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Proton boss in no Western rush

Visionary: Proton CEO Tengku Mahaleel thinks BMW, VW and Toyota when he looks to the future.

Proton's sales volumes are miniscule, but bigger things are in store

Proton logo25 Feb 2003

THE total sales dollars generated by Proton from selling superseded Mitsubishi cars in Australia last year was less than many large dealers can generate in a month.

Frankly, the company is a bit of a laughing stock in the local industry. Many retailers might be tempted to write it off as it moves to recruit a broader dealer network in Australia.

But a rush to judgement might just be a mistake because Proton could be onto something we have yet to see played out.

The important thing to remember about Proton is that it is not so much a car company as a centrepiece of government policy. As such, it is on a path of development that is not fully travelled.

Therefore what we see today may encourage derision by the strong and successful players but care might be needed. It might be that Proton needs to be taken more seriously.

Proton is on a mission. It knows where it is going and is, in a very Asian way, prepared to get there through a measured and orderly program. It is in no Western rush.

Indeed the company regards itself as extremely fortunate that it did not sell more of its Mitsubishi-based cars in export markets because - under a new direction now being rolled out - it believes it will have fewer perceptions to change about the brand.

It is now relieved that it did not spend a fortune branding itself into what it now sees as being the wrong position for the company.

The CEO, Tengku Mahaleel, who is a Malaysian prince, one of Maharthir Mohamad'sconfidants, a doctor of engineering and a former champion rally driver, spelled out Proton's ambitions in an interview with GoAuto.

Mr Mahaleel, a marketing executive from Shell and Nestle, has three companies on his mind as he directs Proton's future: Toyota for its "brilliant" product engineering and manufacturing systems BMW for its brand management andVolkswagen for its vehicle design.

This chief executive of this massively protected national car company believes those three companies hold the clue to transforming Proton as it pursues a master plan started in 1985 and set to run until 2006. The plan explains a lot.

Phase One was to develop a car industry for Malaysia to encourage entrepreneurs and businesses to service the industry and to create jobs. The strategy was to involve Mitsubishi to teach the Malaysians how to assemble cars and train the local parts makers.

The price of entry was onerous licence fees which made the cars uncompetitivein global markets but they were protected by high import duties and other forms of favouritism at home.

These days Proton employs 10,000 people directly and 100,000 indirectly and purchases $2 billion in the local economy. So the first 10 years was to build a strong domestic business with what amounts to government-dictated market share (currently 60 percent) that would provide a sound platform on which to move to the next step - independence.

"The second phase was to develop our own products, go global and develop the brand. We are now in this phase," Mr Mahaleel said.

"You say we are not competitive and that is true. But in Phase One we learned how to assemble a car. That is not so easy. Mitsubishi came and helped us. There is a price to pay for doing that but we were prepared to pay that price.

"There is no way you can become competitive, no matter how good our vendors arebecause of the fees you have to pay (to Mitsubishi)."Mr Mahaleel said the licence fees (to use Mitsubsihi designs) can be almost as much as it costs to create a new model.

"That is the development cost. But then there is cost of parts which you have to buy and there is a margin (from Mitsubishi) on that part.

"When you total them both it is true that it is not competitive. So, if you know how to do it, and it takes that kind of money, then you are better to create your own car."Mr Mahaleel said the arrangement also inhibited moving into export markets because Proton was selling the same car already being sold under a more established brand.

"You cannot sell it at the same price because it is not an original. We were always trapped by that. When we went out into the global market we had to sellbelow Mitsubishi's prices and some of them were also pretty old models at that time.

"I don't want to knock Mitsubishi. They have done some good things for us but that is the price you pay."The first step in the route leading to independence, by creating their own designs, was buying 80 per cent Lotus Group International in 1996 for about $170 million. (Proton bought out the remaining shareholders late last year).

Effectively they bought their own R&D department that came with 50 years of leading edge engineering know-how in a profitable establishedbusiness which sells its expertise to a range of car makers.

This purchase was crucial to Proton becoming competitively priced beyondMalaysian borders.

"If we had tried to develop this know-how ourselves it would have taken a minimum of 10 years. So in 1996 we were saying 10 years would take us out to 2006 and that is too late if we are going to compete.

"Also, because we were able to do the Waja program in 38 months, instead of the six years it would have taken without Lotus, if you calculate the benefit of that (earlier time to market and reduced development cost) we got Lotusvery cheap."Mr Mahaleel said that dramatic reductions in development times can reduce development costs to one fifth of what they were.

The expertise of Lotus, which designs the power trains for 25 per cent of Europe's vehicles, is also crucial to cost reduction.

"The engine is the highest cost. Power train is almost 30 per cent of the cost of the car. For us as much as 35 per cent of the cost is engines because we buy them from someone else."Mr Mahaleel said it was crucial to Proton's competitiveness to work with Lotus to get a competitive engine that was about 25 per cent of the cost of the car.

ihIf you can get your powertrain to be 25 per cent of your costs you are there with the big boys," says Mr Mahaleel.

Proton's first Lotus engine, the 1.6-litre Campro goes into production this year. It is 1.6 litres "because that is where we have to be for Asia" butthey targeted a 1.8-litre engine as the benchmark for power, torque and fuel consumption.

"We also designed it for direct injection, cam profiling and cylinder deactivation. Lotus has this technology. It is all done and we can putthis in this engine."Mr Mahaleel said that the performance of the engine, saving on development costs and the fact that royalties are no longer payable on the engine would transform Proton's prospects.

"If you have a competitive power train your overall competitiveness becomes very very attractive."The next phase in the move to independence is a new $800 million modular assembly plant north of Kuala Lumpur which will have an initial capacity of 150,000 that can be increased to 250,000.

The production system has been designed by Toyota's production consulting group, Kanto Auto Works and, because construction coincided with a downturn in sales of auto production equipment, Proton was able to "buy very welll".

This plant will build Proton's four completely new platforms for which they plan 10 to 15 variants. The new plant will eventually take over all Proton production and reduce cost further. Last year Proton sold 220,000 units.

Mr Mahaleel said that Proton had the opportunity to move to different systems for retailing its cars around the world and believed that the next generation of buyers would make greater use of the Internet than buyers today.

He said that today's 15-year-olds would be ordering new cars via the Internet in 10 year's time and that the new manufacturing plant had been built with build-to-order retailing incorporated into the design.

Cash-rich Proton

PROTON is one of the wealthiest car makers in the world. The Malaysian car maker, with 60 per cent share of its home market, has more than $2.2 billion in cash reserves and is funding all its development programs from income.

CEO Tenku Mahaleel says that its $170 million purchase of Lotus Group was funded out of revenue as was the $800 million so called Proton City plant being completed north of Kuala Lumpur, the development of the Campio engine, the China investment, four new platforms and more than 10 variants - allin five years.

Added to the current reserves in a few years will be the proceeds of the present assembly plant built nearly 20 years ago which will be decommissioned. This is expected to sell for $500 million for housing.

According to Business Week magazine, the company is expected to earn $525 million in the year to March on sales of $5.9 billion.

But there is a threat as Malaysia rolls back its tariffs of imported sedans from ASEAN countries from 42 per cent to 20 per cent and taxes on domestic cars increase.

However, the company believes its lower cost base for its new models, the ability of generating higher margins from the technology in its cars and the sales potential for Protons in the Middle East, North Africa and China will more than balance out any sales reductions in Malaysia.

Proton plans bigger margins on modest volumes

PROTON CEO Tengku Mahaleel says Proton will never become a high volume, low price car company in global markets.

In an interview with GoAuto he said the company's links with Lotus Engineering would allow it to become an upscale Asian car maker selling superior design cars that would attract higher margins than in the low-price area of the market.

"In Malaysia we are already pulling away (from lower-priced cars). Our new vehicles coming out will strongly reflect this (thinking). But in the process of producing those vehicles we would like to adopt a vehicle that always offers high value in the niche we are playing in. The brand name Lotus is very critical to this plan."Mr Mahaleel said that Proton planned to use the Australian market as a trial horse for moving the brand away from low-price cars.

"I want to create the perception that this company caters to a small segment of'what people would like to have' rather than create cars that are for everybody.

"We could sell a lot of volume at low prices but where does that end? Onceyou have become known as a cheap car you cannot break out of that.

"So we will never be a large volume player by any definition."Mr Mahaleel agreed that Proton is well-connected in the world's Islamic markets and that the company had the opportunity to grow with the increasing sophistication of those markets.

"That is the whole game plan. We realise there are one billion Muslims. It is not a hard task to sell 50,000 cars to one billion people if you have decent products and good technology.

"The Middle East, North Africa and ASEAN market will be very good for us. These countries can give us the scale we need to get optimum costs.

"But we won't be doing it all from Malaysia. We have a joint venture in China already. We have contract assembly in Iran and assembly discussions in North Africa."There are also discussions with other governments about technology exchanges using the business model Proton developed for a car industry in Malaysia.

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