An Acquisition of Proton by Geely. Who Pains, Who Gains?

An acquisition of Proton by Geely.
Who pains, who gains?
Prepared by:
Syafiq Bin Shuhaimi
From:
KU Leuven, Belgium
Prepared for:
Malaysian Student Association in Turkey - MASAT
Date:
20th January 2018
E-mail:
syafiqbinshuhaimi@gmail.com
Syafiq Bin Shuhaimi syafiqbinshuhaimi@gmail.com KU Leuven, Belgium
An acquisition of Proton by Geely. Who pains, who gains?
Abstract
This paper will discuss some part of the definitive agreement of Proton-Geely and who will benefit
or loss from this move. Factors that are discussed in this paper in favor of Proton are employment
opportunities, funds injection, and technology sharing. From the opposite position, Geely will
enjoy Proton handovers of Lotus, the British sports car brand that Proton owns from 1996, market
access to Southeast Asia (SEA) through Proton and access to Proton’s Tanjung Malim plant. Some
of these factors are derived from Proton-Geely definitive agreement. On the other hand, the
drawback of the acquisition towards local vendors is also discussed.
Keywords: acquisition. Proton, Geely, Lotus,
Introduction
Recently, an acquisition of Proton by Geely has become a hot topic. There are people
criticizing that Proton does need foreign intervention in order to sustain while others do not. In
general, Proton received RM1.5 billion soft loan in 2016 from the government with conditions of;
i) Draw up a turnaround plan, ii) Route to expand its market domestically and internationally and
iii) Tie-up with a well-known strategic partner (Sidhu, 2016). The third condition is the main
reasons why Proton was acquired by Geely.
Due to the collective culture of Malaysian society, they tend to be highly patriotism towards
buying Malaysian made cars. This is supported by Wel et. al., (2015) found that Malaysian scored
high in patriotism as buying intention of Malaysian Cars but still, Proton could not make into
number 1 brand in Malaysia. For the year 2016, Proton fell to number 3, behind to an international
brand, Honda, and Perodua as number 1 (Lee, 2017).
An acquisition of Proton by Geely is said to save Proton from bankruptcy. For the year
2017, data has revealed that 70,991 units sold compared to 72,290 units sold in 2016, down by
1.8% (Lye, 2018). Figure 1.0 shows the data of Proton’s overall sales performance for the year
2016. According to Sidhu (2016), Proton needed to sell a minimum of 12,000 cars monthly in
1
2016, in order to reach breakeven. However, still under the target. Unfortunately, total sales of
2016 were also lower than the total sales in 2015 (Lee, 2017). Therefore, will this acquisition able
to safe-guarding Proton’s performance?
Figure 1.0: Sales performance in the passenger vehicle sectors for the year 2016 and 2015.
Source: Lee (2017)
Factors that will be discussed in this paper in favor of Proton are employment
opportunities, funds injection, and technology sharing. On the other hand, for Geely, it will
enjoy Proton handovers of Lotus, the British sports car brand that Proton owns from 1996,
market access to the SEA through Proton and access to Proton’s Tanjung Malim plant.
Some of these factors are derived from Proton-Geely definitive agreement. However, not all of
the factors from the definitive agreement are discussed. Furthermore, drawback towards local
vendors is also discussed in this paper.
How can an acquisition by Geely lead to higher employment opportunities? New models
will be introduced yearly with the increase of production in Tanjung Malim, and it definitely will
need a lot of hands (Chan, 2017). The new culture of management will be part of the learning
curve as the management of Proton is replaced by Geely’s management where Li Chunron is the
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new CEO of Perusahaan Otomobil Nasional Sdn Bhd (PONSB), replacing Datuk Ahmad Fuaad
Kenali (Tan, 2017)1. Therefore, this could lead to the improve learning curve of Proton employees
and thus make them be more competitive. In the need of sustainability, Geely will inject funds in
term of the cash injection of RM170.3 million and the supply of new sports utility vehicle (SUV)
‘Boyue’ worth RM290 million to Proton (Lye, 2017)2. At the same time, Geely will lend expertise
in the area of production, manufacturing, operations, and marketing (Tan, 2017)3.
However, Geely also had acquired Lotus by 51% of the stake (Lye, 2017)4. In this case,
Proton will no longer have the accessibility of Lotus technology as DRB-Hicom selling off the
remainder of its 49% stake in Lotus to Etika Automotive, shows that DRB-Hicom exiting the
sports car business (Lye, 2017)5. In addition, Geely does not have the market presence in the SEA.
With this acquisition, Geely is able to enter the SEA market that is dominated by the Japanese
automaker (Ng and McDonald, 2017). Furthermore, Geely will have the access to assemble Volvo
cars in Tanjung Malim plant, which will give Geely its first right-hand-drive production cars
(Taylor, 2017). Instead of building up a new production plant, Geely is also able to save a
significant amount of capital.
Unfortunately, local vendors face the major heat. After the new management took over
Proton., local vendors are not only required to reduce the price drastically, but also the local content
of Proton cars will be reduced to the minimum of 40% local content. Failure to do so will let local
vendors facing a major risk.
Thus, a question arises. Who pains and who gains?
1,3
Tan, D. (September 29, 2017). Paultan.org. DRB-Hicom, Geely announce new Proton board – Li Chunrong is
CEO, Winfried Vahland joins the board. Retrieved from https://paultan.org/2017/09/29/drb-hicom-geely
-announce-new-proton-board-li-chunrong-is-ceo-winfried-vahland-joins-board/
2
Lye, G. (June 23, 2017). Paultan.org. Proton-Geely FSP deal in detail – what DRB-Hicom, Geely and the
Malaysian government will be getting. Retrieved from https://paultan.org/2017/06/23/proton-geely-fsp
-deal-in-detail-what-drb-hicom-geely-and-the-malaysian-government-will-be-getting/
4, 5
Lye, G. (May 24, 2017). Paultan.org. Geely to acquire 49.9% stake in Proton, 51% in Lotus – definitive
agreement to be signed before end of July. Retrieved from https://paultan.org/2017/05/24/geely-to-acquire
-49-9-percent-stake-in-proton-51-percent-in-lotus/
3
Introduction of Proton
Proton stands for ‘Perusahaan Otomobil Nasional’. It is the first Malaysian automobile
manufacturer that headquartered in Shah Alam, Selangor alongside manufacturing plant in
Tanjung Malim, Perak. Proton was established by the former prime minister, Dr. *Mahathir
Mohamad in 1983. When Proton was at its peak, Proton was able to dominate local and
international automobile sales. According to Irwan (2017), Proton in 1996 controlled over 64%
of market share in Malaysia with a sales volume of 176,100 alongside export markets to more than
50 countries such as Ireland, Australia, New Zealand and Sri Lanka.
Another amazing fact is the production of Proton cars had reached a high-time level of
500,000 in 1993 (Kaur, 2016). Kaur (2016) added that nearly 80% of new passenger cars sold
coming from its factories, during its victory. However, over the past 15 years, Perodua is taking
over the market share and Proton left well behind. Surprisingly, Proton even lost out to foreign
brands such as Toyota and Honda (Irwan, 2017). In 2016, Proton received a RM1.5 billion soft
loan from the government with conditions of Proton needs to draw up a turnaround plan, route to
expand its market domestically and internationally, and tie-up with a well-known strategic partner
that will help in research and development in order to boost Proton to become competitive in
international markets (Sidhu, 2016).
Introduction of Geely
Geely, which officially known as ‘Zhejiang Geely Holding Group Co. Ltd’, is a private car
manufacturer from China. It was established in 1986 by Li Shufu, as a refrigerator manufacturing
unit. When his business of refrigerator making huge profits, Li Shufu decided to shift its attention
to motorcycle manufacturer. Li Shufu purchased new machinery for his manufacturing plant and
began producing the first ever China’s scooter motor. Within a year, sales volume of Geely’s first
ever scooter motor reached more than 60,000 units. Jump to the year 1996, Geely became popular
as the main motorcycle manufacturer in China.
In 1997, Geely decided to expand its business even more and shifted its attention from
motorcycle to the industry of automotive. This led to its first production vehicle, called Geely GQ
in Linhai City. From this first ever Geely production car, “Geely Automobile Holdings Ltd”
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formed as a subsidiary of the Geely Group. Due to the expansion, it is now listed on Hong Kong
Stock Exchange.
History of Geely expanded by mid of 2008 where Geely approached the Ford Motor
Company in order to acquire the Swedish automaker, Volvo Brand. After numerous meetings and
negotiations in 2010, the deal was made.
Volvo’s performance after Geely’s acquisition.

Geely poured investment into new models, manufacturing, and technology including self-
driving cars, where it is a pioneer (Tovey, 2017). The Economist (2014) stated that $11 billion
has been put into Volvo in order to help Volvo develop new models and build assembly plants in
China for production of Volvo cars. In addition, Volvo sales of its upmarket vehicles rose 6.2%
to a record 534,000, driving revenues 10% higher to SEK 180 billion (£16.2 billion) and operating
profit up to 66%, £990 million (Tovey, 2017).
From the financial performance, we can see that Geely able to recover the Volvo from further
losses, as Volvo recorded a pretax loss of 653 million in 2009 (Yan and Leung, 2010). Geely
showed a commitment to enhancing Volvo’s performance, which could be the same to Proton.
Part 2: Discussions
Geely VS PSA
PSA Group from France which sells the Peugeot, Citroen, and DS, with Opel and Vauxhall
brands recently added, was also interested in Proton. This makes PSA competed with Geely. The
best part is, PSA is totally interested in Proton while Geely’s main interest is the technology-rich
but low-volume Lotus brand (Sigal, 2017). Sigal (2017) added that the main reason why PSA is
more interested in a stake of Proton is that on the wide range of strategic benefits, mainly PSA
may have a strategic way to enter ASEAN market. Back in 2007, PSA, General Motors, and
Volkswagen were attempted to negotiate an alliance or partnership with Proton. However, the
negotiation failed as Malaysian officials would not cede control to foreigners (Chrysler, 2012).
This time, PSA Group tried to negotiate an alliance for the second time. However, PSA Group
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beat out by its rival bidder, Geely (Frost et. al., 2017). According to an interview with a Proton
manager, the reasons on how PSA Group lose out to Geely is only known by top-level management
and the stakeholders.
Proton
1. Employment opportunities
Tanjung Malim plant will be used to its maximum capacity by becoming the right-hand-drive
hub for Geely in this region, alongside an opportunity to assemble Volvo cars. According to Tan
(2017)6, Proton only uses a third of Tanjung Malim’s capacity to produce cars due to its market
share has declined over the years to 14% in 2016. Other than that, Proton could increase
employment opportunities by entering the automotive market in China. According to The Star
(2017), Datuk Seri Ong Ka Chuan, the International Trade and Industry Minister II mentioned to
reporters that Geely was optimistic that Proton could capture 1% market share of the automotive
market in China with the assistance of Geely. He added that it could translate to about 280,000
cars.
Calvalho (2017) wrote that Deputy International Trade and Industry, Datuk Ahmad Maslan
stated that, there are plans to increase the number of Proton employees to 20,000 people in the
coming decade from the Proton and Geely strategic tied up. This could be translated by the vision
of Mr. Daniel Li, Executive Vice President and Group Chief Financial Officer of Geely that
foresees a potential contribution of 500,000 units from Tanjung Malim by 2020, perhaps by the
more extension of capacity than the current Tanjung Malim’s capacity (Kon, 2017).
2. Funds injection by Geely

According to Lye (2017)7, Datuk Sri Syed Faisal Albars, the group managing director of DRB-
Hicom stated that Proton will be provided a consideration (funding) by Geely with RM170.3
6
Tan, CK. (June 23, 2017). Nikkei Asian Review. China’s Geely buys big stakes in Proton, Lotus for
discounted price of $235M. Retrieved from https://asia.nikkei.com/Business/Companies/China-s-Geely
-buys-big-stakes-in-Proton-Lotus-for-discounted-price-of-235m
7
Lye, G. (June 23, 2017). Paultan.org. Proton-Geely FSP deal in detail – what DRB-Hicom, Geely, and the
Malaysian government will be getting. Retrieved from https://paultan.org/2017/06/23/proton-geely-fsp
-deal-in-detail-what-drb-hicom-geely-and-the-malaysian-government-will-be-getting/
6
million being a cash injection and RM290 million being the cost of supplying the Boyue SUV
platform to Proton as a new model. This is a good start as in 2016, Proton received a RM1.5 billion
soft loan from Malaysian government as a bailout package in order to help Proton pay its debts,
amid poor sales and heavy losses (The Straits Times, 2016). This becomes an issue as the
government needs to support the Proton in order to sustain in the market. In this case, the
Malaysian government will no longer have to support Proton's financial.
3. Technology Sharing
One of the most interesting parts of the definitive agreement is, Proton will have the chances
of getting exclusive rights to Geely’s products and access to state-of-the-art technology (Bernama,
2017). By the end of next year, first Proton car with Geely’s technology, which is based on Geely
Boyue will be roll out (Chan, 2017). It will be the first Proton sports-utility vehicle.
Recently, Proton Holdings Bhd. invited 28 top Proton dealers on a trip to visit Zhejiang
Geely Holding Group Co. Ltd. in Shanghai, China (The Star Online, 2017). The trip was planned
to showcase how Geely’s dealers operating. This is part of the Proton’s efforts to urge dealers and
service center operators to improve their facilities in conjunction with a new model of Proton to
be launch next year.
Another form of technology sharing is, Geely will supply latest engine and energy solutions
to Proton. Proton will receive engines from Geely that meet the Euro 6 emission standard
alongside hybrid engines and most interestingly, pure electric engine (CIMB Research, 2017).
These new engines will allow Proton to penetrate other potential international markets. Thus,
Proton will have a stronger appearance in the markets that Proton never entered.
Geely
1. Lotus
Geely gains full control of Lotus Cars, the sports car operation based in Hethlel, near
Norwich in the UK, is the glamour part of the deal (Taylor, 2017). However, Lotus do not
make up profit for decades. Campbell and Milne (2017) stated that Lotus made a loss of
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£27.6M in the 12 months ending on March 31, 2016. Even though Lotus is in the unfavorable
condition, it is a surprisingly benefits to Geely.
According to Foon in The Star Online (2017), Geely had expressed more interest in
acquiring Lotus, which produces the sports car, rather than the whole of Proton in the earlier
negotiations with DRB-Hicom. Foon (2017) added that Geely interested to Proton as for the
Lotus and while for PSA, which is strong in sport-utility vehicles (SUVs), it is not keen on
Lotus. This is due to technology that Geely lacks. Campbell and Milne (2017) stated that
Lotus is a leader in composite materials and light-weighting technology, which Geely keen to
deploy across its vehicles in order to meet stringent emissions targets in China. Geely is
pursuing a plastic body-on-aluminum architecture for its London Taxi programme, as the
technology was effectively used for the Lotus Elise and Lotus Elise-based sports car for 20
years (Taylor, 2017).
In addition, Lotus would help Li Shufu’s ambition to add a portfolio of international brands
at multiple price points, just like Volkswagen has Porsche and Toyota has its Lexus
(Bloomberg News, 2017). Therefore, Lotus would be a prestigious brand for Geely as
according to Gui Shengyue, the Chief Executive Officer of Geely Automobile Holdings “There
are no sports car models under Geely and Volvo, so Lotus will help beef up Geely Group’s
presence in the segment” (Bloomberg News, 2017).
Auto companies in China were encouraged by China's government to acquire technology

that it lacks and for the auto sector, it has been identified as a weak segment within its
manufacturing sector (Bigg, 2017). To portray this, Geely has transformed itself into an
automaker with up-market aspirations by its Volvo’s R&D advantage and helps to jump the
sales table (Reuters, 2017).
2. Market access to Southeast Asia

Now, Geely obtained a platform to expand into Southeast Asia. Definitive agreement of
Proton-Geely lets Geely have a distribution network in Southeast Asia, the region where it is
a very difficult market due to the domination of Japanese brands (Ng and McDonald, 2017).
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According to Ng and McDonald (2017), Yale Zhang, managing director of Automotive

Foresight, Shanghai said that “If you look at U.S. or European automakers who started from
scratch there (Southeast Asia), basically none of them succeeded. If you want to enter and you
have a well-established brand like Proton, then you get access to relatively popular brand and
also a ready distribution channel.”
Geely will able to export cars to tax-free countries as Brunei, Singapore, Indonesia, the
Philippines, Thailand, Laos, Cambodia, and Vietnam as Malaysia is part of the free-trade
ASEAN bloc (Taylor, 2017). This could enhance the sales of Geely to a higher level as Geely
do not have market presence in Southeast Asia. By acquiring Proton, Geely will have an access
to 600 million consumers in SEA (Bloomberg News, 2017).
3. Tanjung Malim Plant

Geely will have the access to Proton’s Tanjung Malim plant that has a significant amount
of capacity, 150,000 cars a year (Taylor, 2017). Instead of building a new plant in ASEAN,
Geely able to save a significant amount of capital as Geely may just utilize the Tanjung Malim
plant, instead of building a new plant. Besides that, Geely may use current Proton workers in
the Tanjung Malim plant to assemble vehicles.
The plant will utilize Geely’s first right-hand-drive production capacity outside Volvo’s
Swedish operations (Taylor, 2017). In addition, the right-hand-drive production of the Sports
Utility Vehicle, Lynk&Co 01 will also be transferred to Tanjung Malim so that the car can be
sold to right-hand-drive countries such as Australia, United Kingdom, Japan and South Africa
(Taylor, 2017). Other than that, Tanjung Malim plant could be used to make Geely’s low-cost
cars (Bloomberg News, 2017). Instead of the plant to be a regional production hub for right-
hand drive vehicles, it will also be becoming part of the group’s vast global R&D network that
includes facilities in across China, Europe, and even California, USA (Kon, 2017).
Drawback
However, the main disadvantage is to the Proton's vendors. This is because local vendors will
have to compete with vendors from China. China is very well known for low-cost and cheap
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prices. Local vendors at a disadvantage because of low material costs, a strong automotive value
chain ecosystem and the abundance of cheap labor in China (Aziz, 2017)8. Aziz (2017)9 added
that the newly appointed Proton’s CEO, Dr. Li Chunrong guaranteed to maintain the minimum
40% local content of Proton cars. Therefore, more or less, 60% will be foreign content.
Previously, from an interview with a Proton manager, he mentioned that Proton has an average of
95% local content, depending on variants. Thus, vendors lose big.
According to FMT Reporters (2017), Chinese manufacturers could produce leather seats at
only 50% of the cost, which a local seat upholstery vendor could not compete due to mass
production in China. Aziz (2017)10 mentioned that in order to be competitive under a supply chain,
Proton Holdings Bhd’s new management warned local vendors to cut prices by 20%, for both
current and future models. Aziz (2017)11 added that failure to do so will expose the vendors to a
risk of losing their business to low-cost Chinese manufacturers due to the new management are
keen to costs reduction and accelerate the turnaround at the car company.
Conclusions
The pain seems to be not to the Proton nor Geely, but to the local vendors. Obviously, both
parties will gain huge benefits. Proton may able to achieve economies of scale alongside better
placement in the Malaysian market and in fact, international market. In addition, Proton may have
a huge comeback in the automotive industry and will have its own competitive advantage to
compete with international brands. Other than that, employees of Proton will experience the
learning curve effect where different culture and fresh knowledge from a new management
combined.
8 ,9
Aziz, A. (November 10, 2017). The Malaysian Reserve. Bumpy road ahead for Proton’s local vendors.
Retrieved from https://themalaysianreserve.com/2017/11/10/bumpy-road-ahead -protons-local-vendors/
10
Aziz, A. (October 31, 2017). The Malaysian Reserve. Proton asks vendors to cut prices by 20%. Retrieved from
https://themalaysianreserve.com/2017/10/31/proton-asks-vendors-cut-prices-20/
11
Aziz, A. (December 6, 2017). The Malaysian Reserve. Proton vendors given 30 days to cut prices by 20%.
Retrieved from https://themalaysianreserve.com/2017/12/06/proton-vendors-given-30-days-cut-prices-20/
10
On the other hand, Geely may enjoy to absorbs technology from Lotus. The vision of Li
Shufu turned to reality with the acquisition of Lotus. Geely will also able to achieve economies
of scale with the utilization of Tanjung Malim plant at the expense of local vendors and local
workers. In fact, Geely able to eliminate the start-up cost with the plant and people that is
production-ready. The process of production can be executed at any time.
For more than 30 years, vendors enjoyed a quite friction-free competition as the
competition only in-between local suppliers. Now, local vendors are facing a new level of
competition where the element of intense and pressures are present. The competition that local
vendors may or may not able to win.
Recommendations
I would strongly recommend to local vendors to collaborate with international vendors
such as China or India. Since China able to provide components with way cheaper than local
vendors may provide, collaborate with China’s vendors may seems to safeguard local vendors
from drifting away from the market. Instead of relying on 100% parts from China, local vendors
may provide local raw components to China’s vendors and storage capacity to the vendors.
Therefore, vendors from China may able to ship in bulk and store the components in Malaysia,
instead of shipping the components back and forth. Cost of transportation and time may be heavily
reduced.
On the contrary, local vendors may also collaborate with local vendors. Since local
vendors have their own association called ‘Proton Vendors Association’ (PVA), it would be a good
platform to gather and discuss the collaboration of production. Local vendors may reduce the cost
of production of producing single or multi components and lead to achieving economies of scale
and scope. In order to provide a competitive price, economies of scale and scope are play as the
important role.
Other than that, local vendors may collaborate and focus on their own core competency.
For instance, new management of Proton required for local vendors to upgrade from a center for
one special category, e.g; a Proton service center, to a 3S (Service, Sales, Spare parts) center.
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(Aziz, 2018). Aziz (2018) added that some vendors are having financial and capability difficulties
to upgrade their facility. Therefore, local vendors may team up with other local vendors as one
big vendor under one roof where one vendor could serve ‘Service’, one vendor may enhance
‘Sales’ and the other vendor focusing on ‘Spare parts’. By having one vendor to focus on its core
competency, the combinations of vendors may lead to lean management and production, exchange
of knowledge and most importantly, reduction of cost and risk.
In this case, only the fittest vendors will remain in the business. Local vendors may not
able to survive if they remain alone, but chances to be in the game is higher with collaborations.
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References
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20%. Retrieved from https://themalaysianreserve.com/2017/10/31/proton-asks-vendors
-cut-prices-20/
Aziz, A. (November 10, 2017). The Malaysian Reserve. Bumpy road ahead for Proton’s local
vendors. Retrieved from https://themalaysianreserve.com/2017/11/10/bumpy-road-ahead
-protons-local-vendors/
Aziz, A. (December 6, 2017). The Malaysian Reserve. Proton vendors given 30 days to cut
prices by 20%. Retrieved from https://themalaysianreserve.com/2017/12/06/proton
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15
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17
Appendix
Figure 1.0: Sales performance in the passenger vehicle sectors for the year 2016 and 2015.
Source: Lee (2017)
18

An Acquisition of Proton by Geely. Who Pains, Who Gains?

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An Acquisition of Proton by Geely. Who Pains, Who Gains?

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An acquisition of Proton by Geely.

Who pains, who gains?

An acquisition of Proton by Geely. Who pains, who gains?

Keywords: acquisition. Proton, Geely, Lotus,

Thus, a question arises. Who pains and who gains?

Volvo’s performance after Geely’s acquisition.

2. Funds injection by Geely

Auto companies in China were encouraged by China's government to acquire technology

2. Market access to Southeast Asia

According to Ng and McDonald (2017), Yale Zhang, managing director of Automotive

3. Tanjung Malim Plant

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