Govt will not force Proton-Perodua merger, but does it have to?

The government will not force a merger between Proton Holdings Bhd and Perusahaan Otomobil Kedua Sdn Bhd (Perodua) to kickstart the consolidation in the domestic auto industry, according to International Trade and Industry Minister Datuk Seri Mustapa Mohamed. But does it really need to when government-linked parties are already major shareholders in both companies?

Mustapa was quoted by Bernama yesterday as saying that any merger proposal needed to be agreed on by stakeholders of the two national carmakers.

“We cannot force them to make a decision as there is a long spectrum. At one end is loose cooperation and at the other, a merger, which has yet to be decided,” Bernama quoted Mustapa as saying.

The minister’s latest statement on not forcing a Proton-Perodua merger raises some eyebrows.

Some quarters actually doubt that the consolidation in the auto industry, which is expected to start off with the two national carmakers, would actually take place if the government were not using its “stick” to drive it.

There is scepticism on the likelihood of a fully market-driven consolidation in the local auto sector simply because merger exercises should be aimed at creating value for all the parties involved, not so much on helping the weaker cousins.

Although Proton has openly said it is keen to merge, the sentiment is not shared by Perodua, which has overtaken the former in terms of market share and profitability in the past few years.

According the latest available figures on Perodua, the compact car manufacturer achieved net profit of RM294.9 million for FY08 ended Dec 31, compared with Proton’s RM184 million in the same year.

The difference in profitability is even more contrasting when one considers that Proton’s net tangible assets (NTA) are three times larger than Perodua’s.

Perodua, although the smaller player in terms of assets, has gotten the lion’s share of the domestic auto market, the biggest in Southeast Asia.

For 2010, Perodua’s market share was 31.2% compared with Proton’s 26% and Toyota’s 15.2%.

A merger between Proton and Perodua would be a sizeable one, with combined NTA of about RM7 billion and an annual turnover of over RM12 billion.

Proton’s NTA was at RM5.4 billion as at Dec 31, 2008 while Perodua’s NTA was RM1.8 billion.

In terms of return on equity (ROE), Perodua achieved 16% for FY08 against just 3% for Proton. For FY10 ended March 31, Proton’s ROE was at 4%.

The difference in ROE could be hurdle for a merger between Proton and Perodua, given the wide disparity in size relative to earnings.

Rumours about a possible merger between the two companies started way back and heightened when Prime Minister Datuk Seri Najib Razak spoke about an automotive industry consolidation at Proton’s 25th anniversary celebrations last July.

It is worth noting that government-linked parties hold substantial stakes in the two national carmakers.

Khazanah Nasional Bhd is the single largest shareholder in Proton with a 42.74% equity stake. The Employees Provident Fund (EPF) owns 12.34% and Petroliam Nasional Bhd has 7.85% in Proton. Other government-linked funds collectively control more than 10% interest.

Perodua, meanwhile, is 73%-owned by local parties, with its Japanese partners holding the remaining 27%.

The local shareholders are UMW Holdings Bhd with a 38% equity stake, MBM Resources Bhd 20% and Daihatsu (M) Sdn Bhd 5%. Permodalan Nasional Bhd, which owns a 60% controlling stake in UMW Holdings, also holds a 10% equity stake in Perodua.

The Japanese shareholders are Daihatsu Motor Japan with 20% and trading house Mitsui Group with 7%.

However, Perodua does not wholly own its manufacturing arm, Perodua Auto Corp Sdn Bhd (PASB), which manufactures cars in Rawang. It has a 49% stake here, with the balance owned by two Japanese partners — Daihatsu Motor Co Ltd with a 40% stake and Mitsui & Co Ltd, 11%.

There is speculation that if the merger between Perodua and Proton were to happen, it could possibly be done by consolidating the government’s shareholding in the two companies.

Considering the government-linked parties have such a high shareholding in the two carmakers, does the government need to force the merger if it wanted it to happen?

Also, what would happen to the minority stakes of the Japanese partners in Perodua and its manufacturing arm? Are their expertise and technology transfer also partly the key to Perodua’s success?

Apart from critical scale and cost efficiency, technology transfer and innovation — not just mere model re-badging — are also critical in the car industry. - by Isabelle Francis, theedgemalaysia.com