Shares in carmarker Proton sank 11.7 percent yesterday as analysts warned its future remained cloudy after Malaysia ditched alliance talks with Germany's Volkswagen (VW).
At 12:30am Proton shares fell 58 sen to 4.36 ringgit (US$1.29), while the overall Kuala Lumpur Composite Index fell 0.5 percent or 6.94 points at 1,364.76.
Analysts and industry officials said there were many outstanding thorny issues that Proton had to grapple with since it lacked economics of scale in its production along with fierce competition from foreign carmakers.
"We are taken aback by the government's decision to end talks with Volkswagen and let Proton operate without a strategic partner," said Sharifah Farah, an analyst with CIMB Research.
"We believe there is still a question mark over Proton's long-term viability given further liberalization of the local auto industry, the influx of new competitive models and competition from foreign carmakers," she said.
Sharifah said it was unlikely that VW would restart negotiations with Proton.
"We see no reason for why Volkswagen would be interested in restarting talks at a later stage. Proton needs Volkswagen, rather than the reverse," she said.
Aishah Ahmad, president of the Malaysian Automotive Association said the government decision had "nothing to do" with controversial affirmative policies designed to narrow the wealth gap between the Chinese and Malays.
"Volkswagen was only looking for a 20 percent equity. They were not asking for a majority stake," she said.
On Tuesday Malaysia's state investment arm Khazanah Nasional, which controls Proton, said it had discontinued negotiations with VW.
The German car maker said it and the Malaysian government had for the time being decided "to shelve their joint talks" about the alliance.
The talks began in October 2004 aiming at revitalizing Proton, which experts say has suffered from stiff competition, a lack of new models and a reputation for poor quality.
Malaysia's second finance minister Nor Mohamed Yakcop said on Tuesday that Proton's fortunes have turned around in recent months.
Sales of Proton cars have improved, especially the Persona model, which chalked up bookings of about 22,000 units at the end of last month after it was launched in mid-August, Nor Mohamed said.
Kelvin Goh, analyst at CIMB Investment Bank said Proton needs a foreign partner to remain competitive in the long-term.
"We were taken aback by this decision as we view the recent improvement in sales as a short-term rebound," he said.
Proton's longer term prospects remain murky as it lacks branding and the technological know-how, said Goh, who described the news as a "disappointing development."
Aishah said Proton lacks economics of scale and needs to boost sales and production.
Proton's production for this year was expected to hit only 116,000 units way off its economics of scale figure of 300,000 units, she said.
"They have to boost their production. It will cut cost and allow them to sell Proton cars at competitive prices," Aishah said.
Meanwhile, the German business daily Handelsblatt reported yesterday that VW was looking for a new Asian partner and is focusing on Indonesia and Thailand.
The paper quoted VW sources as saying that research teams from the car giant were ready to begin looking at possible partners.