• Prime Minister Tun Dr Mahathir Mohamad at the Nikkei Conference in Tokyo yesterday said the government may set up a new national car company by partnering up with another Asian country. This followed his view that Proton was no longer a national car after the disposal of a 49.9% stake to China’s Geely.

• We emphasize that this is not the first time Mahathir has mooted this idea. In the months around the Proton-Geely deal of June 2017, Mahathir had made various comments in his blog posts and public events that a national car would be a boon for local manufacturers.

• He had proposed several ideas to assist Proton’s survival – among them to upgrade its engine and introduce a Proton pick-up truck – that were rejected. Proton needed a foreign partner to develop an engine that met specifications for international markets such as Europe, he had said.

• However, Pakatan Harapan in its manifesto did not include the establishment of another national car. We believe this was due to the lukewarm public reception towards such a plan. Our comments: (1) We believe the setup of another national car would be negative for the local automakers and the domestic auto market as a whole. We believe such a plan would necessitate stronger protectionist policies that would distort market demand. A new national car company would require certain incentives or allowances, which could be disadvantageous to other players and in turn, its consumers by way of higher prices. (2) We see limited opportunity for Malaysia to form a win-win situation with a foreign partner. The prime minister mentioned that he had Thailand, China, South Korea and Japan as possible partners. The latter two already have successful homebred brands that are popular globally. Moreover, he said a national car meant that it had to be owned by Malaysia. (3) A successful national car would require a foreign partner for the technical expertise and access to overseas markets, given Malaysia’s relatively small market size. Recall that these are the two factors that Proton lacked and is trying to rectify by way of its partnership with Geely. Proton has largely contended with Perodua and the two remain differentiated largely on price. Its long-term plan with Geely is to transcend this limit and cater to regional markets.

• We are neutral on the news and hold back from making any quick conclusions given the very preliminary and ambiguous nature of this plan.

• All eyes are currently on Proton, which has resolved to bring the Boyue in by early October. We believe Proton is merely trying to be ahead of Perodua in bringing in the country’s first homebred SUV, although the Proton version is a CBU with localization eyed only for 2H2019. Our channel checks indicate that contracts with local suppliers may only be drawn up in early 2019, indicating that Proton intends to test the market with the CBU Boyue to determine the final volume targets and market price of the CKD version.

Source: AmInvest Research - 12 Jun 2018