Reuters / February 20, 2004

KUALA LUMPUR -- Mitsubishi Motors Corp. is in talks to sell its stake inMalaysian state-controlled automaker Proton back to the government as Protonsteps up its search for a new foreign partner to help it battle fallingsales.

A sale would mark an end to Mitsubishi's 19-year partnership with Proton,the national car firm that makes a ubiquitous car modeled on Mitsubishidesigns.

A source close to Malaysia's state investment arm Khazanah Nasional toldReuters on Friday the agency had been invited to buy Mitsubishi's stake inProton, but no decision had been reached.

"Khazanah was approached two to three weeks ago," said the source.

Mitsubishi, which is battling to revive its own car-making business, hasindicated Proton asked the Japanese carmaker to sell the stake back to thegovernment. Proton is looking for another partner to help it develop newmodels.

Mitsubishi Corp. and Mitsubishi Motors each have a 7.9 percent stake inProton. At current market prices, the stake is valued at around $219million.

A Mitsubishi Motors spokesman in Tokyo said no decision had been made onwhether the company was going to sell its stake.

But Mitsubishi Motors Chief Executive Rolf Eckrodt indicated this week thatProton wanted out of the partnership.

Mitsubishi Motors, Japan's fourth-largest auto maker and owned 37 percent byDaimlerChrysler AG, has been battered by loan control problems at its NorthAmerican finance unit.


"Now Proton thinks it can do it by itself, which is respectable. We aregoing to develop our own sales network in Malaysia," Eckrodt told a newsconference in Tokyo on Thursday.

"We will have cooperation from Proton by sharing ideas, keeping in touch,but the real partnership is over, defined by their (Proton's) strategy."

State-led Proton, a pet project of ex-Prime Minister Mahathir Mohamad, builtup a 60 percent share of the Malaysian passenger car market with the help oftwo decades of tariff protection.

But it now controls just under half of the passenger car market afterforeign rivals such as Honda Motor Co., Toyota Motor Corp. and South Korea'sHyundai Motor Co. slashed prices and won market share.

Last month Proton completed a corporate restructure and said it was in talksto form strategic alliances with a couple of foreign carmakers. It cannotafford the increasingly high costs of developing new models to compete withgiants such as Honda and Toyota and needs a development partner.

Proton recently unveiled its latest model, powered by its own Campro engine,a move to cut costs as previous models using Mitsubishi engines requiredroyalty payments.

"Mitsubishi is probably under a lot of pressure with the Campro engine out,"said Mohd Hasnul Ismar Mohd Ismail, general manager for TA Unit TrustManagement Bhd.

Data from Proton showed that it paid over 1.2 billion ringgit ($316 million)to Mitsubishi Motors and Mitsubishi Corp in the year ended March 31, 2003.

Khazanah currently holds 30 percent of Proton and if it has more than 33percent, it would have to buy the remaining Proton shares under Malaysiansecurities law. However, companies can ask for a waiver of the rule.

If the takeover rule is triggered, the state agency would have to payanother 2.83 billion ringgit to buy outstanding minority shareholdings inProton, based on the stock's closing price on Thursday.