The new year has just begun but it has turned bleak for Malaysia's struggling national automaker Proton, which faces an uncertain future after Germany's Volkswagen AG dropped plans for a strategic alliance seen as crucial to reviving its fortunes.
Proton will need to intensify its search for a new partner to keep Malaysia's homegrown auto industry alive, but it will be tough if the government, which controls the money-losing automaker, remains averse to surrendering management control to foreign investors, analysts warn.
"Without a foreign partner, Proton would not be able to compete effectively locally, let alone in the international market," says Gan Kim Khoon, research chief at AmResearch.
Even if it succeeds in latching on to a new partner, Gan cautions that an alliance "may not be value-enhancing given the government's firm stance on not allowing a foreign automaker to have a controlling stake in the company."
The loss of Volkswagen as a potential partner is a huge setback for Proton as it seeks to bolster exports after its domestic market share has dived to around 30 percent from 57 percent in 1993 due to crushing competition from both domestic rivals and automakers abroad.
Set up in 1983 as a symbol of Malaysian self-reliance in heavy industry, Proton used to enjoy protection in the form of high tariffs on foreign cars. But the tariffs have come down under a regional free trade pact and the consequences for Proton have been disastrous.
The automaker sank into the red in the second quarter, and losses worsened in the three months through September to 154.3 million ringgit (US$41 million) -- the largest quarterly loss in the company's history.
A partnership with VW signed in late 2004 to jointly assemble and build cars for the domestic and regional markets would have boosted Proton's production and given it access to Volkswagen's technology and global distribution network.
But talks apparently collapsed after Proton's biggest shareholder -- state-owned investment firm Khazanah Nasional Bhd, which owns 42 percent of the automaker -- insisted the automaker retain its independence.
Volkswagen's decision on Thursday to end the alliance had caught Proton executives by surprise and will be the first challenge for its new chief executive Syed Zainal Abidin Syed Tahir, a former director of second national automaker Perodua who began work on Jan. 1.
Syed Zainal Abidin replaced Mahaleel Ariff, who was ousted last year after he opposed the sale of a significant stake to foreign investors.
Proton has not commented on Volkswagen's withdrawal, saying it is waiting for official confirmation.