Turning around a National Icon (Part 1)

With the announcement of Geely taking up 49.9% shareholding in Proton Holdings, a number of industry friends were curious how the new partnership will help steer the company onto the path of profitability once again. Suffice to say, while a discussion on this is obviously proceeding at a feverish pace on how best to leverage on both parties’ combined strengths to achieve the stated goal, it is important to note that the success of any mass market auto manufacturers hinges on their economy of scale. 

What most people may or may not realize is that prior to producing a car, aside from the development and engineering cost, there is also the investment into tooling, molds, dies and also other equipment and machinery required to produce all the parts and components of a car. Not a small number of these items are model specific and will require substantial monetary investment. This investment sum is then spread out across a pre-determined number of vehicles expected to be sold and recovered over the entire model life. If the manufacturer managed to sell above this target volume, there are savings to be achieved and can be considered as additional profits due to lowered cost. However, if the reverse were to happen, then the manufacturer will have to assume a loss. Thus, many manufacturers have adopted the famous platform-sharing strategy to ensure that the same component can be used on as many models as possible to achieve higher economy of scale while catering to different tastes and needs. 

In 2014, Proton had 9 different engines, 12 different transmissions for 7 in-house models with a total annual sales volume of less than 120,000. Save perhaps a few select models, the others are far from achieving their target volume. Thankfully, by 2017, this has been whittled down to 4 engines and 5 transmissions for 6 in-house models. However, the sales volume has also dwindled to less than 80,000 during this same period. Moving forward, it is clear that more drastic measures are required to turn the company around.

Any mass-market car model should and must be able to achieve at least 80,000 units sales every year in order to remain competitive in an open market over a 4-5 year product life cycle. Obviously this will be a real challenge as the last time Proton did so was during the Wira and Waja era in the 90s and early 2000s. The Persona and Saga launched 10 years ago were commercially successful models thanks to their prolonged product life cycle. Such a strategy will no longer work especially when Perodua have successfully challenged Proton with the introduction of the Myvi in 2004, subsequently taking over the market leadership position and haven’t looked back since. With the introduction of the Alza and now the Bezza, they have cemented their market share for the foreseeable future. 

What is clear is that Proton have to bolster up its volume by exploring the export market as it will take some time, if ever, to recover to their previous performance in the domestic market. Of course there are challenges to be overcome, which we will dive into in the next article. 

(The opinions expressed in this article are the author's own and do not reflect the view of any legal entity, real or imagined.)