Proton Full Report from Proton case study

1) From a financial analysis perspective, has the Proton management done a good job? Key Financial Indicators (KFIs) 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 KFIs 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. Financial Ratios Liquidity Ratio

Current Ratio [Current Asset / Current Liabilities] Quick Ratio [(Current Asset – Inventories) / Current Liabilities]

2005 5,026.5 / 2,210 = 2.27 4,059.4 / 2,210 = 1.84

2006 4,431 / 2,341.1 = 1.89 3,042 / 2,341.1 = 1.30

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2007 3,165.5 / 1,533.8 = 2.06 1,891.9 / 1,533.8 = 1.23

2008 3,446.1 / 1,639.2 = 2.10 2,345.8 / 1,639.2 = 1.43

2009 3,404.6 / 1,883.6 = 1.81 2,009.5 / 1,883.6 = 1.07

Liquidity ratio shows the ability of the company to repay its short term liabilities. It can be seen that Proton has current and quick ratio above 1.0 which means that Proton is having enough money to repay its short term debt. However, the current ratio was decreasing from 2.27 in 2005 to 1.81 in 2009. For quick ratio, it can be seen that the ratio in 2009 had decrease to 1.07 compared to 1.85 in 2005. It shows that Proton is not strong in their finance and affects the ability to pay the debt with the cash assets. As a conclusion, Proton has quite poor performance in term of its liquidity during 2009. Profitability Ratio

Profit Margin [Net income / Revenue] Return on Equity [Net income / Total Equity] Return on Assets [Net income / Total asset]

2005 442.4 / 8,483.3 = 5.215% 442.4 / 5,860.2 = 7.549% 442.4 / 8,830.9 = 5.010%

2006 46.7 / 7,796.9 = 0.599% 46.7 / 5,870.6 = 0.795% 46.7 / 8,312.8 = 0.562%

2007 (589.5) / 4,687.3 =(12.577)% (589.5) / 5,230.6 = (11.270)% (589.5) / 6,946.8 = (8.486)%

2008 184.6 / 5,621.6 = 3.284% 184.6 / 5,421.2 = 3.405% 184.6 / 7,293.3 = 2.531%

2009 (301.8) / 6,486.6 = (4.653)% (301.8) / 5,101.6 = (5.916)% (301.8) / 7,098.9 = (4.251)%

Profitabiliy ratio measures the company’s ability to generate profit relative to sales, assets and equity. ROA and ROE indicate the efficiency of management at using its assets and equity to generate earnings. Meanwhile, profit margin indicates how much out of every dollar of sales a company actually keeps in earnings. Throughout the ratio analysis of Proton, it shows that in 2007 and 2009, Proton was unable to generate profit from the sales, assets and equity because its ratio shows negative percentage. In conclusion, it can be seen that the profitability of Proton is fluctuating from year to year and for 2009, the profitability of Proton is quite low compared to 2005 or even with the previous year 2008. In conclusion, based on the financial performance of PROTON from 2005 till 2009, we observed that Proton management has not done a good job. This is due to 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. Plus, low performance the liquidity and profitability ratios also indicate the bad performance of Proton between the years 2005 to 2009. 2

2) What characteristic should a foreign partner have that will enable maximum synergies? First of all, synergy can be define as 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 in term of quality control. PROTON’s major problem would be the poor 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 declined 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. As the technologies in this world changes rapidly, the foreign partner should be advance in technology. This is to guarantee that they can give consultation, share the technology and information to be adopted by Proton for their benefits. This is due to the fact that the automobile industry are compete each other in providing the best products to their customers. They are fast forward and understand well their consumer’s preference and always improve their products from time to time. Most companies that well established are from Japan especially; Honda, Mazda, and Suzuki. Besides, 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. 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 3

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. On its own, Proton has limited funds for research and development. Therefore collaborating with bigger automotive players lends research and development (R&D) capabilities would be very beneficial, particularly in production of hybrid and electrical vehicles. Last but not least, one of the reasons for collaboration is to share the capital injection. So, Proton should find partner or make collaboration with a company that already have strong and stable financial position. This is because, when the partner has strong financial position, it can help Proton in term of capital. In other words, Proton will indirectly have larger capital in short period and they can fully utilize the capital for the benefits of the company in long term.

3) What are the areas that the Proton should focus on going forward? Service Excellence Proton should focus on providing service excellence to ensure that PROTON continues to be the preference of its existing customer. It is important for brand building and to earn trust and loyalty from the customers. PROTON has been strengthening their customer touch points by introducing its i.Care, which is a customer management centre totally dedicated to the needs of their customer. However, PROTON needs to ensure that those staffs who are working in i-Care Centre have sufficient knowledge and high emotional quotient when communicating with customers. Quality Control Proton had been long criticized for its poor quality and unimpressive design. For a car, engine is the major or critical part of the product, since it is resemble the heart of a human being. Therefore, to produce a car with premier quality, priority must be given to its engine. In this area we recommend PROTON should invest in R&D and technology, and speed up its effort in developing strategic partners to strengthen quality, manufacturing and know-how which they are unable to do it themselves. PROTON may have invested in its technology; however, its efforts in this area seem insufficient. Consumers expect it can 4

provide a better technology, for instance Perodua offered its DVVT engine which is fuel efficient, but PROTON has continued using its CAMPRO engine for all the cars for decades. In this regard, we recommend considering partnering or joint venture with those reputable engine manufacture, such as manufacturer from Europe country (BMW, Mercedez, Renault or Peugeot) or Japan (Mitsubishi, Honda). Utilization of plant 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 leaving it unproductive.

4) From the review of 2009 National Automotive Policy, are there areas of possible collaboration with the Proton in the event of short of a full merger or takeover? Based on the 2009 National automotive Policy, there are possible areas for collaboration with the Proton in event of short of a full merger or takeover. As stated in the case, the main objective of NAP is to make the automotive industry in Malaysia competitive. 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. 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 5

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. Besides, the other area which is possible is tax incentive on training and R&D. It will give huge prospect 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. 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.

5) What other information not included in the case could help consultant Saiful Alawi makes a more meaningful recommendation? Why?

As a consultant engaged by a multinational auto giant company, Saiful Alawi need to come out with recommendation whether it is worth for the interested company to invest and/ or collaborate with PROTON. In order for him to produce more meaningful recommendation, there are several information that might be an advantage for Saiful Alawi although it is not provided in the case study. Firstly, regarding the items in Income Statement of PROTON. As can be seen, the Income Statement of PROTON did not show the expenses incurred part. Supposedly PROTON disclose their expenses items in order to help Saiful in making a more reasonable and rationale judgement. Some of the expenses that PROTON should disclose are cost of sales, research and development cost, distribution cost and administrative cost. For example cost of sales. Cost of sales can be used to determine ratio of inventory turnover. Inventory turnover ratio is a ratio that measures a company’s ability to sell its products or convert its inventory into cash in a year. By knowing this ratio, Saiful Alawi will know how efficient

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Proton in planning its production and sales to ensure that there is a balance between them to avoid inventory that is kept too long. Next would be SWOT Analysis. SWOT Analysis is an analysis that consists of a company’s strength, weakness, opportunity and threat. The analysis will help company to discover their own strength and weakness and opportunity and threat that they are facing from outside. SWOT Analysis is an important information because from the analysis, Saiful Alawi will have a broad mind of PROTON and also manage to decide the crossroads of PROTON in a long run as well. Besides SWOT Analysis of Proton, other information that should be included is lists of its competitors and their SWOT Analysis. This information is very useful to Saiful Alawi so that he manages to make a comparison and able to know where PROTON stand compare to its competitors and arrange better strategies for PROTON in the future if they decided to make a strategic alliance. Another thing that Saiful Alawi could take into consideration in order to produce more meaningful 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. For example in Thailand, it has several hub of assembly of vehicle which very crucial for reduce transportation and distribution cost. Furthermore, Indonesia provided low labour cost and huge market capacity since the country among the highest population in Southeast Asia. Moreover, other countries also have a full pace of liberalisation and flexible in their automotive policies which the prices of the vehicle will be competitive. By knowing this information, Saiful can compare which country will give better benefits to the multinational auto giant company.

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