VW Considering the Purchase of Proton?

July 30, 2005

by wallabyguy (Robert Konick)

It was just over two decades ago when Lotus started down a road that it still travels today. In December of 1982, Lotus' founder and spiritual father, Colin Chapman, passed away from a heart attack. The company was in the midst of a up market movement featuring models like the Elite and Esprit and suddenly found itself leveraged out and without a net. Thus began over twenty years of the company's search for a corporate partner to keep it alive in the wake of Chapman's passing. Suitors and Owners included Toyota, GM, a renewed Bugatti and most recently Malaysian Auto manufacturer, Proton.


Proton's current majority shareholder is Khazanah Nasional Bhd., a government investment entity. Khazanah Nasional Bhd. currently holds 42.7% of Proton, the majority stake of the automaker. The Malaysian government spent 100's of millions of dollars in manufacturing facilities to produce Mitsubishi based models. When management realized that Proton was not capable of internally developing it's own competitive models, the government funded the purchase of Lotus from the bankruptcy proceedings for Bugatti. The value of Lotus to Proton was in the world renowned engineering arm. The manufacturing side of Lotus featured the Esprit which required a influx of cash to support the introduction of a much needed V8 engine to stay competitive with it's segment competition and a newly developed small, back to basics sports car in the mold of Lotus's famous Sevens and Elans of the 50's and 60's, the Elise. The Elise wasn't expected to break 700 units per year. Shutting down the production side of Lotus was a option that carried quite a bit of weight with the new Owner until sales of the new Elise far exceeded expectations and it looked like the Lotus could survive as a manufacturer. Proton's ownership allowed Lotus to become to develop the 340R and Exige. It also allowed Lotus to renegotiate it's engine deal with Rover thus reducing the manufacturing costs associated with the Elise.

Proton has begun to roll out models benefitting from Lotus's engineering assistance. As good as they may or may not be has yet to be seen but it is Lotus which has truly benefitted from the relationship which initially gave them the security required to redevelop the product line which has now led to the manufacturing side of the company posting profits for the first time in decades.

Proton has benefitted from the provision of a sheltered market. The Malaysian market has shut out foreign competition in order to incubate the fledging automotive company since it's inception. But that changed in June when the tariffs placed on imported vehicles were lifted in response to a Regional free trade agreement. This leaves the market open to competition and Proton simply doesn?t have the models to be competitive. It was obvious that a stronger partner would need to be found for Proton if it was to survive the deregulation. In the midst of this turmoil was Lotus who now found itself expendable in the interest of the survival of it's parent company.


Meanwhile, in Wolfsberg, Volkswagen has grappled with the opening of the Asian markets to foreign automakers. It's endeavors under former chief executive and current chairman Ferdinand Piech centered on heavy investment to move the Volkswagen brand upmarket to compete with Mercedes and the acquisition of Bugatti, Bentley and Lambroghini. This heavy investment in the upper end of the market set Volkswagen up to be flat footed for China's demand for economical and regionally sourced products. Even Volkswagen's traditionally entries into the segment (Golf, Polo, and Bora) had all been redesigned with the intent to move the brand up the food chain. To compound the problem, this same move upmarket has thus far proven unsuccessful, leaving many predicted sales goals, unrealized. The failure to reach sales targets of models like the Phaeton and W8 powered Passat along with delays in the product launches from Bugatti, has spent much of the accumulated wealth Volkswagen had left from the 90's.

The Chinese market is Volkswagen's primary concern. This years current anticipated sales in China of 3.5 million units (a 40% increase from last year) will continue to grow at a rate of 14% a year. By 2010, sales in China will reach 8 million units. The three major Chinese automakers Changan, Changhe, and Hafei are limited to a combined 2 million units and do not posses the technology to meet the pending environmental legislation recently passed by the Chinese government. Their products are entirely based in the very low end of the market and do not offer the features demanded by consumers. Proton's line up would quickly fill the gap between these low end domestics and Volkswagen's current line up until new models could be developed. With this in mind and in an attempt to cheaply gain access to Asia, Volkswagen negotiated a ?cooperative? agreement with Proton late last year. Proton would gain access to Volkswagen technologies to meet the pending legislation and in return Volkswagen could manufacture some models or components thereof for Asian markets in Proton facilities. This is a huge advantage over the manufacture of units in China. It costs on average 10-20% more to manufacture a car in China due to substandard plants, high costs for raw materials and subcontracted parts and components, and low job productivity. Low end cars can see those premiums balloon to almost 40%. By producing cars in Malaysia in existing Proton facilities that are modern by comparison to their counterparts in China, Volkswagen can effectively produce cars for the Chinese market which meet the legislative and internal corporate requirements at a competitive price point. In retrospect, this was merely the beginning of talks and was a hint of the ?official? talks which began in June.


What we now know is that the Malaysian Government, which had previously forbidden foreign ownership of it's domestic companies, has lifted such impediments in order to facilitate the investment of Volkswagen in Proton. Currently on the table is a stock purchase of at least 30% of Proton by Volkswagen at a price of 1.65 Billion Ringget ($440 million). Also part of the negotiations is the management of Proton and it's assets including manufacturing facilities and subsidiaries, including Azlan, MV Agusta and Lotus. Proton currently is only utilizing a fraction of the manufacturing capacity it has available in it's existing facilities and that allows Volkswagen to utilize the access for manufacture of it's current range, in Asia, at a reduced rate allowing sale of those models at a competitive price. The Malaysian government see sanctuary for manufacturing jobs and a jump start on the foreign investment it has sought in opening it's markets in the first place. Talks seem to be in their final stages with this past weeks removal of Proton's Chief Executive Tengku Mahaleel Ariff. Ariff had battled for months with the board of directors over allowing a foreign company to gain majority control of the entity.

What this Means for Lotus

So what does this mean for Lotus? Volkswagen has space in it's brand portfolio for Lotus. It would neatly fit below Lambroghini (which technically is under Audi management). There are no direct product overlaps in Lotus's and the existing lineup from any of Vokswagen's current marquees. In fact, the recently announced Versatile Vehicle Architecture (VVA) by Lotus, would allow Volkswagens niche product ambitions financially more realistic. Lotus Engineering\'s expertise in aluminum assembly, as demonstrated with Jaguars XJ and forthcoming XK as well as Aston Martin's current product line, could assist Audi with it's thus far unrealized desire for a totally aluminum based line. Volkswagen's CEO has made it well known that he admires Lotus and the Elise. His daughter even drives one!

Lotus would gain access to the worlds most advanced engine technology as found in the FSI series currently being introduced throughout the Audi line. A 2.0 Turbo 4 cylinder engine would be a perfect fit for future Elise models. This engine has more accessible torque characteristics than the currently employed Toyota unit and offer better tuning capability. A 4.2 V8 as found in the recently announced RS4 would be a good match for future Esprit models.

The deal also gives Volkswagen access to the prestigious MV Agusta motorcycle company which Proton gained control of this year. Audi's routes can be traced back to Auto Union AG which consisted of several brands including DKW, NSU and to a lesser extent Wanderer. All of these marquees offered 2 wheeled vehicles. The recent resurgence of the motorcycle market has sent Audi back to it's roots. That soul searching recently resulted in the several non motorized offerings thought the Quattro GmbH division. By acquiring MV Agusta, Volkswagen gains instantly access to advanced motorcycle technology. It also gains the recent R and D work performed by Lotus to develop the MV Agusta brand even further. All of this information would allow Volkswagen to either expand the Audi (or one of it's subsidiaries) lines into the two wheeled market or simply continue to develop the MV Agusta line. They may even develop a multiple brand lineup strategy combining the two previous possibilities. Either way, it would give Volkswagen a huge lead over other auto manufacturers in the motorcycle market.

The coming months should prove to be a turning point for Lotus. It is preparing to make announcements on 2 new Lotus badged models as well as production of a Proton badged version of the Elise. Lotus will also make official it's decision as to the assembly location of the new Esprit. It will be interesting to watch the effects of the Volkswagen acquisition on the future of Lotus and it's current product plans. This could very well prove to be a match made in heaven. Only time will tell.