From a financial analyst perspective, has the proton management done a good job? Based on the financial performance of PROTON from 2005 till 2009, our observation from a financial analysis perspective showed that Proton management has not done a good job as far as financial performance is concern. The Key Financial Indicators (KFIs) covers measurements such as basic earnings per share, net assets per share; dividend paid as well as retained earnings carried forward. At a glimpse, almost all the KPI of Proton shows decrement throughout the years. Basic earnings per share (EPS) fluctuated vastly from 2005 to 2009. Proton recorded highest basic earnings per share of 80.6 in 2005. However, it can be observed that Proton faced severe problems by making loss in the shares, EPS of -107.3 in 2007 and EPS of -54.9 in 2009. Besides that, there is also a report with regards the net assets per share (NAPS). This net asset indicates the price at which shares are bought and sold, and represents company’s value per share. Based on the information given, we can see that the NAPS of Proton had deteriorated from 2008 to 2009. The decreasing rate of dividend paid to the shareholders simply means company did not do very well.
Dividend was not paid in 2008 as Proton needs to recover from the huge loss they held in 2007. Furthermore, the Balance Sheet displayed that the total assets owned by company decreased gradually from 2005 (RM 8, 830.9) to 2009 (RM 7,098.9). Other than that, increment in inventories indicates that sales order because higher inventory indicates poor sales resulting in higher cost to be incurred thus leads to the reduction in sales volume. In conclusion, we hold the believe that Proton management had performed badly as portrayed by its deteriorating overall performance graph between the period in low basic earnings per share, low net assets per share, lower dividend paid to shareholders, low retained earnings carried forward, low total assets and high inventories count for the year 2009.
What characteristics should a foreign partner have that will enable maximum synergies? Synergy by definition means the interaction or cooperation of two or more organizations, substances, or other agents to produce a combined effect greater than the sum of their separate effects. To enable synergy, the foreign partner should be able to tackle Proton’s existing weakness. For instance, PROTON’s major problem would be quality control. The public usually complaint about the overall poor quality vehicles by PROTON over the years which indirectly affecting the financial result of the company, when its sales dwindled tremendously and continuously losing market share and which subsequently eroded the profit margin of the company.
Therefore, a foreign partner that is known for its excellent quality of products would be a leap to induce a positive perception of Proton among the consumers which can help boost its revenues. Next, a foreign partnership with expertise and economies of scale is necessary which can encourage the sustainability of Proton. Since it has registered net loss for 2007 and 2009 indicating high cost that could not be covered with sufficient revenue generation, it’s very much clear that Proton lacks the efficiency in managing the cost, which leads to overall loss. To overcome this problem PROTON will need a partner that can help shoulder the exorbitant costs. Also, a foreign partner well known for its good reputation would be critical in order to elevate the already weak reputation of Proton among consumers. PROTON lacks an engine or platform to expand into the SUV and MPV markets, or the 2.0-litre and above segments. PROTON may need to collaborate with a foreign partner much in the way BMW and PSA Peugeot-Citroen are working together to develop new engines and technologies.
Hence, the foreign partner should have the technological advances which Proton lacks. Furthermore, many of the green engine technologies that are emerging as a result of rising fuel prices and global warming would dictate the direction of automotive development, and these are beyond PROTON capabilities. On its own, PROTON has limited funds for research and development. Therefore collaborating with bigger automotive players lend research and development (R&D) capabilities would be very beneficial, particularly in production of hybrid and electrical vehicles. Question 3
What broad consideration should determine the part of proton that are worth keeping and developing and matter of operation needs to be relocated or closed down? Proton needs to reconstruct its business structure by forgoing some part of business which are not worth keeping and expand those activities which generates ample profit. After analyzing Protons overall condition, firstly, the partnership with Lotus has helped Proton in strengthening the engineering, providing Proton an edge in Europe. Since Lotus is a British company that builds sports car, they have very well developed motor engineering technology which might be a gold opportunity for Proton to move forward and create more elegant and high-performance car models. In, Lotus even appeared in the Paris Auto Show 2010 with five slick looking sport cars. In order to move forward, Proton should seriously invest in R&D with its strategic partner Lotus, to strengthen quality which they are unable to do themselves. In order to draw sales, you have to know how to attract customers. PROTON’s investment in technology; seemed insufficient as now consumer expects better performance as per value of money.
Proton should concentrate its energy on overall product improvements most importantly the engine. Perodua offered DVVT engine which is fuel efficient, but for decades PROTON continued using CAMPRO engine for all the cars. The idea is that they should try creating a car with a different engine as the perception build about Proton is that it has bad engine system to begin with. Possible solutions to mitigate the problems identified are by introducing additional value improvised features which focuses on fuel efficiency, convenience and safety. Next, Proton should also focus on providing excellent after sales service at its service centre Proton Edar. It is best to expand Proton by gaining their trust and loyalty.
By proving security, reliance and great servicing skills, Proton will become an attractive deal because maintenance costs of transportation with is secured by warranty is one of the most crucial point of comparison between local and foreign cars as foreign cars provide high security and assurance over their cars. Lastly, the management of Proton need to undergo total reconstruction. PROTON owns not one, but two factories that can output a combined maximum of 1.2 million cars a year, yet it builds only 156,845 units. If proton is not going to fully utilize its plant, it is better and more cost efficient for them to lease out the space to other car manufacturers so that it can generate profit from the unutilized space rather than living it unproductive.
From a review of the 2009 National Automotive Policy, are there areas of possible collaboration with Proton in the event of short of a full merger/takeover? There are areas found that will enable possible collaboration with Proton in the event of short merger or takeover based on reviewing the 2009 National Automotive Policy(NAP). The main objective of NAP is to ensure the development as well as long term competitiveness and capability of Proton. NAP also intends to create a conducive environment to attract possible new investment to enhance the sustainability of Proton. Firstly, the government offered tax incentive for high value-added part components. Through this, the high value-automotive-part manufacturers would enjoy 10-year 100% fiscal deduction on pioneer status or 5-year 100% tax exempted Investment Tax Allowance. This particular policy gives an opportunity to the company to make an investment in Malaysia and set up an alliance with Proton.
Furthermore, it can benefit both parties because the investors can enjoy an incentive while Proton can improve the quality of their products with cost reduction due to the tax incentive thereby eliminating their reputation on low quality products. Meanwhile, tax incentive on training and R&D also gives huge opportunity to the investors particularly in the hybrid vehicle market. The trend of hybrid car is potentially expanding rapidly in Malaysia and research on the hybrid technology could produce higher return of investment and collaboration with Proton will give a cost saving to the companies and support Proton to pursue on producing hybrid cars. Besides, it can be cost-competitive for them if strategic alliance is set up with Proton since its plant in Tanjung Malim can be used for assembly hub for both the collaborating companies.
Next, the full liberalization of local assembled luxury passenger cars can enable other foreign or local automotive firms to freely obtain manufacturing license and hold up to 100% stake in Proton pertaining to certain conditions. This could lead to possible alliances with Proton that can improvise the company’s under-utilized plant capacity. The full liberalization on assemble of luxury car also can give an opportunity to Proton to continue operating in low cost vehicle without any stiff competition and acquire more proportion of the market. So, strategic alliance with Proton in low cost vehicle segment will give strong position in the market which will help to boost the profits of the company.
The policy on excise duty structure for imported vehicles CBU and locally assembled vehicles CKD’s would encourage foreign carmakers to consider possible collaboration with Proton in order to prevent the excise duty which will elevate their cost of production and continue producing cars in Malaysian market.
What other information not included in the case could help consultant Saiful Alawi make a more meaningful recommendation? Why? In order to come out with recommendation whether an investment and/or collaboration should be considered, Saiful Alawi has several things to be considered such as automotive market outlook and the national automotive policy. Apart from those, there are few other things that might also take into consideration for the recommendation in which one of them could be financial leverage for the company. Financial leverage refers to the degree to which an investor or business is utilizing borrowed money. High leverage indicating the company or an organization could be at risk of bankruptcy if they are unable to pay their debts as well as unable to find new lenders in future. However, financial leverage is not always bad as it can increase the shareholders’ return on investment and often there are tax advantages associated with the borrowed money.
Proton should be disclosed the information about the debts of the company in its financial report or in its financial indicators. This is because, it would make it easier for the users to interpret the performance of the company in terms of the total debt to assets ratio, long term debt to assets ratio, total debt to equity ratio as well as equity multiplier and other measurements related to the financial leverage ratio of the company. Besides that, Proton should also include the measurement related to the return on assets (ROA) and return on equity (ROE) of the company to know the level of profitable the company in which related to its total assets as well as the shareholders’ equity. Another thing that Saiful Alawi could take into consideration for the recommendation could be regarding the information of the opportunity of investment in other country. Other Asean countries also offered advantages and benefits of the investments in automotive industry. In Thailand, it has several hub of assembly of vehicle which very crucial for reduce transportation and distribution cost.
Furthermore, Indonesia provided low labor cost and huge market capacity since the country among the highest population in Southeast Asia. Moreover, other countries also has a full pace of liberalisation and flexible in their automotive policies which the prices of the vehicle will be competitive. Finally, the other information that could help him is the environment and safety of Asean country. Malaysia is among the peaceful countries compared to others although the citizens were multiracitional. So, safety and harmonious environment is also important for the investors to make sure the stability of the operation and consistency in long-term run.