DRBHCOM (1619) - Proton’s Never Ending Problems

All Malaysian tax payers must be shocked to read the article “Proton to raise capital” Car maker issuing Rm 1.25 billion convertible preference shares to Government, on page 3 of The Star on 7th June 2016. Proton is a 100% unit of DRB-Hicom. When the redeemable convertible cumulative preference shares (RCCPS) is exercised into shares. The Government will end up with 79% stake in Proton and DRB-Hicom’s shareholdings will be diluted from 100% to about 21%.

DRB-Hicom yesterday said the Government had agreed to subscribe to 1.25 billion RCCPS issued by Proton via GOVCO Holdings Bhd by way of Rm 1.25 cash payment.

Proton group has been experiencing flagging vehicle sales in recent years and this has affected its cash flow position. Proton group plays a crucial role in the national automobile industry where there are about 12,000 workers directly under it while about 50,000 are employed under various vender companies.

The founding of Proton National Bhd. in1983 was a big expensive mistake to begin with. Billions of ringgit from tax payers have been lost in the process. Moreover, to encourage people to buy Proton, the Government increased the import duty for other cars and car parts. As a result, the consumers have suffered. For over 30 years we have had to pay higher prices for all cars including Proton. Even this has not been sufficient to save Proton which has been sold five times already.

Now with the Government owning 79% of Proton, the haemorrhage will continue forever unless the Government, the controlling shareholder make some drastic changes to the current existing system of producing cars.

1. From the report, the Government representatives will come from the Ministries of Finance, Industries and Economic Planning Unit. I suggest some old Directors should be removed to be replaced by these Government representatives.
2. It is also essential to remove a few of the top managers to be replaced by new people with the necessary experience.
3. The new management must see how to measure the efficiency of the 12,000 workers directly under the company? One way is to compare the labour cost of producing a similar car in Japan or compare it with Perodua which has been profitable since its inception in 1992.
4. The new management must also see how does the company buy parts from the venders who are employing about 50,000 workers? Is the company obliged to buy parts from these venders? Can the company call quotations for the supply of parts from the open market?
5. Proton should copy the way how Perodua manufactures its cars. I understand that the Japanese has full management control of the car manufacturing process, although they are minority shareholders.

Malaysians are now wondering – will the burden on tax payers and car owners be continued in other new ways?

One simplistic assumption which appears to have been made by Dr. Mahathir, the initiator of the national car project, is that an industry that is growing yearly should be profitable. It is not. In fact, industry data shows that the total profits of all the car companies over the last few decades amount to only a modest return, and that only for the fittest in the industry. Even with year on year rises in sales is not guaranteed to generate good returns to shareholders, even in a highly developed economy with a long tradition of successful car manufacture such as Britain.

This is because one of the forces that limit profitability is the intensity of rivalry between car companies from around the world. This leads to oversupply and pressure on prices. This is exacerbated by a high degree of freedom for new competitors to enter the industry.

Consider the case of British Leyland a vehicle-manufacturing company formed in the United Kingdom in 1968. It was partly nationalised in 1975 with the government creating a new holding company. The company incorporated much of the British owned motor vehicle industry, and held 40% of the UK car market.

Despite containing profitable marques such as Jaguar, Rover and Land Rover, as well as the best-selling Mini, British Leyland had a troubled history. In 1986 it was renamed as the Rover Group, later to become MG Rover Group, which went into administration in 2005. This ended mass car production by British-owned manufacturers.

Today, many British car marques have become owned by foreign companies. For example MG and the Austin, Morris and Wolseley marques have all become part of China’s SAIC Motor Corporation Limited.

Another question to ask is why few car manufacturers, until recently, seem to get into bankruptcy? Then prices can rise relative to cost and shareholders can get a fair return.

There are two main reasons. In some countries there is always the perennial optimism of managers and shareholders. In Malaysia, the reason is different. Here, our Government has been changing rules and regulations to obstruct other cars from entering our market whilst providing special favours including an ever ready supply of financial assistance to keep Proton afloat.

The end result is that some Malaysians have ended up with more expensive cars of other brands whilst most Malaysians have had little choice but to buy Proton – a poor substitute!

This is the price we have to pay for brainless patriotism.

DRBHCOM (1619) - Proton’s Never Ending Problems