Proton and Volkswagen deal is off

The government and Volkswagen said today they had shelved long-running talks about an alliance between the German firm and Malaysia's national carmaker Proton.

Malaysia's state investment arm Khazanah Nasional, which controls Proton, said it had discontinued negotiations with Volkswagen.

The German carmaker also said in a statement it and the Malaysian government had for the time being decided "to shelve their joint talks" about the alliance.

The talks began in October 2004 aiming to revitalise Proton, which experts say has suffered from stiff competition, a lack of new models and a reputation for poor quality.

Khazanah said it had also ended talks with General Motors. The government had earlier said it would turn to the US auto giant if talks with Volkswagen failed.

An improvement in Proton's domestic sales and exports had led to the decision to halt negotiations, the state investment arm said in its statement.

"The government is therefore of the view that Proton's management should be allowed to continue with its plans to further strengthen the company," it said.

But it also left the door ajar for a future tie-up, saying a strategic alliance could be considered at a later date.

"Talks with Volkswagen have not broken down. They may have discussions later on," a senior finance ministry official, who wished to remain anonymous, told AFP.

"For the time being, Proton will not enter into any pact with any car manufacturer. The government has decided that Proton will be managed by itself," the official said.

Proton has suffered a sharp decline in market share and been hit by losses, including a 46.75-million-ringgit loss over the three months to June.

A deal was expected to boost Proton's efforts to reclaim top spot in Malaysia and gain a foothold in the lucrative European market.

But such partnerships were hard to forge because of the government's reluctance to cede control of a key national company to foreign hands, analysts said.

"We can only speculate but management control and the shareholding structure was probably the main issue. The talks have really dragged on," Kurnia Insurans chief investment officer Pankaj Kumar told AFP.

"Proton cars have been selling well locally for the last few months but at the end of the day, Proton has to be competitive globally," he said.

"I don't think it has been that innovative. The new models are mostly re-badged versions of previous models," he added.

A Volkswagen spokesman said in Frankfurt that the group was now looking for "new commitments" in Southeast Asia.

"The company continues to pursue the goal of developing a successful foundation for production and distribution in Southeast Asia for years to come," the firm said.- AFP