Malaysia Won’t Sell Entire Proton Stake to Volkswagen

June 20 (Bloomberg) — Malaysia’s government, seeking a partner for carmaker Proton Holdings Bhd., ruled out selling its entire 43 percent stake to Volkswagen AG, raising concern that disagreements over control will threaten alliance talks.

Volkswagen, the government’s preferred partner for unprofitable Proton, wants a “substantial” stake in the carmaker, Malaysia’s Deputy Prime Minister Najib Razak said in an interview.

“It’s the national car,” Najib said in Putrajaya, outside Kuala Lumpur, yesterday. “It can’t be all of the stake.”

Proton, set up to spearhead Malaysian industrial development 24 years ago, needs a partner after losing half its market share to competitors including Toyota Motor Corp. and posting its first annual loss in at least 17 years. Control of an alliance may be key for Volkswagen, which would gain access to Southeast Asia’s largest car market.

“The only thing I’m afraid of is this government will get emotional with this,” said Nordin Mohd Nasir, an analyst at Inter-Pacific Securities in Kuala Lumpur with a “trading buy” rating on Proton stock. “Proton doesn’t have much to offer. It’s still not visible how or when they will come up with this agreement.”

Proton, which sold six out of 10 cars in Malaysia a decade ago, needs an agreement with another company to develop new technology and models. An alliance with Mitsubishi Motors Corp. ended in 2004, and the Malaysian government missed its own March 31 deadline this year to find a new partner.

Manufacturing Division

Shares of Proton were unchanged at 6.25 ringgit in Kuala Lumpur, after falling as much as 0.8 percent earlier today. The shares have dropped 5.3 percent this year, trailing the 26 percent gain by Malaysia’s benchmark index.

Volkswagen possibly wants a stake in the manufacturing division, Najib said. Malaysian government investment unit Khazanah Nasional Bhd. owns 43 percent of Proton.

Andreas Meurer, a spokesman for Wolfsburg, Germany-based Volkswagen, said talks are continuing and declined to comment further. Volkswagen is Europe’s biggest carmaker.

Najib declined to say if acquisition talks are limited to Proton’s manufacturing facilities or to name other possible partners because talks haven’t ended. Offers and counteroffers have been “bandied about” and negotiating positions are always changing, he said.

Commercial Basis

“Whether we can give up a substantial stake, that’s the question,” Najib said. “Substantial means majority. Are we willing to give up a majority in the manufacturing side?”

Proton was set up in 1983 by then-Prime Minister Mahathir Mohamad. The state-run carmaker last month reported a loss of 591.4 million ringgit ($172 million) for the 12 months ended March 31, its first annual loss since at least 1991.

Protons, favored by taxi drivers across Malaysia, are among the cheapest cars in the country. The Saga saloon is still on sale more than two decades after the first model was produced.

Najib said his government is prepared to let a foreign partner run Proton without political interference. The government also hasn’t “closed the door” to companies other than Volkswagen, he said.

Commercial Basis

General Motors Corp., the largest U.S. carmaker, is among overseas automakers to have held talks with Proton. Local companies including Naza Group, which assembles and sells Kia Motors Corp. vehicles, and DRB-Hicom Bhd., which puts together cars for Honda Motor Co., have also indicated interest in Proton.

“If we want a foreign strategic partner then we have to accept the fact that it has to be run on a commercial basis,” Najib said.

Volkswagen may give Proton engine technology to install in its new models, said Jason Yap, a Kuala Lumpur-based analyst at Affin Securities Sdn. In return, the German company would want the freedom to run its own business in Malaysia, he said.

Control of Proton’s manufacturing unit may cost about 900 million ringgit, analysts including Chong Lee Len at Hwang-DBS Vickers Research Sdn. in Kuala Lumpur have said.

Najib also said he expects the Malaysian economy to expand 6 percent for a second consecutive year in 2008. The government isn’t in a rush to allow the ringgit to be traded offshore, and any strengthening by the currency should be “gradual,” he said.

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