Talks Between Volkswagen and Proton Progressing Well

By: Benjamin Hudson

In the news: Volkswagen, Europe's largest automaker and producer of the popular brand of including various --- has released some statements saying that its partnership with Malaysia's Proton Holdings Bhd is already at its "fairly advanced" stage. The automaker also added that the ongoing talks between them and Proton are part of the company's plan of expanding its market in Southeast Asia. According to Kevin Rose, Volkswagen's head of international sales in an interview, "Both parties clearly know what they would want from such an agreement." He also said that the company will try to "work within" the Malaysian government's set deadline which will end on March 31, 2007.

Still in connection to its sales expansion program, Volkswagen has also added production plants in two of the fastest growing economies in the world---India and China. The main objective of VW is to boost its sales of its Passat and Jetta models in these two countries. It should be noted that Proton has again reported last month its biggest quarterly loss for the last eight years and has been continuously losing market share to its other overseas rivals including Toyota Motor Corporation. It also needs some new technology and designs to become competitive.

Ang Kok Heng, who manages about $114 million at Philip Capital Management in Kuala Lumpur, "There are a lot of things Proton needs to learn in order to be competitive and having a partner will help it catch up with the bigger boys."

Despite the losses that Proton obtains it was still able to obtain an increase in shares which rose to 1.5 percent to 6.6 ringgit and traded at 6.55 ringgit at 11:54 am in Kuala Lumpur valuing the company at 3.6 billion ringgit or $1 billion USD. The stock has fallen by 0.8 percent for this while Malaysia's benchmark stock index has increased by 7.4 percent.

Proton is not actually the first Malaysian automaker that has entered into a partnership with a foreign carmaker, the Shah Alam which is a Malaysian-based automaker have been in partnership with Mitsubishi unfortunately the joint venture only lasted up to 2004.

Another reported foreign automaker the PSA Peugeot Citroen which has been in talks with Proton has announced last week that it is no longer interested in pursuing further talks with Proton on the other hand the world's largest automaker General Motors said that it is still discussing the possibility of a partnership with Proton.

Volkswagen in Controlling Production
The Wolfsburg-based automaker said that it has been controlling its local production since it believes that it is a vital strategy to succeed in emerging markets such as Malaysia, China and India. According to Rose at a recent interview in Singapore, "For us as a brand, it's important that we can always say made by VW, or built by VW. Even in China, where for legal reasons we are a minority partner, we still have a great control over the production, assembly, design of our products, and that's incredibly important for us."

Talks between Volkswagen and Proton have collapsed in January last year after some disagreement on issues particularly in terms who will control the company. It is no secret that Malaysia's government controls Proton through a 43 percent stake held by its investment unit Khazanah Nasional Bhd. The Proton was founded by former Prime Minister Mahathir Mohamad who also stressed the need of the company for a foreign partner to survive.

Volkswagen: Proton's Chosen One
Chong Lee Len, an analyst at Hwang-DBS Vickers Research Sdn. in Kuala Lumpur and who rates the Proton stock "fully valued" said that comments from Volkswagen is indicative that the automaker is seeking 51 percent of Proton's total manufacturing business. She also said that Volkswagen is "definitely the chosen one for the stake by the investment community". She added that it would cost Volkswagen about 900 million ringgit to control Proton's manufacturing unit.

Another analyst this time from CIMB Investment Bank said "Volkswagen will use Proton as a manufacturing hub for the region. The deal will help Volkswagen expand its sales in Malaysia, the largest passenger cars market in Southeast Asia. It's positive news for Proton." But of course unless Volkswagen and Proton confirms a partnership then all we'll be having are mere speculations.

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