ARTICLE: Analysts say Proton-Perodua merger won’t solve woes

The Star Business: Wednesday July 28, 2010

Analysts say Proton-Perodua merger won’t solve woes

By JAGDEV SINGH SIDHU
jagdev@thestar.com.my

Perodua deemed reluctant to merge

IT may seem strange that the merger between the national car companies was initially proposed by Perusahaan Otomobil Kedua Sdn Bhd (Perodua) but now, it appears as if Proton Holdings Bhd is the main driver of that proposed union.

Initially, the general view was that such a merger would not help lift the fortunes of Proton. Today, most market observers opine that an amalgamation of both companies may not be in Perodua’s best interest.
A proposal to bring together both car companies was first mooted sometime end 1998 as the local car industry was slowly starting to gain some lost ground after being badly hit by the Asian financial crisis.
The suggestion was made public not by Proton, but by then Perodua managing director Tan Sri Abdul Rahman Omar, who floated that idea as Proton was on the verge of being acquired by Petroliam Nasional Bhd (Petronas).

Cash muscle

The reason for that suggestion by Perodua’s management was simply down to financial strength. The idea was that with Petronas’ cash muscle, a merger between both car companies would lower costs, improve research and development on new models and offer economies of scale once the industry and market improves.
When Abdul Rahman made that suggestion, car sales for the year was poor. Total auto sales in 1998 was 163,000 units and with the recovery in the economy and sentiment, sales rebounded in 1999 to 288,000 units.

National car manufacturers commanded 93% of sales, or 222,000 units, in 1999 with Perodua then a distant second in sales compared with Proton.

That scenario, however, reversed and the idea of a merger with Proton fizzled out in the later years as Perodua overtook Proton and maintained its market leadership of passenger cars sales since 2006 thanks to the Myvi and a growing demand for smaller, fuel efficient cars.

Proton was then saddled with mammoth capacity from its plant in Tanjung Malim and Shah Alam after sales did not match projections that led to the creation of all that capacity.

The reversal of fortunes of the national car companies since then has seen the idea of a merger between the two companies emanate from Proton’s side, the latest being this month after Prime Minister Datuk Seri Najib Razak said at Proton’s 25th anniversary celebration that if overcapacity was an obstacle, auto companies should merge to create a stronger, bigger and more able company.

Those comments set into action suggestions from Proton why a merger would be beneficial as there would be economies of scale, costs would be cut and exports could grow following the merger.

Perodua, however, maintained its stance since becoming the market leader by saying there was little synergy between both companies too seek a merger.

Analysts too have played down the overtures from Proton, saying there was little incentive for Perodua to proceed with a merger given the profit its making and the seeming hesitancy from its Japanese partner Daihatsu to share the money its making with another company.

Analysts said immediate gains from the lowering of cost would not be forthcoming as cars from Proton and Perodua operate on different platforms.

Structural issues

Should a merger materialise out of political persuasion as opposed to financial reasoning, it would temporarily mask the deep structural issues that have plagued the national auto companies over the past decades.
Both Proton and Perodua were created during the wave of industrialisation in Malaysia and as a vehicle of import substitution.

The companies jointly have the lion’s share of the domestic car industry, thanks to high taxes, but that market share has slowly eroded over the years as Malaysia adheres to the Asean’s Common Effective Preferential Tariff agreement between the member countries.

The entry of lower taxed cars produced mostly in Thailand, which has grown its automotive industry thanks to the bureaucratic barriers in Malaysia that drove investment up north, has led to sales of non-national cars rising.

Growing affluence of the middle class, along with the fall in taxes for cars from Southeast Asia and the historical low interest rates in recent years, have allowed households in the country to buy a growing number of non-national cars. Analysts said while the merger could stem the decline in national made cars, it may not solve a sore point of the domestic auto industry, which has been weak export numbers.

Proton sold 160,000 cars during its 2010 financial year ended 31 March, out of which 25,000 were exported. Perodua sold 166,000 cars in calendar year 2009 and a news report said just 2% of sales was shipped out of Malaysia.

It does not need to export as the domestic market has been lucrative for the company over the years.
A merger might not boost exports from Perodua’s models as Perodua needs to demonstrate an ability to be competitive to its Japanese shareholders before being given the greenlight to sell cars overseas.
Right now, it is exporting cars to the UK and it has made a case to export the Myvi, badged as a Daihatsu, to Indonesia.

The future challenge to the small car segment, in which Perodua dominates in Malaysia, will come from Thailand once “eco-cars” start rolling out of production lines in the Detroit of the East.
The need to defend domestic market share would override any export ambition, and one analyst expects that to start in 2012 once Tan Chong starts producing the Nissan March in Malaysia two years from now.
About half a dozen companies have secured eco-car licences in Thailand and exports to Malaysia might grow if manufacturers who hold those licences start exporting those small and fuel efficient cars in greater numbers to Malaysia.

Gaining exports would also depend on model mix of cars produced and newer models would need to be made, and in faster frequency, to gain share in markets where global players are already in fierce competition.
As it stands right now, Perodua produces one new model every two years and Proton’s development pipeline has shown a similar albeit faster rollout of a new model.

The financial commitments needed to compete globally might also be prohibitive given the challenges both companies face in their home market.

With total industry sales for 2010 expected to be a new record at 574,000 units, the incentive for Perodua, which now has about 30% of that market, to proceed with a merger is just not there.

Exports are not as high up on its agenda as Proton and the economies of scale a merger would bring would not be justified right now given the difference in platforms and models both companies are operating with.