Volkswagen Says Proton Talks Are `Fairly Advanced'

Volkswagen AG said talks on a partnership with Malaysia's Proton Holdings Bhd. are at a ``fairly advanced'' stage, as Europe's largest carmaker seeks a platform to expand in Southeast Asia.

``Both parties clearly know what they would want from such an agreement,'' Kevin Rose, Volkswagen's head of international sales, said in an interview. He said the company will ``work within'' the Malaysian government's March 31 deadline.

Volkswagen has added capacity in China and will expand in India to bolster sales of its Passat and Jetta models in the world's two fastest growing major economies. Proton, which last month reported its biggest quarterly loss in at least eight years, has been losing market share to overseas rivals including Toyota Motor Corp. and needs technology and designs to compete.

``There are a lot of things Proton needs to learn in order to be competitive,'' said Ang Kok Heng, who doesn't count Proton stock among the $114 million he manages at Phillip Capital Management in Kuala Lumpur. ``Having a partner will help it catch up with the bigger boys.''

Proton shares rose as much as 3.1 percent and closed up 5 sen, or 0.8 percent, at 6.55 ringgit in Kuala Lumpur, valuing the company at 3.6 billion ringgit ($1 billion). The stock is down 0.8 percent this year, while Malaysia's benchmark index has climbed 7.8 percent.

The Shah Alam, Malaysia-based automaker has sought an alliance since Mitsubishi Motors Corp. ended their partnership in 2004. PSA Peugeot Citroen ended talks with Proton last week, while General Motors Corp. said discussions were still ongoing.

Controlling Production

Wolfsburg, Germany-based Volkswagen said having control of local production is key to its strategy in emerging markets such as India and Malaysia.

``For us as a brand, it's important that we can always say made by VW, or built by VW,'' Rose said in Singapore late yesterday. ``Even in China, where for legal reasons we are a minority partner, we still have great control over the production, assembly, design of our products, and that's incredibly important for us.''

Initial talks between Volkswagen and Proton collapsed in January last year after disagreement on issues, including control of the company.

Malaysia's government controls Proton through a 43 percent stake held by its investment unit, Khazanah Nasional Bhd. Former Prime Minister Mahathir Mohamad, who set up Proton in 1983 to be the bedrock of the country's manufacturing industry, said last year the business will collapse without a foreign partner. The automaker launched its first model Proton Saga in July 1985 and the sedan remains the country's most popular car for taxis.

`Chosen One'

Volkswagen's comments suggest the company is seeking 51 percent of Proton's manufacturing business, said Chong Lee Len, an analyst at Hwang-DBS Vickers Research Sdn. in Kuala Lumpur, who rates Proton stock ``fully valued.''

Volkswagen is ``definitely the chosen one for the stake by the investment community,'' she said. Control of Proton's manufacturing unit may cost about 900 million ringgit, according to Chong.

``Volkswagen will use Proton as a manufacturing hub for the region,'' said Sharifah Farah, an analyst at CIMB Investment Bank Bhd. ``The deal will help Volkswagen expand its sales in Malaysia, the largest passenger cars market in Southeast Asia. It's positive news for Proton.''

Losing Ground

Proton has been losing ground to Toyota and Perusahaan Otomobil Kedua Nasional Sdn. in Malaysia. The company's market share fell to 32 percent in 2006 from 40 percent in 2005, according to the Malaysian Automotive Association.

The association predicted vehicle sales in the country will be little changed at half a million units this year, after falling 11 percent to 490,768 units last year.

``To really grow in that market, we will have to produce cars there, and we would have to have models specific for the country and the region,'' Volkswagen's Rose said.

General Motors hasn't ruled out a partnership with Proton.

``We're still interested and working toward that deadline,'' Rob Leggat, a Shanghai-based GM spokesman, said today by phone, declining to give more detail on the negotiations.

Proton Chief Executive Officer Syed Zainal Abidin Syed Mohd Tahir wasn't immediately available for comment, said Faridah Idris, a spokeswoman for the Malaysian company.

India, China

Volkswagen is expanding into emerging markets such as India and China, where sales are growing with economic expansion and rising disposable incomes. In India, the company aims to replicate the success of the Jetta in China where it was the top selling car model in 2006, according to the China Association of Automobile Manufacturers.

Volkswagen will start making the Passat in India later this year. The model will be assembled at Volkswagen's Skoda Auto AS unit in Aurangabad in the western state of Maharashtra.

A separate plant to be built near Pune in Maharashtra state will build the Volkswagen Jetta model. The factory will have the capacity to make 110,000 cars annually, starting 2009.

Volkswagen returned to profit in China last year after posting its first loss in more than 20 years in its biggest overseas market in 2005. Volkswagen earned 108 million euros in China in 2006 compared with a 2005 loss of 119 million euros.

The automaker boosted Chinese 2006 sales 24 percent to 711,289 cars with discounts as well as cars specifically designed for the market, including the Sagitar sedan and Polo Jinqing and Jinqu compacts. Volkswagen plans to introduce as many as 14 models in China by 2009.