Malaysian Prime Minister Abdullah Ahmad Badawi declined comment when asked in Switzerland if a foreign wire report on Proton's sale to German carmaker Volkswagen AG was true. 'I don't want to comment because it is being negotiated,' he told newsmen on the sidelines of the World Economic Forum in Davos. 'Maybe it's among the proposals.'

The premier's statement is telling because he never denied it. The market certainly believed the report which said on Friday that Volkswagen had signed a deal to buy 51 per cent of the national carmaker's manufacturing arm: Proton's shares jumped smartly, by almost RM1.

Proton courted multiple bids - from Peugeot-Citroen PSA and America's General Motors - presumably to fetch best prices but Volkswagen was the most persistent suitor and, according to some industry executives, submitted a comprehensive proposal to take over the ailing carmaker and turn its fortunes around.

A Volkswagen takeover of Proton is good for a number of reasons. It's good for the market as a whole because it demonstrates to investors that Kuala Lumpur is pragmatic enough to allow foreigners to take control of what could be conceivably described as a strategic national interest.

It also removes one of Mr Abdullah's biggest headaches. The question of what to do with an ailing state-owned carmaker in an era of gradually decreasing protection amid intensifying global competition amongst carmakers was always going to be a problem for Mr Abdullah. His predecessor, the intensely nationalistic Mahathir Mohamad, was Proton's creator and he liked the idea of Proton being sold to foreigners about as much as children contemplate castor oil.

The taking over of Proton by German interests will create some pain but it will be good for the country going forward. There is no such thing as a free lunch as Volkswagen is eyeing Proton not for altruistic reasons but because it gives them access to South-east Asia's largest passenger car market. Thanks to the Asean Free Trade Area pact, it also allows it entry into 10 regional markets. Finally, it allows Volkswagen access to Japan courtesy of a free trade agreement Tokyo signed with Kuala Lumpur last year.

But by taking over Proton's manufacturing unit, Volkswagen will also take over control of research and development and its vendor supply chain. And there will be pain for the latter, currently numbering over 120 companies. The German manufacturer sells over eight million cars a year not least because it is fussy about quality.

Expect VW to globally outsource, expect it to bring German suppliers to Malaysia and expect serious attrition among Malaysian car-component makers. Only the fittest and most efficient will survive which is bound to cause a political firestorm in Malaysia. But Mr Abdullah probably knows this and should be prepared for it.

But Proton will no longer have to do research and development work. Nor will it have to worry about new models - one of its biggest problems currently - because Volkswagen could simply rebadge its cars as Protons, not unlike what Mitsubishi did with Proton over 20 years ago. And if Volkswagen succeeds in making Malaysia its base for export to the rest of Asia, then Kuala Lumpur, which would still own Proton's holding company, will still benefit. Deep down, the government has always known this.

Look at Perodua, Malaysia's other national car. Its manufacturing arm is majority-owned by Japan's Daihatsu, a unit of global giant Toyota. Perodua isn't just successful and profitable. Last year, it overtook Proton as the highest selling car in Malaysia.