market and they believe total industry volume registered another decline in November, following the decline in October. It remains to be seen how Proton will brace itself through this bumpy period compared with its peers in this region.


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Higher target price for Proton

KUALA LUMPUR: OSK Investment Research has raised its target price for Proton Holdings Bhd from RM1.64 to RM1.81 after the national carmaker’s announcement of a non-equity partnership agreement with Mitsubishi Motor Corp (MMC).

The agreement would involve a possible rebadging exercise and to develop a new small hatchback car to be released in 2010.

“However, we view the agreement as being more favourable to MMC pending the confirmation of Proton’s rebadged model by Mitsubishi,” it said in a report released on Tuesday.

The research house was revising its earnings assumptions for FY10 onwards to incorporate its new capital expenditure assumptions given the lower depreciation expense arising from the strategic tie-up.

OSK Research said FY11 included a higher volume assumption of the Waja, which sources claim would likely be a rebadged Lancer, thus boosting potential revenue.

“This raises our target price from RM1.64 to RM1.81 but we maintain a Neutral due to the upward revision in earnings by 12% and 22% for FY10 and FY11 respectively,” it said.

Last Friday, Proton announced it had entered into a strategic partnership with Mitsubishi. It favoured this move given its similar technology platform tracing back to its first model of the Saga based on the Lancer platform.

Rebadging is common amongst automakers in their attempts to cut research and development expenses as well as production and marketing costs. Proton has finally jumped on the bandwagon in order to revitalise its fleet of upcoming models by taking the shortcut.

OSK Investment Research said this would reduce research and development (R&D) expenses over the shorter term to be shared with MMC.

It had reduced its estimated R&D expenses by RM11mil to RM45mil from FY10 onwards, at similar levels back in FY03 when MMC was still Proton’s strategic partner.

“Our capex estimates have been fine tweaked accordingly to RM429mil from RM600mil in FY10 and FY11. A company source claims that the new Waja, slated to be replaced by 2010, would be based on the Lancer or Galant.

“Given this possibility, we have changed our assumptions of the Waja come FY11 from 5,000 units to 25000 units on higher demand, effectively increasing our revenue estimates by 11%,” it said.

OSK Research said given the potential savings from R&D expenses, lower depreciation costs and the higher volume assumption of the Waja, it was revising upwards its bottomline estimates by 12% (RM21.59mil) and 20% (RM36.64mil) respectively for FY10 and FY11.

Proton Holdings inks product collaboration deals with Mitsubishi

KUALA LUMPUR: Proton Holdings Bhd has today entered into a product collaboration arrangement with Japanese rival Misubishi Motors Corp.

The tie-up, involving three agreements between Proton Holding's wholly owned subsidiary Perusahaan Otomobil Nasional Sdn Bhd and Mitsubishi, enables the Malaysian carmaker to tap the technical expertise of its foreign partner, according to filings to Bursa Malaysia today.

Both parties have signed a development agreement to develop a new car model for Proton. At the same time, Misubishi, under a licence agreement, has granted Proton the rights to manufacture the Japanese carmaker's components and rebrand them under the Proton banner.

Third, an engineering services agreement will see Misubishi extending its expertise to Proton Holdings for the production of the Japanese firm's licensed products.

"At the same time, Perusahaan Otomobil has entered into an understanding with Mitsubishi in relation to product collaboration for the development of a new vehicle model for Proton. The understanding encompasses initiatives to be taken by both companies to improve both build and component quality for Proton vehicles.

"Concurrently, both companies shall explore possibilities on export and contract assembly wherein the parties commit to conduct feasibility studies on the said areas within three months from the date of signing," Proton Holdings said.

三菱自動車とプロトン社、三菱ブランド車の生産などで協業

三菱自動車はマレーシアPerusahaan Otomobil Nasional Sdn Bhd（以下プロトン社）と、プロトン社における新型車両の開発・生産に関する契約を締結したと発表した。
　
　三菱自動車はプロトン社における新型車両の開発を支援するほか、プロトン社は三菱自動車の車両をベースとした新型車をライセンス契約によって生産する。開発・生産分野の協業を通じて三菱自動車はマレーシア向けの事業を拡大する。

　両社は2004年に資本提携を解消したが、2006年にはプロトン社の新規モデル開発に三菱自動車が協力することを含む協業提携に関する覚え書きを締結していた。今回の提携内容以外についても、協業内容を検討していくという。