It is crunch time for the Malaysian government as it ponders three separate proposals to rescue the country's ailing national car-maker, Perushaan Otomobil Nasional Bhd, or Proton. Global auto giant Volkswagen AG and two other Malaysian auto groups - Naza Holdings and DRB-Hicom Bhd - have submitted plans to become the government's strategic partner in Proton, which is languishing from weak domestic sales and mounting competition from Japanese and South Korean car-makers.

The three groups have submitted bids that could help the government raise more than RM1.6 billion (S$695 million) from the sale of a strategic stake in Proton.

On paper, regional auto experts say that Germany's VW would be an ideal fit for Proton, which needs to establish a tie-up with a foreign manufacturer that can deliver technological know-how to produce new models and help the Malaysian car company break into regional markets.

But Naza and DRB-Hicom, which are headed by two Malaysian tycoons who wield significant political clout, are putting up a tough fight, colouring their bids with nationalistic arguments, say government officials and financial executives involved in ongoing negotiations.

Even if a foreign group is to be grafted to help Proton progress, Naza and DRB-Hicom are insisting that control of the national car company must remain in local hands.

Malaysian government officials have confirmed that there are three separate proposals for Proton, and they say that Prime Minister Abdullah Ahmad Badawi is expected to make a final decision on the matter as early as next week.

A Finance Ministry official, who declined to be named, said: "Each proposal has its strong points. The priority here is to make Proton competitive and to do it quickly."

What the Malaysian government decides will have far-reaching implications.

Bankers and investment analysts say that a tie-up between Proton and VW would send a positive signal to potential foreign investors that Datuk Seri Abdullah's government is ready to liberalise the country's heavily protected auto industry and other economic sectors with limited foreign competition.

More importantly, a Proton-VW tie-up could transform Malaysia into a serious contender for Thailand's position as the regional auto hub. It could also turn South-east Asia into a battleground between Japanese auto companies, which have long dominated the region's motor vehicle market, and their US and European rivals, who are struggling in their own domestic markets.

"Everyone is getting smoked by the Japanese," says Mr John Bonnell of Bangkok-based Automotive Resources Asia Ltd, a consultancy that specialises in the regional auto market. "A group like VW would be the competitive face against the Japanese in this region."

That, in turn, could spur fresh investments into the region by international car part suppliers, he says.

Regional ramifications aside, analysts say that the Malaysian government cannot afford to delay fixing Proton's troubles.

Proton has seen its market share - once more than 65 per cent of Malaysia's passenger car sales - shrink to below 40 per cent by rivals such as Hyundai of South Korea and Nissan of Japan.

RHB Research, which is owned by Malaysia RHB Bank, estimates that Proton will incur losses close to RM771 million for the financial year ending March this year, down from a small profit of RM46 million th company posted in the previous financial year.

According to Malaysian government sources, VW is proposing to acquire a controlling 51 per cent interest, but only in Proton's fully-owned manufacturing arm. That way, sources say, Proton, which is listed on the Malaysian stock market and is 64.5 per cent owned by the government, will remain a Malaysian-controlled company.

"The VW proposal is by far the most comprehensive because it will offer Proton technology to build new product lines, the reach into regional markets and technology transfer," says a banker familiar with the proposals for the car maker.

Naza, which is owned by businessman Nasimuddin Amin, is proposing to acquire a controlling 30 per cent in Proton before striking an alliance with a foreign car maker. People familiar with this deal say that the group is valuing Proton's shares at RM10 apiece and that a 30 per cent interest would cost roughly RM1.64 billion.

Government sources say that DRB-Hicom, which is controlled by entrepreneur Syed Mokhtar Al-bukhary, has indicated that it will match the Naza offer.

Apart from matching VW on pricing, Messrs Nazimuddin and Syed Mokhtar are lobbying that Proton must retain its national identity and that a Malaysian private group must lead the joint-venture with a foreign party.

But government officials involved in Proton's turnaround plans say that nationalist sentiments must mesh with economic realities.

"The national agenda for Proton is always a priority. But the pressing issue now is to ensure that we strike a formula that will allow Proton to thrive in a very competitive market," says a senior government official involved in the Proton restructuring.

What's at stake

Global auto giant Volkswagen AG and two Malaysian auto groups - Naza Holdings and DRB-Hicom Bhd - have submitted plans to become the government's strategic partner in Proton.

Volkswagen

Experts say a tie-up with VW will offer Proton technology to build new product lines and help it break into regional markets.

It will also send a positive signal to potential foreign investors that the Malaysian government is ready to liberalise the country's heavily protected auto industry and other economic sectors with limited foreign competition.

It could turn Malaysia into a serious contender for Thailand's position as the regional auto hub.

Naza and DRB-Hicom

Both groups, which are headed by Malaysian tycoons, insist that control of the national car company must remain in local hands.