Geely grabs a new growth engine on the cheap

Group Managing Director DRB-Hicom Berhad Syed Faisal Albar (2nd L) and Executive Vice President and CFO Zhejiang Geely Holding Group Daniel Li (Li Donghui) (2nd R) shake hands as Malaysia's Minister of Finance II Johari Abdul Ghani (C), Vice President International Business Zhejiang Geely Holding Group Victor Yang (Yang Xue Liang) (R) and Group Director Corporate Strategy Planning and Business Development DRB-HICOM Berhad Khalid Abdol Rahman (L) look on after a signing of agreement ceremony in Putrajaya, outside Kuala Lumpur on May 24, 2017. — AFP
The Geely Automobile Holdings logo is pictured at the Auto China 2016 auto show in Beijing, China April 25, 2016. — Reuters

HONG KONG: Zhejiang Geely is grabbing a new growth engine on the cheap. The Chinese carmaker is poised to buy nearly half of Malaysia's Proton and a slightly bigger stake in its Lotus sports-car subsidiary. Reversing Proton's long decline won't be easy, especially as a back-seat driver. But this looks like a piece of bargain-hunting to set alongside Geely's previous purchases of Volvo Cars and London's black cabs.

Wednesday's agreement in principle with DRB-HICOM, Proton's current owner, will be followed by a definitive deal in the next couple of months. The structure is not perfect: Geely would stand a better chance of engineering a turnaround if it had majority control. Even so, this may be a first step in that direction.

Though the two sides provided no financial detail it seems safe to assume only small sums will change hands. Proton is a national champion that has withered away despite – or perhaps because of – repeated state support. Last year it sold just over 72,000 cars at home, industry data shows, giving it a mere 12.5% of a market it once ruled. CIMB analysts recently valued Proton at just RM1.15 billion (US$268 million).

So while reviving the maker of the Perdana and the Persona will not be easy, Geely is probably not taking a big financial risk. In return, there are several potential payoffs. First, mass-market car-making is a volume game: the wider manufacturers can spread their costs, the better their margins. Adding Proton hardly makes Geely a rival to Volkswagen or Toyota but it does offer a little boost to Geely and Volvo's overall sales of about 1.3 million vehicles last year. Second, there could be useful technology transfers from Geely to Proton and from Lotus to the Chinese.

Third, China's most internationally minded carmaker could press Proton's underused factories into service, making Geelys for sale in South Asia. The region holds plenty of promise as the newly-affluent swap scooters for four-wheeled vehicles – hence the intense focus it has attracted from Japan's big automakers.

In February IHS Markit forecast car sales there would grow 5.9% this year, faster than any other part of the world. That sounds like a bandwagon worth joining.

Context news

>> Zhejiang Geely Holding Group, the Chinese carmaker, on May 24 agreed in principle to buy 49.9% of Proton, the Malaysian carmaker, from local conglomerate DRB-Hicom for an undisclosed sum.

>> Geely said the companies had reached a "binding heads of contract", and planned to sign a definitive agreement by mid-July, subject to regulatory approval.

>> Geely will also acquire 51% of Lotus, the sports carmaker owned by Proton. Geely said in a statement it, Proton and Lotus would explore "synergies in areas such as research and development, manufacturing and market presence".

>> The unlisted Geely controls about 44% of the shares of Hong Kong-listed affiliate Geely Automobile, which has a market value of about US$13 billion. The parent company bought Sweden's Volvo Cars from Ford in 2010. In 2013 it bought the maker of London's black taxis out of administration.

>> Malaysia gave Proton financial aid last year, on condition that it found a strategic foreign partner. — AP