Case Project: Peugeot's Maker PSA, Suzuki And Renault Keen to Partner with Proton (FIN 4040)

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Published on December 19, 2016

Author: echizen94

Source: slideshare.net

1. KULLIYYAH OF ECONOMICS AND MANAGEMENT SCIENCES CORPORATE FINANCE (FIN 4040) CASE PROJECT: “PEUGEOT'S MAKER PSA, SUZUKI AND RENAULT KEEN TO PARTNER PROTON” GROUP MEMBERS: 1328350 ANIS SYAZIANIE BINTI CHE MOHD ZAIMI 1323568 SHARINA AZLEEN BINTI ERMAN EFENDI 1321976 AFIFAH NABILAH BINTI MOHD SAFEI 1329010 MUNIRAH BINTI RAMLI 1322836 RUZANA BINTI SUHAIMI SECTION: 4 SESSION: SEMESTER 1, 2016/2017 LECTURER: DR. ROSLILY BINTI RAMLEE SUBMISSION DATE: 27TH NOVEMBER 2016

2. 2 CONTENTS INTRODUCTION ..................................................................................................................................3 SUMMARY OF MAIN ARTICLE ........................................................................................................3 ISSUES ...................................................................................................................................................4 QUALITY OF PROTON’S CARS.....................................................................................................4 PRICE OF PROTON’S CARS ...........................................................................................................4 PUBLIC PERCEPTION TOWARDS PROTON’S CARS.................................................................4 DISCUSSIONS ON THE CAR MAKERS ............................................................................................5 PSA PEUGEOT CAR MAKERS .......................................................................................................5 SUZUKI..............................................................................................................................................6 RENAULT..........................................................................................................................................7 ANALYSIS BASED ON RATIO ANALYSIS ......................................................................................8 OPINION BASED ANALYSIS .............................................................................................................9

3. 3 INTRODUCTION Perusahaan OTOmobil National (Proton) is the first Malaysian national automobile manufacturer. It was founded in 1983 during Tun Dr. Mahathir Mohamed’s era. In 1993, Proton was able to obtain 74 percent of domestic market share. However, when Proton started to produce their own models and due to several qualities and services issues, their market share declined to about 15 percent. According to Titikorn Lertsirirungsun (2016), ASEAN manager at consultancy LMC Automotive, “If Proton need to develop their own technology or design, they need more money”. This had supported Proton’s decision to search for foreign partner in 2007 which had attracted industry giants such as Volkswagen and General Motors. However, the negotiations were called off after Malaysia refused to give them a controlling stake. In 2012, DRB-Hicom took over Proton. This paper aims to investigate the most profitable partnership for Proton to help them revive in the industry. SUMMARY OF MAIN ARTICLE The main article for this paper is ‘Peugeot’s maker PSA, Suzuki and Renault keen to partner Proton’ by REUTERS. According to the article, due to the profit being hit by sub-par cars, poor after-sales service and tough competition, Proton is currently in search of a partner to help revive their profit. This is proven as the financial year ended 31st March 2016 of DRB-Hicom had shown net losses of RM 991.90 million due to the poor performance and tough competition in Proton. Therefore, Proton had sent partnership proposals to nearly 20 car makers earlier this year. Among all of the car makers, at least three firms including Peugeot maker PSA, Suzuki and Renault have signalled interest and responding to the proposal initiated by the ailing Malaysian car maker Proton. However, all three of the car makers refused to comment due to confidentiality. On the other hand, DRB-Hicom has not ruled out selling a majority stake in Proton, and may also consider selling British sports and racing car brand Lotus, owned by Proton. Besides, Proton and DRB-Hicom also do not give any immediate comment on this matter.

4. 4 ISSUES QUALITY OF PROTON’S CARS Recently, it was revealed that Proton was recalling about 100,000 of its vehicles from the Preve, Exora and Suprima models, due to a cooler hose issue, which could likely rupture once the car exceeded the 40,000 km mileage mark. Proton admitted that they knew about the issue earlier, but, they were not publicized the problems. The Malay Mail Online reported that the Proton CEO, Abdul Harith Abdullah said that they were keeping silent on the problem to avoid from publicising the defects discovered in their vehicles. Thus, the faulty items were quietly replaced when the owners brought their cars in for maintenance checks. PRICE OF PROTON’S CARS In the recent years, Proton has been facing declining vehicle sales which have affected its cash flows. This is a serious matter as Proton plays an important role as the national automobile industry with 12 000 workers directly under it while 50 000 people are employed under various vendor companies. During its foundation in 1983, billions of ringgit from tax payers had been spent in the process. Apart from that, the Government had increased the import duty for other cars and car parts in order to encourage people to buy Proton. However, the facts that we had been paying higher prices for all cars including Proton still has not been sufficient to save Proton which have already been sold for five times. Proton cannot blame the users for not buying their models or use other external factors like the poor economy or the decline in the Ringgit Malaysia. They should realize that by increasing the prices of their car models at a time will also not going to revive the sales. This is because the users realize that despite of buying the Proton’s cars, they can buy other cars with similar prices, but, with better quality. PUBLIC PERCEPTION TOWARDS PROTON’S CARS According to Tun Dr. Mahathir Mohamad, the public perception was the main problem faced by Proton as the public have negative perception of the quality of its cars. This is following the declining sales in Proton for the fifth straight year. Although the Proton group chairman had mentioned that the current engineering team is good and professional

5. 5 enough to produce good cars in Proton, still, the public perception towards Proton is that it has poor-quality cars and cannot be good as a Japanese car. DISCUSSIONS ON THE CAR MAKERS PSA PEUGEOT CAR MAKERS PSA Group is a French-based company in automobiles industry. There are several brands of automobiles under this group including Peugeot, Citroen, Mister Auto, DS, Peugeot Citroen Moteurs and Banque PSA Finance. In Malaysia, the two most popular car brands under PSA Peugeot Citroen would most probably be Peugeot and Citroen. PSA Group is also known as PSA Peugeot Citroen. As mentioned before, PSA Group is one of the companies that are responding to the proposal sent by Proton to nearly 20 automobile companies in order to create a strategic partnership earlier this year. According to Lee (2016), a PSA spokesman told the news agency that Peugeot confirmed that it is responding to a request for proposals initiated by Proton and its shareholders, but, he refused to clarify about the actual response and the content of Proton’s proposals. Previously in 1996, Proton had already experienced a strategic alliance with PSA Peugeot Citroen for the purpose of technology transfer. As a result, Proton Tiara or also known as the Malaysian Citroen AX was produced. However, four years later, the production of Proton Tiara was ended due to its failure to compete with Perodua. Nevertheless, the experience of Proton working with PSA Peugeot Citroen could be considered while choosing for the best partner among the other two potential automobile companies which are Renault and Suzuki. Besides, as Proton’s goal is to leverage the technological expertise of a major global automobile manufacturer in areas such as product development and quality improvement while optimizing the capacity utilization of its plants, PSA Group can be a good partner due to its advancement in technology. On the other hand, for PSA Group, the agreement is expected to increase the sales of Peugeot and Citroen vehicles in Malaysia and serve as a foundation for developing business in the ASEAN region. Moreover, during this year, it had been reported that PSA Group is planning to build a factory in Southeast Asia with a focus on Indonesia, Thailand and Malaysia as it is now widening its international reach to reduce its reliance on a dynamic European home market (Ania Nussbaum, 2016).

6. 6 In this project, we are going to analyse which is the best companies between PSA Group, Renault and Suzuki that will be the most profitable strategic partner to Proton. The field related to Corporate Finance is Financial Statements and Long-Term Financial Planning. In order to calculate the profitability of PSA Group, we are using the Profitability Measures. The calculations involve in Profitability Measures are Profit Margin, Return on Assets and Return on Equity. In order to perform a timely and relevant analysis, the Profitability Measures are performed for the past five years which are 2011, 2012, 2013, 2014 and 2015. 2011 (%) 2012 (%) 2013 (%) 2014 (%) 2015 (%) Profit Margin: Net Income / Sales 0.98 -9.04 -4.28 -1.32 1.64 Return on Assets: Net Income / Total Assets 0.86 -7.49 -3.72 -1.17 1.63 Return on Equity : Net Income / Total Equity 4.25 -42.35 -27.74 -8.74 9.07 SUZUKI Suzuki Motor Corporation is a Japanese company that is founded on October 1909. Suzuki has a specialization in manufacturing automobile such as four-wheel drive vehicle, motorcycles, all-terrain vehicles, outboard marine engines, wheelchairs, and a variety of other small internal combustion engines. Moreover, as the fourth largest Japanese automotive company, Suzuki excels in providing high-quality engines and known for using a low-cost strategy where it relies on high volume of sales to boost its profits. According to the ‘World Cars Brand Ranking’ for the first nine month of the 2016, it shows that Suzuki rank as a global car brand drops from 16th place in 2015 to 19th place in 2016. This is proven when the consolidated net sales of Suzuki drop from 1,131,713 unit in 2015 to 1,049,727 unit in 2016 with a negative variance 7.2 percent. On the other hand, Suzuki global production in 2015 was 3,034,081 unit and for the first nine month of the 2016 is 2,203,740. As one of the potential partner for Proton, it is necessary for us to look at the Suzuki’s public perception, quality, price and cost of production, and research and

7. 7 developments, to grasp a better understanding of the company and the value added that Suzuki can bring to Proton. In relation to the article, the partnership with Suzuki is received well by Proton since Proton chief executive officer, Datuk Abdul Harith Abdullah said that since Suzuki is strong for its technology and expertise in producing smaller engine segment, hence, this collaboration will complement Proton’s long-range product plan. Moreover, Proton will receive tremendous benefits from this collaboration such as able to complete the offering of different segment of vehicles in Proton, and reduce its research and development and production n cost. Since Suzuki is still within the top 20’s in the ‘World Cars Brand Ranking’, it might improve Proton’s market share in Malaysia and boost the confidence in Proton’s brand that has a decline. This collaboration will also give opportunity for Proton to introduce new models in terms of compact and small car categories which will lead to improve Proton’s sales volume. If this collaboration is successful, Proton could potentially overtake Perodua, which is currently the market leader in Malaysia’s automotive market. 2011 (%) 2012 (%) 2013 (%) 2014 (%) 2015 (%) Profit Margin: Net Income / Sales 1.73 2.15 3.12 3.66 3.21 Return on Assets: Net Income / Total Assets 1.96 2.38 3.36 4.01 3.16 Return on Equity : Net Income / Total Equity 4.70 5.51 7.53 8.69 6.90 RENAULT RENAULT 2011 (%) 2012 (%) 2013 (%) 2014 (%) 2015 (%) Profit margin = Net Income / Sales 4.91 4.29 1.43 4.60 6.23 Return on asset = Net Income / Total Assets 2.93 2.39 0.78 2.41 3.25

8. 8 Return on equity = Net Income / Total Equity 9.03 7.33 2.49 7.99 10.76 ANALYSIS BASED ON RATIO ANALYSIS Year 2013 (%) 2014 (%) 2015 (%) CAR MAKER PSA SZ RN PSA SZ RN PSA SZ RN PM -4.28 3.12 1.43 -1.32 3.66 4.60 1.64 3.21 6.23 ROA -3.72 3.36 0.78 -1.17 4.01 2.41 1.63 3.16 3.25 ROE -27.7 7.53 2.49 -8.74 8.69 7.99 9.07 6.90 10.76 Return of Assets (ROA) shows the profit per ringgit of assets. From the analysis that we made based on the financial information of the latest three years, Renault was more profitable than other company by showing a consistent growth in ROA. For every 1% of the asset, Renault was able to generate 3.25% in 2015 and is the highest ROA that it achieved over the past 3 years period. Suzuki also gives a good figure in their financial status as can be seen from 2011 to 2014, which shows an increasing ROA in the long run. The company also manages to achieve a high ROA and profit margin (PM) over the past 5 years. While PSA Group indicates that the company was not doing very well and often incurred losses prior to 2015. However, the ROA was getting better from year to year even though it often showed a negative figure prior to 2015. Thus, Proton should consider PSA Group least compared to Renault and Suzuki which clearly showed a higher ROA and profit margin. Next measurement to be analyzed is the return on equity (ROE) which is the most important element for the shareholder to invest in the company. Suzuki shows a growth in ROE from 4.7% to 6.9% over the 5 years with the latest one indicates that 1 ringgit of equity can generate 6.9% of profit to the company. It shows that as more equity invested in Suzuki, the profit will be increased as many as possible. It is really suggested that Proton should cooperate with Suzuki because it can attract more investor to invest in the partnership of both companies. But, for the PSA GROUP, ROE might be greater in 2015, however, its history

9. 9 shows that the company was experiencing a big loss in 2012 by getting -44.35%. Therefore, the investors will think twice to invest in the company because they afraid that the company will not manage to maintain the high ROE in the future. OPINION BASED ANALYSIS Few years back in 1990’s era, Proton can be considered as one of the best Malaysian car brand with the production of Proton Wira and Proton Perdana which were the symbol of Malaysian’s pride. During that time, Proton was the leading car makers with high expectation from the public in Malaysia until most of the global car makers started to enter and invest in Malaysian market. However, somewhere along the way, Proton started to break down and no longer received full support from the public. Some people say it is because of the management of the Proton which was corrupted while some say it is because of the unreasonable high price of Proton cars and its replacement parts with average or even low specifications and performance. No matter what are the causes of the bad reputation of Proton car makers, it is undeniable that Proton has been doing very badly in both sales performance and the development of the cars. We can see the sales generated by Proton is fluctuated and unstable while there are many review on the unsatisfied performance of Proton cars and the services given by Proton’s car service centre. Even though Proton has generated losses over the year, recently, Proton tried to introduce new cars which are supposed to fulfil the demand of the customers. Proton improves most of the specification of the new cars especially in term of safety. The best example is Proton Iriz which is said as the safest compact car in Malaysia due to its almost perfect safety measures and the new model of Proton Perdana which was a result of Proton’s collaboration with Honda. This shows that Proton has the ability to improve the company’s reputation by improving its services and performance. Proton can do it if they really focused on doing it. Therefore, the decision to perform a partnership with global brand car makers is one of the wise decisions that Proton makes to improve its car performance and brand reputation. In this case, it is said that Suzuki has the highest possibility as a successful candidate due to the latest signed memorandum of understanding (MoU) and license agreement between Proton and Suzuki for a long-term strategic collaboration and partnership. This

10. 10 grants Proton access to Suzuki’s models, platforms, power train and automotive technology besides the permission to sell rebadged Suzuki’s cars. It is also supported by the good performance in the Suzuki’s financial status which clearly shows that Malaysians are buying and can afford to buy Suzuki’s cars compared to PSA Peageot and Renault. On the other hand, Proton had been trying to form collaboration with PSA Group for a few times before, but, there is still no results showed from all of those meeting and talking. This shows that, no matter how good and great PSA Group cars, their cars are still pricy and unaffordable to most Malaysians. Therefore, we suggest that Proton should take advantage of their latest collaboration with Suzuki to form a deeper relationship by forming the partnership with Suzuki. Who knows, one day, Proton’s cars can be as good as a Japan’s cars with the latest technology brought by Suzuki. CONCLUSION This article shows that Proton has the opportunity to increase the sales and improve the research and development if it performs a partnership with any three of the global car makers. What measures will determine which company is the best one and which company will give most benefits to Proton are the main issues that we discussed. In order to do the evaluation, a set of ratio analysis has been done in which we find profit margin (PM), return on assets (ROA) and return on equity (ROE). From the analysis made, we can conclude that PSA Group is out of the question, where PSA Group is not suggested for the Proton to form a partnership, while, Suzuki is the best out of them to partner with Proton. Proton may also consider Renault but from the analysis made, we conclude that Suzuki is still better than Renault.

11. 11 REFERENCES Peugeot's maker PSA, Suzuki and Renault keen to partner Proton. (n.d.). Retrieved October 9, 2016, from http://www.nst.com.my/news/2016/09/175506/peugeots-maker-psa-suzuki- and-renault-keen-partner-proton Sidhu, J. S., & Huang, T. (2015). Proton's fight for survival. Retrieved October 10, 2016, from http://www.thestar.com.my/business/business-news/2015/07/04/protons-fight-for- survival/ Y. (2016). Malaysians have sacrificed enough for Proton. Retrieved October 19, 2016, from http://www.malaysiakini.com/news/330002 Lim, A. (2016, May 23). Renault and Groupe PSA supposedly in talks with Proton over a possible strategic partnership – report. Retrieved November 25, 2016, from http://paultan.org/2016/05/23/renault-and-groupe-psa-supposedly-in-talks-with-proton-over- a-possible-strategic-partnership-report/ H. (2016, September 28). Up To 51 Percent of Proton Up For Sale – Skoda, Suzuki ... Retrieved November 25, 2016, from https://www.bing.com/cr?IG=C7BDD163F27441A5A700DA56B812C95E&CID=0BDA97 A3016464D527F89E79005565F4&rd=1&h=0NE29iGpTLHvz6bzzyd6kQ96HSU8RudFYW RsAkXmMcs&v=1&r=https://www.carlist.my/news/51-percent-proton-sale-skoda-suzuki- renault-peugeot-interested/41747&p=DevEx,5084.1 Lee. J, (2016). PSA confirms partnership interest in Proton, Suzuki, Renault also eye deal; Lotus could be sold – report. Retrieved November 26, 2016, from http://paultan.org/2016/09/23/proton-psa-confirms-partnership-interest-suzuki-renault-also- eye-deal-lotus-could-be-sold-report/ Ania Nussbaum (2016). Peugeot Maker Plans Southeast Asia Factory as Global Push Widens. Retrieved November 26, 2016, from http://www.bloomberg.com/news/articles/2016-09-07/peugeot-maker-plans-southeast-asia- factory-as-global-push-widens Peugeot SA (2016). Retrieved November 26, 2016 from http://financials.morningstar.com/ratios/r.html?t=PEUGF

12. 12 Suzuki Motor Corp. (2016). Retrieved November 26, 2016 from http://financials.morningstar.com/ratios/r.html?t=7269

13. 13 APPENDIX SALES IN JUNE 2016 FOR PROTON, PSA PEUGEOT, RENAULT AND SUZUKI BY MALAYSIAN AUTOMOTIVE ASSOCIATION SALES IN JULY 2016 FOR PROTON, PSA PEUGEOT, RENAULT AND SUZUKI BY MALAYSIAN AUTOMOTIVE ASSOCIATION SALES IN AUGUST 2016 FOR PROTON, PSA PEUGEOT, RENAULT AND SUZUKI BY MALAYSIAN AUTOMOTIVE ASSOCIATION

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