The task ahead for DRB-Hicom

Proton will prove a tough – but not impossible – nut to crack

DRB-Hicom Bhd has a history with Proton Holdings Bhd. That may or may not be a good thing but serves as a good reminder to DRB-Hicom that Proton is not an easy venture to handle.

After its 10th year of operation, in 1995, control of Proton went from government-owned Hicom Holdings to the Diversified Resources Bhd (DRB) group founded and owned by the late Tan Sri Yahya Ahmad who bought a 32.9% stake, just short of the trigger point that would have required a general offer. Eventually the group was renamed DRB-Hicom Bhd.

Some two years later, in March 1997, Yahya died in a late-night helicopter crash en route from Kuala Lumpur to central Pahang when he wanted to visit his ailing mother who had taken a turn for the worse.

DRB-Hicom was then in the midst of restructuring operations at Proton and the burden moved to the shoulders of Yahya’s long-time business associate and key executive Tan Sri Mohd Saleh Sulong.

Over three years later, in December 2000, under the stewardship of Saleh, DRB-Hicom sold its 25.8% stake in Proton to national oil giant Petroliam Nasional Bhd (Petronas) for RM981mil or RM7 per share as part of its restructuring process. This was billed a rescue of sorts by the Government of the DRB-Hicom group which was then ailing.

In a circular to shareholders in September 2000, DRB-Hicom said in its rationale for the sale of its stake in Proton that to remain competitive in the car industry, substantial capital outlay would be required for future plant upgrading and continuous research and development work.

“Competition is keen, especially in the passenger car segment as automotive companies are continuously striving to produce innovative models with cutting-edge technology to meet customers’ demand,” noted DRB-Hicom in the circular.

That was admission by DRB-Hicom then that it did not have the capacity to take Proton further. Petronas’ stake was shuffled among other government agencies and eventually the bulk of it came to Khazanah National Bhd.

Yahya was reported to have been hand-picked by then Prime Minister Tun Dr Mahathir Mohamad to take over Proton in 1995 from Government control because he was impressed with the way Yahya’s DRB group, an assembler of different marques, was able to come up with new models.

Proton’s management then, under managing director, Datuk Mohd Nadzmi Mohd Salleh - its current chairman - was said to be resistant to introducing new models because it would mean smaller number of cars produced and reduced economies of scale, already a problem because Proton was and is a small scale manufacturer.

Yahya’s initial efforts focused on producing different models with different looks. In addition to Mitsubishi, he also collaborated with Citroen to make a car from an outdated Citroen model, called Proton Tiara here, which gained notoriety for unreliability.

While the number of models proliferated during Yahya’s and subsequently Saleh’s time, the quality took a dip especially when Proton turned the screws on the vendors to cut their prices to increase its own profitability.

Eventually the then DRB-Hicom group exited the national car business when it sold its major stake to Petronas.

In 2006, control of DRB-Hicom passed to Tan Sri Syed Mokhtar Al-Bukhary through a purchase of a controlling block by one of his companies. As he did 17 years ago, Mahathir has openly backed Proton’s sale to DRB-Hicom again.

But market forces must prevail and Khazanah must sell its 42.7% stake in Proton for the best price, in this case RM5.50 a share, to the company it judges as the best one to take Proton forward. It is good too that DRB-Hicom will make a general offer to all other shareholders, which may take the total cost for Proton to some RM3bil so that minority shareholders have a choice to either stay or go depending on their take on Proton.

For DRB-Hicom, it is a massive task that it faces. What the Malaysian public wants are good-looking, reliable and economical cars which can stand the test of time, all to be sold for decent, competitive price, akin to the first Saga built with Mitsubishi’s help.

Model proliferation is a big no as well as squeezing vendors to bring costs down. One goes against scale economics, the other depresses quality. In-house development of engines and platforms will be costly to say the least.

Proton needs true manufacturing capability and international competitiveness – that means at some point in time it needs a strong alliance, including equity tie-up with a major big-name manufacturer.

DRB-Hicom’s best bet is of course Volkswagen with which it has business arrangements. But VW will drive a hard bargain even though it is looking for a strong presence in South-East Asia, one of the few areas where it is under-represented.

One hopes that DRB-Hicom’s hands are not tied too tightly by politics when it comes to this, as was Khazanah’s when a deal with VW was aborted in 2006 at the last minute.

It’s a heavy burden on DRB-Hicom’s shoulders. Shortcuts and short-term solutions won’t work. You need a radical change at Proton; you need an alliance. Otherwise, we may see the government having to take over Proton yet again.

·P Gunasegaram notes that the Proton saga, as in story, will turn 30 next year. - Star