Proton and Volkswagen talks simmer

TALKS may have stalled but negotiations between Proton and German car giant Volkswagen could deliver big benefits for both players, according to Proton Australia managing director, John Startari.

Both sides are yet to reach agreement on the fine points of the technical tie up – which could also extend to the Proton-owned Lotus Cars – and talks have now dragged on since July because of Proton’s reluctance to concede ground.

Late last month, Proton Holdings chairman Azlan Hashim told Malaysian media that the loss-making Malaysian car-maker wanted to remain the national car-maker and did not want to give up majority control of its shares. He has also suggested the deal could falter if no deal could be reached.

Under the proposal VW would take a 51 per cent stake in Proton’s manufacturing and engineering divisions.

Proton Australia managing director, John Startari, said the negotiations now centred on the amount of equity share between the two car-makers.

He said a VW stake in Proton would offer huge benefits for the car-maker through technical tie-ups and global market access while VW would gain an important foothold in the emerging Association of South-East Asia Nation (ASEAN) markets.

One of the key aspects of the deal is a bid to allow Proton to build the Passat for Asia and the small VW Fox hatch but it is still unclear whether Australia will get these Malaysian-sourced cars.

Mr Startari said talks between Proton and VW about the Passat and Fox were still progressing. However, he said a production start date had been set for early next year for Asia.

"It’s one thing to enter into an understanding but there are VW employees currently looking at the vendor base because ASEAN qualifications mean it needs a certain amount of local content and whether they can use Proton vendors," he said.

Mr Startari said he believed VW had learned more about Proton’s Asian-based operations than Proton had learned about VW but that was a fair trade-off if it meant Proton’s quality levels and platform opportunities were expanded.

The VW-Proton tie could have a flow-on effect for Australian car buyers.

Mr Startari said platforms and engines could be developed specifically for the Australian market, and that some of VW’s larger engines would be ideal for Proton vehicles.

"It’s obvious the tie-up has synergies for both participants," he said.

He signalled out research and development costs as a possible mutual saving.

"We have the ability to adapt powertrains out of the joint-venture company," he said.

Proton currently builds 240,000 vehicles in Malaysia with between 190,000 and 200,000 sold domestically.

However, sales have been declining as tariff barriers come down, allowing quality Korean and Japanese imports to challenge the once-dominant player.

Tariffs on Japanese and Korean cars were 50 per cent two years ago but have come down to 20 per cent today and by 2008 will fall to just 5 per cent. At one point import tariffs on some vehicles were as much as 190 per cent.

Proton’s key export market is Australia with the UK a close second.

The Government-control car-maker has been seeking to lift quality and arrest the decline in domestic sales.

Proton’s share of the Malaysian market has slipped over the past few years from 67 per cent in 1999 to a forecast 36 per cent this year.

It has been seeking a foreign partner since the Mitsubishi Motors Corp and Mitsubishi Corp ended a 21-year arrangement with Proton this year.

Proton had used Mitsubishi powertrains and adapted superseded Mitsubishi bodystyles for its cars.

Last week Proton announced a second quarter net loss of $US40.8 million, hurt by bad debt charges related to its 58 per cent stake in Italian motorbike company MV Agusta.

Proton rescued Agusta about 12 months ago, pumping about $US80 million ($A110 million) into the failing motorcycle maker with a plan to turn it into a premium car division.

MV Agusta, Cagiva and Husqvarna made up MV Agusta Motor SpA.

It was Proton’s intention to make high-end luxury performance cars under the Agusta name, while Cagiva would be used for sports models and Husqvarna would be an off-road brand.

However, there are now some suggestions Proton may offload Agusta.