Can the turnaround specialist make something special out of Proton?

• Khazanah selected DRB's proposal for purchasing 42% of their stake in national carmaker Proton
• Offer price is RM5.50 or RM1.29billion in total
• DRB-Hicom will make mandatory general offer to other shareholders
• Deal makes DRB-Hicom a brand owner rather than just assembler, distributor or retailer
• Turnaround plan expected to bear fruit in 5 to 10 years time
• Future of Lotus hangs in the balance

In a short Media statement issued at lunchtime, Malaysian sovereign wealth fund Khazanah tied the knot between suitor DRB-Hicom and national carmaker Proton, ending months of speculation that has seen shares in both entities rising steadily - which many say was a sign of market confidence in the abilities of the conglomerate to make something special out of Proton.

Before we go further, these are the million-dollar questions that needs answers, I will not attempt to answer all of them but you may get hints of what I think the answers would be in the following paragraphs:

The million dollar questions are as follows:

1. Who will be the person in charge at Proton - who will be the MD? Will Datuk Seri Syed Zainal Abidin Tahir stay or will they find a replacement for him?
2. Will DRB de-list Proton and do all their magic away from the prying eyes of the market?
3. What sort of wish-list will they hand over to the Government for the RM5 billion that they are expected to spend on the acquisition and future of Proton?
4. Will Lotus have a position in the new marriage?
5. Will Volkswagen enter the picture? 

It is no secret that Khazanah has been flummoxed by the car industry and has found Proton a difficult beast to handle and has left it pretty much to its own devices with expected mixed bag of results.

On a positive note, the operations of Proton has seen much improvement, especially in manufacturing with the number of defects plummeting as the management pays closer attention to detail and the workforce find a fresh boost in morale since the appointment of current Managing Director, Datuk Seri Syed Zainal Abidin Tahir.

On a less than salubrious palate, the company is lacking a clear long term vision, not surprising as such long range planning can only be driven by an enthusiastic owner and Khazanah was not an enthusiastic owner.

The result is a crop of current and upcoming models that are meeting market requirements and developed at very reasonable costs and this sits along an unclear strategy over technology and global market goals.

As the management tries to formulate a mid-term global market strategy with the development of cars that meets European and American standards, they are not so committed in pushing for new markets as the move requires substantial financial and political muscle.

The current effort by Proton to produce hybrid and range-extender electric cars under collaboration with industry unknown, Fraser Nash is an example of what happens when there is no clear idea where the company should go in the long run.

Frazer Nash may be a relatively well known small sports car maker from the middle of the 20th century but they are certainly not the top heavyweight contender in the automotive consulting business, far away from the likes of Ricardo, Ilmor, McLaren, Lotus and Porsche.

Frazer–Nash Research Limited is the flagship company of the Singapore-based Kamkorp group which lists its other companies as Frazer Nash Energy Sytems, Metrail and Bristol Cars.

There is no doubt that Hybrid technology is the talk of town and the flavour of the month but it is, by definition, a stopgap technology between internal combustion engine power and electrically motivated vehicles.

Proton's decision to spend more than RM300 million into a stopgap technology that has very little appeal in the local market seems like an expensive kneejerk reaction to current automotive trends and jarring proof that the company is unclear about its long term powerplant strategy.

From what we have heard trough sources inside Proton, the collaboration is problematic and they may not be reaping the rewards for every ringgit that they have sowed.

DRB will need to take out the magnifying glass and apply it to the Frazer-Nash deal and make sure that every cent already paid to the British consulting company is worth it or cut their losses and any links to the Frazer-Nash.

Proton, as it stands, is a Jaguh Kampung or big fish in a small pond that desperately wants to go global but does not have sufficient confidence to make the jump and has not found a strong cheerleader in Khazanah. Truth be told even the Jaguh Kampung title is in question, what with Perodua taking the top sales spot over the last few years.

Proton's overseas market continues to take the cautious approach, thanks to the limited store of enthusiasm within the company.

Khazanah's effort at turning around the company went only as far as recruiting the current Managing Director, Syed Zainal - in the hope that he would do the necessary without the sovereign wealth fund spending any close management attention in the nuts and bolts of the operations.

Syed Zainal was pinched from second national carmaker Perodua thanks to his impressive technical and management credentials where he was credited with improving the quality of cars coming out of Rawang to a level that is comparable to global standards.

Of course, at Perodua, he has the benefit of Japanese support and unwavering committment to quality and  this was clearly not in place at Proton when he arrived and he quickly found out just how much work was needed to make Proton a proper carmaker.

At that time the company had been on a major downturn in terms of sales volume as well as market reputation with every website, blog and news outlets lapping up any bad news they could find about the company and there was no shortage of those.

Morale was low at Proton and they needed a major boost from a strong and charismatic leader and they found some rejuvenation from Syed Zainal for the last five years.

The company has now worked through the majority of their major quality issues and are now enjoying much lower defect numbers out of the assembly line and they are now in the process of regaining public confidence in their products and moving their cars up the value chain with exciting design and features.

That is not to say that they are out of the woods yet, quality wise but at least they can start to see sunlight from their current position.

Even if Proton were to come up with a globally competitive vehicle, the company needs clear, long-term commitment to global market developments and a clear target in terms of its size and sales volume in the worldwide league table.

The South Korean car industry experience, specifically Hyundai Kia is a worthwhile parallel to explore and apply to Proton.

In 2001, journalists from around the world were invited to South Korean to hear Hyundai-Kia announce their Vision 21, the plan to become the world's fifth largest carmaker within 10 years.

This is barely three years after Kia became insolvent and had to be rescued by Hyundai and it is a clear example of how a visionary new owner can and will dream big to make an impact on the global car market.

Bearing in mind that at the time Hyundai-Kia was just barely in the top 10 of global carmakers and had to jump over major names such as Nissan, Honda, Volkswagen and Fiat to get to fifth spot, assuming that Toyota, GM, Ford, Chrysler did not lose their spots.

The big dream that Hyundai Kia had resulted in noticeable quality improvements and the establishment of regional design centres in Europe and United States.

While it is nice to think that Proton could dream as big as Hyundai Kia, we should remember that even in 2001, Hyundai Kia were producing more than a million cars a year and exporting to the US and Europe, although with limited success while meeting much cynicism and criticism.

At the moment, Proton is languishing somewhere in the 30th rung with nearly 200,000 units sold in 2011 or about 30 per cent of the Malaysian market. Export numbers are negligible and has never had any significant impact on the company's bottom line.

For Proton to start registering global presence, the company needs to join the bottom ranks of Japanese mass market carmakers with sales of around 800,000 units a year and if it wants to become profitable as a global player then it would have to register around 1million units of cars annually.

We can see that bottom rung Japanese players like Mitsubishi and Mazda with around 900,000 units of sales per year are just barely keeping their heads above water and are now forced to re-badge and re-brand other models to complete their line-up.

As a regional player, Proton can probably survive by doubling their sales figure to 400,000 units in South East Asia and other developing markets but even this market push will require substantial investment from the owners.

It is understood that DRB-Hicom has earmarked RM5billion for the Proton project and out of that amount about RM2 billion will be cash injection into the company to take it to the next level. Will this be enough?

DRB Hicom Managing Director Datuk Seri Mohd Khamil Jamil is fond of saying that the conglomerate is not a short term player, it looks at low hanging fruits that offer immediate returns and long term potential of any business venture that it enters.

In a candid Media conference last week, without being specific he said there are enough low hanging fruits at Proton to make the purchase justifiable and that Proton is a good company to buy because it has a lot of potential.

It is hard to argue with Khamil's assessment of Proton because the hard work put into the carmaker in the last five years has improved the quality and maturity of the products and this can be quickly turned into sales figures with a revamped and rejuvenated sales and marketing team.

Proton has also invested well in design and engineering capabilities in their effort to develop globally acceptable cars and DRB Hicom will now have to take it to the next step, perhaps by finding a mature and globally noted talent to head the design team at Proton.

We have seen how the fortunes of Hyundai Kia rise to unprecedented levels after they improved quality levels and found their own, distinctive and attractive design identity, thanks to idea injections from Europe and North America.

The fact that DRB-Hicom will spend up to RM5billion of their own money to get hold of Proton and make it work means they are deadly serious about the entire project and their number crunchers would have told them that Proton would not survive as a purely national carmaker selling only on home territory.

Khamil had said before that they have plans for Proton beyond Malaysian shores and they are keen to apply everything they have learnt dealing with a vast constellation of foreign automotive brands to the national carmaker.

It is unclear how far DRB-Hicom  will take their partnership with other carmakers into this venture with Proton but certainly there is a lot of scope for cooperation.

As a small carmaker, Proton is in need of a technology partner and also a strategic partner to allow for platform and cost sharing.

Before a technology or strategic partner can be found, DRB-Hicom will have to put in place a long-term goal for Proton and then only work out the sort of partnership that is best for the national carmaker and from there they will be able to narrow down which industry player to pursue.

Obviously there are speculations that Volkswagen, a major partner of DRB-Hicom may be beneficial to the new marriage and this would not be the first time that the German carmaker would be mentioned in the same sentence as Proton.

Just around the new millennium, Volkswagen and Proton entered into talks for a possible linkage but the negotiations collapsed as they could not find a common cause long enough to span the large gap between what each of them expected out of the proposed joint effort.

Under the current arrangement, DRB-Hicom will assemble Volkswagen cars at their plant in Pekan and they are expected to play a key role in the German make's fast expansion into the South-East Asia region.

With a large pool of automotive executives in their ranks, DRB-Hicom is certainly not short of talent to work with Proton and in many cases the talents have had experience working for the national carmaker in the past.

For example, the head of DRB Auto Group is Datuk Nik Hamdan Nik Hassan, a pioneer with Proton and has three decades of experience handling various brands from Honda to Audi.

Khamil insisted that they are not going to make wholesale changes at Proton once the deal goes through, saying that they will judiciously inject new blood where it is needed and this they will have to do post haste.

After all is said and done, DRB needs to change the way they do the car business, with the acquisition of Proton, they are now a brand owner and they will have to spend a lot more time and money developing the brand and finding new markets for Proton.

PROTON MAY NO LONGER HOLD LOTUS POSITION AFTER MARRIAGE TO DRB

As we wait with bated breath the plans that DRB will now draw up for Proton, the other rampant speculation about the national car company will reach fever pitch; how will British sportscar Lotus feature in the national carmaker's future.

With an ambitious five-year plan now entering its second year, Lotus will start spending a large part of the RM1 billion in loans that Proton guaranteed.

The five year plan involves Lotus launching five new models and investing heavily in a new manufacturing facility that allows for metal car production and vastly improved product quality.

The reality is that the RM1 billion borrowed by Lotus will only allow them to design one and half car and invest in a new production facility, the hope is that the first car will do well enough in the market to allow Lotus to roll over some cash into the subsequent models until all five are out to market.

Right now we know that the all-new Lotus V8 engine was successfully fired in October and they expect to have it running in a mule of the all-new Esprit sometime this or next month with the full prototype on road trials in the second half of 2012.

With no clear development updates from Lotus with regards to their new models, the market is nervous and vacillates between excitement and cynicism about the future of the British sportscar brand.

DRB-Hicom will have to evaluate how Lotus is performing and whether it will meet the milestones already set down and whether the new products will be worth the money they are spending right now.

They will also have to decide whether they can sell off the sportscar company company and facilities while holding on to the brand  and research and development arm of Lotus and use it to the advantage of Proton.

The new owners will also have to investigate the value that the Lotus group is enjoying from their association with Formula One and other motorsports series.

If DRB-Hicom decides to hold on to Lotus, the first thing they will have to do is shorten the leash and take closer interest in the running of the Norfolk-based carmaker or they could end up paying for an expensive busman holiday for Danny Bahar and his elite team of highly paid auto executives.

Top brains from Porsche, Ferrari, AMG and Aston Martin have been hired for Lotus and if the Lotus recover plan is slow to take off, Proton could do well to put these highly sought after individuals to work for Proton. It would help to give much needed maturity to the design and R&D facilities in Shah Alam.