Auto player DRB-Hicom Bhd’s negotiations with Germany-based auto giant Volkswagen AG to assemble its cars here have run into a snag.

Sources say talks between the two companies hit a brick wall following interference from certain government-linked bodies that forced the diversified group to cease discussions with the German automaker.

Officials close to DRB-Hicom confirmed that there was some difficulty in the negotiations, saying this occurred about three weeks ago but did not want to elaborate.

At press time, it was not clear what the government’s intentions were or why DRB-Hicom’s plans were scuttled. But industry officials do not rule out national automaker Proton Holdings Bhd and Volkswagen coming back to the negotiating table.

It is believed that in recent months, Proton’s management has been leaning towards collaborating with a foreign partner on its operations in Malaysia and also on its subsidiairy Lotus plc.

It is not known if the scuttled talks have anything to do with Proton’s plan to get a strategic partner. Proton and Volkswagen have been engaged in talks on forming a strategic partnership and possible equity participation by the German carmaker since 2004 but no deal has materialised.

To recap, in 2004, Proton announced that it was looking at teaming  up with Volkswagen, which would enable the former to tap the latter’s technical expertise. Volkswagen in return would be able to use the spare capacity at Proton’s state-of-the-art Tanjung Malim plant to assemble its cars. But the talks were called off in January 2006.

At present, Euromobil Sdn Bhd, a unit of the DRB-Hicom group, is a dealer of Volkswagen cars. Euromobil is wholly owned by Edaran Nasional Bhd, which in turn is a 79%-owned unit of DRB-Hicom.

Talk that Volkswagen cars will probably be assembled by DRB-Hicom has been around for sometime now. These cars would have been for the Asean market, insiders say. 

The Edge had earlier reported that the contract with Volkswagen, if it materialised, was likely to be for the assembly of smaller Volkswagen marques such as the Polo and the Golf.

At press time, it was not clear if the decision to hold back DRB-Hicom’s assembly plans would derail its import of the German brand. Under its wholly-owned unit DRB-Hicom Auto Solutions Sdn Bhd (DHAS), the automaker has the approved permits (APs) to import Volkswagen cars, among other makes.

An industry player, however, says the latest development is unlikely to hinder DRB-Hicom’s import of Volkswagen cars since the appointment of DHAS as the importer became effective in April this year.
Lately, the talk that DRB-Hicom may assemble Volkswagen cars has intensified. The Edge also reported that the group was eyeing the lucrative deal for its assembly plant in Pekan.

The hitch surfaced in the wake of recent reports that DRB-Hicom and Chevrolet may go their separate ways. Two years ago, DRB-Hicom and Chevrolet had teamed up via joint-venture company Hicom-Chevrolet Sdn Bhd to sell Chevrolet cars in Malaysia. US auto giant General Motors Corp has 51% equity in Hicom-Chevrolet while the remaining 49% is held by DRB-Hicom.

Nevertheless, industry players do not expect the snag and the parting of ways to affect DRB-Hicom’s bottom line.

“Things remain status quo for now as the Volkswagen deal has not been signed. It would have a big impact if DRB-Hicom had commenced assembling Volkswagen cars,” a party familiar with the group says.

Depending on the local content, Volkswagen cars assembled in Malaysia would be as much as 30% cheaper, which would boost sales. Besides, DRB-Hicom would likely be paid for assembly services, which would further impact its bottom line.  

For FY2009 ended March 31, DRB-Hicom posted a net profit of RM660.5 million on the back of RM6.1 billion in revenue against the previous year’s RM292.4 million and RM4 billion respectively. The huge jump in net profit was due to the sale of DRB-Hicom’s 20.2% stake in EON Capital Bhd to Primus Pacific Partners for RM1.3 billion cash, which resulted in a one-off gain of RM567 million.

The automotive business contributed some RM4 billion or 64% to revenue but posted a loss of RM17 million in the last financial year. DRB-Hicom’s largest shareholder is Tan Sri Syed Mokhtar Al-Bukhary, with a 55.9% stake.

DRB-Hicom’s stock hit its 52-week high of RM1.33 on Aug 7. It, however, closed at RM1.12 last Friday.



This article appeared in The Edge Malaysia, Issue 769, Aug 24-30, 2009.