“Transforming Proton: Can Geely Do It and At What Costs?” by Tham Siew Yean

2017/61, 23 October 2017

The sale of Proton to Geely in 2017 marks another new attempt to transform Proton from a lagging national car company to a global player. The appointment of Dr. Li Chunrong as the new CEO of Proton at end September is an important shift towards this new path as he comes with significant credentials from the auto industry.

Proton’s gradual slide from holding the largest domestic market share of 73 per cent in the heydays of protection in the 1980s to a mere 14 per cent in 2016, was attributed to the introduction of a second national car, Perodua, which is effectively a Daihatsu car, and the eventual removal of tariff protection under the ASEAN Free Trade Agreement (AFTA). Nevertheless, Proton continued to receive preferential treatment in terms of grants and lower excise duties due to a higher domestic content, thereby enabling Proton cars to be competitive price-wise. Others have asserted that continued intervention from former Prime Minister Mahathir in the operations of Proton, including its management, derailed Proton’s expansion plans and search for a new foreign partner.

The critical question is what can Geely do for Proton where others have failed.

Geely is well placed to bring new technology into Proton as its acquisition of Volvo in 2010 enabled it to use the latter’s research-and-development advantage to become the seventh largest auto car maker in the highly competitive Chinese auto market. Its purchase of 51 per cent of Lotus from Proton will allow it to synergise between Volvo and Lotus technologies for new developments. Geely also brings with it the scale that is needed for Proton to be globally competitive due to the former’s inroads into the Chinese and global markets. It has reportedly sold 1.3 million units globally in 2016, operating16 production facilities, seven design studios and five R&D Centers.

For Proton, the leap to a global market will require it to follow global sourcing strategies that characterise all global car companies. This may spell the end of both Bumiputera and non-Bumiputera vendors that currently supply parts and components to Proton, and which are disadvantaged by scale. In particular, it is instructive to learn from the experience of another Chinese auto maker, Chery’s operations in Malaysia where little localization has taken place. Instead, parts and components for locally assembled cars are mostly imported from China. It is equally critical to learn from the revealed preference of other Chinese investments in Malaysia, where inputs, technology and talent are all imported from China for local production. The experience of these companies indicate that scale, speed and costs matter the most for Chinese firms while adaptation to local production needs and culture are of second order importance. In the chase for global prominence, will Malaysia be able to lay to rest the Bumiputera preferential policies at least in the local car market?

Dr Tham Siew Yean is Senior Fellow at ISEAS-Yusof Ishak Institute.

The facts and views expressed are solely that of the author/authors and do not necessarily reflect that of ISEAS – Yusof Ishak Institute.  No part of this publication may be reproduced in any form without permission.