DRB-Hicom to invest RM1bil and accelerate development of Proton City

However, other analysts pointed out that DRB-Hicom would need to look at issues such as the costs of moving the production facilities from Shah Alam to Tanjung Malim as well as employees' concerns. “It would not be easy because employees in Shah Alam are not keen on moving to Tanjung Malim. Also, would DRB-Hicom want to incur the one-time costs and deal with the hassles of moving all the equipment and facilities?” one analyst questioned.

Another analyst said the reported planned RM1bil investment by DRB-Hicom was likely to be more of a property development play in Proton City.

“Based on the news reports, this is not just about investing in machines and vehicle production facilities. Perak Mentri Besar Datuk Seri Dr Zambry Abdul Kadir had spoken about infrastructure development in the area, including better road access to Proton City from the North-South Expressway as well as building commercial areas and schools,” he noted.

OSK Research said in a report late last year that a potential sale of Proton's Shah Alam land bank could fetch at least RM500mil. The research unit also pointed out that DRB-Hicom could be keen on developing Proton's land bank in Shah Alam for its housing development arm.

Automotive conglomerate DRB-Hicom took over and privatised national carmaker Proton earlier this year.

Dr Zambry was recently reported as saying the development of the 4,000-acre Proton City is set to be re-ignited after slowing down since it started 15 years ago.

According to Dr Zambry, DRB-Hicom plans to invest RM1bil in the next five years and make Tanjung Malim the main Proton car manufacturing centre.

Dr Zambry said Tanjung Malim was not fully developed as an automotive city, and only about 30% of the land had been used.

According to the Proton City website, the township consists of residential, commercial, institutional as well as industrial parcels with seven lakes.

It is located about 5km north of Tanjung Malim, and 90km from Kuala Lumpur.

Besides the RM1.8bil Proton car assembly plant, it also houses Universiti Pendidikan Sultan Idris.

On its website, Proton says Proton City is targeted to be fully developed by 2020, and aims to be home to Malaysia's automobile industry.

However, some analysts say the development of Proton City is not a major priority for DRB-Hicom which needs to focus on rectifying the problems in the national carmaker and bringing it to greater heights.

RHB Research analyst Alexander Chia said DRB-Hicom's focus must be to fix issues at Proton.

Chia said Proton's vehicle manufacturing plant in Tanjung Malim presently had a capacity utilisation rate of between 40% and 50%.

“Without economies of scale, Proton cannot make cars cheaply enough to compete. The development of Proton City is a secondary objective.”

“DRB-Hicom needs to bring in a technology partner. Volkswagen is a possibility. Such a deal has to be win-win for all parties involved. Perhaps Volkswagen can use the extra capacity at Proton's facility in Tanjung Malim as an assembly hub to expand its presence in Asean,” said Chia.

The Proton plants in Tanjung Malim and Shah Alam presently have an annual production capacity of 150,000 and 200,000 vehicle units respectively.

Last year the Tanjung Malim plant produced 52,235 units while the Shah Alam facility produced 114,645 units.

However, the Proton plant in Tanjung Malim can be expanded to have a maximum production capacity of up to one million cars per year.

Meanwhile, HwangDBS Vickers Research said in a recent report that Volkswagen's production capacity at DRB-Hicom's Pekan plant would be progressively ramped up to 50,000 units by 2017 or 2018 to pave the way for exports to the Asean market.

“This will be for three variants, Passat (rolled out), Jetta (early 2013) and Polo (second half of 2013) making Malaysia Volkswagen's regional hub for passenger vehicles.”

It also noted that as the Volkswagen Group owned other marques such as Audi, which DRB-Hicom is already distributing in Malaysia, there is potential for similar tie-ups.

“This may help to absorb some capacity at Tanjong Malim.”

The research unit said DRB-Hicom was gearing up for regional expansion and was ready for the eventual saturation of motor vehicle sales locally.

It also noted that with DRB-Hicom's key executives now in Proton, the focus was on procurement to ensure stringent quality control, to migrate the dealerships to a full franchise to reduce costs, and launch a Perdana replacement model within 18 months to fill the void in the D-segment.

“Sales of Proton Preve (pic), launched in April, have been encouraging with 11,310 bookings just two months of launch.”

According to HwangDBS Vickers Research, DRB-Hicom is still discussing with other automotive majors to take strategic stakes in Tanjong Malim.

“We have assumed the acquisition would be dilutive, leaving room for upgrades whenever there are synergies. For now, earnings delivery is vital,” said the research unit.

Meanwhile, OSK Research said recent news reports claiming Volkswagen was still keen on Proton was not entirely surprising, given the former's quest to set up a manufacturing plant catering for the Asean region.

“Proton's plant in Tanjung Malim could be the best fit for Volkswagen in establishing its hub,” said OSK Research.

It also pointed out that Proton's performance in the second quarter of 2012 was dismal, with year-on-year vehicle sales dropping by 6.4% to 37,753 units.

CIMB Research pointed out that Volkswagen presently had less than 1% market share in Asean, which is in stark contrast to its top position in China and in Europe, and its number three position in the United States.

“Therefore, the DRB-Hicom and Volkswagen partnership is essential in plugging the Asean gap in Volkswagen's global market and helping it achieve its target of becoming the world's largest auto manufacturer by 2018,” said CIMB Research.

The research unit also did not rule out the possibility of Volkswagen's equity participation in Proton in the future, going by the German carmaker's past partnership record when it took an initial 30% equity stake in Skoda and a 19.9% stake in Suzuki.