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Malaysia may cede control over Proton carmaking unit

From Bloomberg News| June 04,2007

Malaysia's government is considering ceding control of Proton Holdings' carmaking unit in order to attract a partner, after talks with companies including Volkswagen failed to produce an alliance.

General Motors, Volkswagen and Malaysian car assemblers are "in the picture" for an alliance, Azman Mokhtar, who is managing director of Khazanah Nasional, the state-owned investment unit that owns 43 percent of Proton, said Friday.

Volkswagen ended plans to buy a stake in Proton, which is unprofitable, the government said.

Proton, which a decade ago sold 6 out of 10 cars in Malaysia, needs help to develop technology and new models after losing half its market share to competitors. The government said Friday that it will not bail out the company and that it will decide the fate of the maker of Waja cars within three months.

"The decision has to be made on a business basis, on a commercial basis, no politics," said Tan Teng Boo, who oversees about $177 million in assets at Capital Dynamics Asset Management in Kuala Lumpur. "Whether it's cutting jobs, getting a partner, chopping heads, we have to do whatever it is to make it a viable business entity."

The Malaysian government has been searching for a partner for Proton since an alliance with Mitsubishi Motors ended in 2004. The government missed a self-imposed March deadline to strike a deal for Proton, which last week reported its first annual loss in at least 17 years.

"We need a strategic alliance," Azman said. "We are willing to look at control of certain parts of the business. It may be not just permissible, it may actually be desirable, in the area of, for example, the manufacturing side."

Foreign control of Proton's carmaking unit may change the identity of a company set up in 1983 by Mahathir bin Mohamad, then the prime minister, as an emblem of national manufacturing. Protons, still favored by taxi drivers across the country, are among the cheapest cars in Malaysia.

"We will be happy to share and work on collaborative models in terms of the management, to bring in scale, to bring in technology, but also not to disregard the considerable local capability built over the last 20 years," Azman said.

Control of Proton's manufacturing unit, based in Tanjong Malim, may cost about 900 million ringgit, or $265 million, analysts including Chong Lee Len at Hwang-DBS Vickers Research in Kuala Lumpur have said.

Proton's market share in Malaysia fell to 32 percent in 2006 from 40 percent a year earlier, as it lost market share to Toyota. Its cash on hand fell 34 percent in the 12 months to March 31, to 461 million ringgit.

The second finance minister, Nor Mohamed Yakcop, said Friday that Volkswagen is no longer interested in a stake in Proton. The government will find other suitors and will consider "anything," he said.

"It's disappointing," said Wan Azhar Mustapha, an analyst at OSK Research in Kuala Lumpur, who has a "neutral" rating on Proton stock. "It could be another lengthy wait."

Local companies including the closely held Naza Group, which assembles and sells Kia vehicles, and DRB-Hicom, which assembles cars for Honda and Suzuki, have also indicated interest in Proton.

"Volkswagen doesn't view the talks with the Malaysian government and Proton as ended," said Andreas Meurer, a Volkswagen spokesman. "Right now a further round of talks is being planned for the near future."

This year will be "challenging," the state-owned automaker said after posting a 40 percent decline in annual car sales.

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