Strategic Business PLAN FOR Proton Holdi PDF

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STRATEGIC BUSINESS PLAN FOR PROTON HOLDINGS BERHAD Written by Mary Salang CORPORATE STRATEGY

July 27, 2018

Important remarks: This paper is an assignment, written by an MBA student. Some of the information contained in this paper may be inaccurate and/or outdated. This document can only be used as point of reference. It is not advisable to use the content of this paper for any professional purpose.

Table of Contents 1.0 Executive Summary.................................................................................................................. 1 2.0 External Environmental Scanning.......................................................................................... 2 2.1 Past Success and Current Challenges......................................................................................2 2.2 SWOT Analysis.......................................................................................................................3 2.3 Porter’s Five Forces................................................................................................................ 4 2.4 The Ansoff Matrix................................................................................................................... 5 2.5 Competitive Analysis and Advantage..................................................................................... 6 2.6 Industry Analysis.....................................................................................................................8 3.0 Internal Environmental Scanning........................................................................................... 8 3.1 Partners....................................................................................................................................8 3.2 Organization and Employees.................................................................................................. 9 3.3 Product Offerings.................................................................................................................. 11 4.0 Strategy Formulation..............................................................................................................12 4.1 Strategy Hierarchy Plan........................................................................................................ 12 4.2 Mission..................................................................................................................................12 4.3 Objectives..............................................................................................................................13 4.4 Strategies............................................................................................................................... 14 4.5 Policy and Certifications....................................................................................................... 14 5.0 Strategy Implementation........................................................................................................ 15 5.1 Marketing Plan...................................................................................................................... 15 5.2 Marketing Program............................................................................................................... 16 5.3 Financial Projections............................................................................................................. 17 5.3.1 Sales Forecast....................................................................................................... 17 5.3.2 Expenses Budget...................................................................................................18 5.3.3 Income Projections............................................................................................... 19 5.3.4 Breakeven Analysis...............................................................................................20 6.0 Evaluations and Controls....................................................................................................... 21 6.1 Key Performance Indicators (KPIs)...................................................................................... 21 6.2 Actual Results........................................................................................................................21 6.3 Risks......................................................................................................................................22 7.0 Conclusion................................................................................................................................23 References...................................................................................................................................... 24

1.0 Executive Summary PROTON Holdings Berhad (PROTON), launched its first car, PROTON Saga, in 1983. Being the country’s first and the only national car at that time, PROTON raised to fame and quickly became the number one choice of family cars in Malaysia. However, 14 years later, in 1997, Malaysia was hit by the Asian financial crisis. PROTON’s sales started to decline and keep declining. It controlled more than 70% market share during the 1990s, now it dropped below 10% in 20171 (Kaur, 2016). It used to be ranked number one automaker, now the third in the country. In 2002, it produced and sold more than 200,000 units of cars, but now in 2016, only managed to sell just above 70,000 units, which is below 100,000 units to break-even2 (Zainul, 2017). In March 2016, PROTON reported a net loss of RM1.46 billion3 (Lin, 2017). Due to its continuous losses, PROTON’s holding company, DRB-HICOM, sold 49.9% stake to a Chinese automaker, Zhejiang Geely Holdings Group (known as Geely), in 20174 (Leong, 2017). After Geely’s take-over, PROTON is undergoing a 10-year Transformation Program5 (Foon, 2018). So, the question is, can PROTON revive its business and what does it take for PROTON to recover from its losses? The objective of this paper is to provide a Strategy Plan for PROTON, by detailing the four key elements of Strategy Management6 (Wheelen, et al 2015); (1) Environmental scanning, (2) Strategy formulation, (3) Strategy implementation, and (4) Evaluations and Controls . PROTON’s new management should review and examine all of these four elements as part of their transformation plan.

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2.0 External Environmental Scanning 2.1 Past Success and Current Challenges The Blue Ocean. During the 1980s, the automotive market in Malaysia was conquered by Japanese cars such as Datsun and Toyota7 (Yap, 2012). When PROTON entered the market in 1983, it was the first and the only national car in Malaysia. PROTON created what is called the “Blue Ocean”, which refers to unchallenged market environment, where competition is not relevant8 (Kim, W.C and Mauborgne, R., 2015). In blue ocean business environment, there was a huge opportunity for PROTON to make profit because it created demand for Malaysians to buy local national cars, rather than competing with imported Japanese cars. PROTON’s cars were reasonably priced making it affordable for Malaysian families to buy. PROTON also received strong government support, after all, PROTON was the brainchild of the then prime minister, Tun Dr. Mahathir. PROTON maintained its number one standing for two decades, market share reached the peak in 1993 at 74%9 (NST, 1995) and number of cars sold reached the highest in 2002 at 214,373 units10 (MAA, 2002). The Red Ocean. The real challenges for PROTON came after Perusahaan Otomobil Kedua Sendirian Berhad (also known as Perodua) joined the automotive industry, positioning itself as the second national badge cars. It offers small and fuel-efficient compact cars with cheaper prices than PROTON. This triggered the “Red Ocean” situation where tight competition results in bloody red ocean of competitors fighting over a shrinking pool of profit (Kim, W.C and Mauborgne, R., 2015). As the impact of the red ocean battle, Perodua took over PROTON in 2006, by winning 42% of the market share with 152,733 cars sold. PROTON lost its number one spot for the first time to Perodua. Its sales dropped to 115,538 units and market share shrunk to 32 percent11 (Raja, 2007). Still bleeding from the battle, PROTON’s financial performance continues to show red. It reported massive financial losses of RM1.46 billion for FY201612 (Lin, 2017). Its Tanjung Malim plant is currently being underutilized for producing below

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break-even of 100,000 units annually. And based on J.D. Power 2017 Malaysia Customer Service Index (CSI), PROTON ranked number 9 (out of 10) due to poor customer service quality13 (Lye, 2017).

2.2 SWOT Analysis Lets look at SWOT Analysis for PROTON. Refer to Diagram 1 below. SWOT helps determine the attributes that are helpful in order for PROTON to achieve its objectives.

Diagram 1: SWOT Analysis for PROTON

Strengths: Being the country’s first national car since 1983, PROTON has long standing legacies for a strong customer base. PROTON can meet different customers needs with varieties of car models. PROTON’s cars are affordable and known for its value-for-money.

Weaknesses: PROTON perceived to have low quality of product by the public. PROTON do not have enough experts in advanced automotive engineering technology. PROTON’s production costs is high because of its high-priced spare-parts and costly technologies.

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Opportunities: PROTON’s Tanjung Malim plant can produce 500,000 cars annually. Geely’s R&D center is equipped with Swedish technology and 10,000 engineers from 46 countries14 (Kanyakumari, 2017). With Geely, PROTON can tap into 1.4 billion new market segment in China. PROTON always receive government support.

Threats: PROTON is now in the red ocean market, fighting for shrinking market share. Fuel price increase can impact PROTON’s sales. Malaysia market is saturated and slow. The automotive technology is changing and PROTON is not responsive fast enough.

2.3 Porter’s Five Forces

Diagram 2: Porter’s Five Forces for PROTON

By evaluating the forces impacting competition in automotive industry, PROTON can identity strategic strengths and weaknesses. Then it can formulate a plan which includes: (1) positioning PROTON’s capabilities to defend against competitors; and/or (2) improving PROTON’s position through strategic moves; and/or (3) exploiting change by executing an appropriate strategy before competitors recognize it15. (Porter, M.E 1979).

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In Porter’s Five Forces for PROTON, the threat of substitutes is high because car drivers can opt to use public transportation such as buses, training, motorbikes or even Grab service. Threat of new entrants is low because it requires economies-of-scale hence it is costly for new players and they are bind by tight government policies. Bargaining power of buyers is high because there are many similar products with similar price range, and the availability of other alternatives. Bargaining power of suppliers is low because PROTON can buy cheaper spare parts from China, leveraging on its partnership with Geely.

2.4 The Ansoff Matrix The Ansoff Matrix can help PROTON to plan its future growth. Igor Ansoff defined product-market strategy as “a joint statement of a product line and the corresponding set of missions which the products are designed to fulfil”16 (Ansoff, 1957). Refer Diagram 3 below, Ansoff explains four growth options.

Diagram 3: The Ansoff Matrix for PROTON (Source: The Ansoff Matrix Wikipedia)

PROTON can grow market share in the existing segment using existing offerings by selling more products or services to existing customer base, or find new customers within existing markets. In this market penetration strategy, PROTON can reduce price, increase promotion and distribution support, and upgrade its existing car models. In market development strategy, PROTON can expand into new markets using its existing

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products by targeting different customer segments, industrial buyers, new areas in Malaysia and Southeast Asia. PROTON can leverage on Geely’s product technology, increases its car output, enter into profitable and not too different market. In product development strategy, PROTON can develop and extend new products (e.g new SUV and commercial vehicles) into existing markets through joint development with Geely which has advanced R&D center, equipped with advanced technology. Finally, in diversification strategy, PROTON can diversity into Southeast Asia and introduce new offerings, but it requires risky product and market development. Because of PROTON’s synergy with Geely, this is possible and it can adopt “related diversification”.

2.5 Competitive Analysis and Advantage Table 1 below illustrates the comparisons for Top 5 car makers in Malaysia in 2017 based on a report named “Updates on the automotive industry 2017 and outlook in 2018” prepared by Malaysia Automotive Industry (MAI)17. The comparison looks into market share in percentage, units sold, price range, and whether it exports cars, and whether it sells hybrid or electric cars. PROTON’s main rivals are Perodua, Honda and Toyota.

No

1

Car Makers (Top 5) PERODUA

Market share (%) 35.5

Qty. Sold (Units)

Highest price (RM)

Export s

Hybrid/ Electric

204,887

Cheapest price (RM) 23,454

61,283

Yes

No

2

HONDA

19.0

109,511

68,422

301,928

Yes

Yes

3

PROTON

12.3

70,991

36,800

113,439

Yes

No

4

TOYOTA

12.2

70,445

66,241

510,343

Yes

Yes

5

NISSAN

4.7

27,154

64,639

180,566

Yes

Yes

Table 1: Automotive Industry Comparison for 2017, by Brands (for Top 5) (Source: Malaysia Automotive Institute)

Perodua is the second largest automobile manufacturer in Malaysia, after PROTON. Perodua can produce up to 350,000 units per year and it owns two plants in Malaysia. Perodua’s market share is 35.5% and sold 204,887 units in 2017. It targets to sell 209,000

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units in 2018 (MAI, 2018). Car prices range from RM23,454 (Axia) to RM61,283 (Alza). Its exports cars into Indonesia, Singapore, Brunei, as well as Mauritius, Fiji and Sri Lanka. Perodua does not have hybrid or electric cars yet.

Honda formed its business in Alor Gajah Malaysia in 2000 and now has 96 dealers in Malaysia. Honda is the top ‘non-national’ car brand in Malaysia. Honda’s current market share is 19%. It targets to sell 109,000 units in 2018 and estimated 18% market share. Car prices range from RM68,422 (Jazz) to RM301,928 (Civic Type R).

Toyota cars are distributed, assembled and exported by UMW Toyota Motor Sdn. Bhd. (UMWT). Toyota sold 70,445 units in 2017 and aim to sell above 70,000 units in 2018. Toyota ranked number one in J.D. Power 2017 Malaysia Customer Service Index (CSI). Car prices range from RM66,241 (Avanza) to RM510,343 (Alphard). PROTON’s Competitive Advantage Compared to other competitors, PROTON has the advantage by being the fist brand of national car in Malaysia. Another advantage is in terms of price, where PROTON is priced lower than Toyota and Honda cars, but slightly higher than Perodua. In order to address the pricing competitiveness, PROTON is already embarking on cost reduction plan, which will bring its car price even lower. Partnership with Geely will put PROTON in a more advantaged position in terms of quality and new car models. PROTON is planning to improve the quality of its cars by manufacturing the new car models using Geely’s advanced engine technology where Geely will supply PROTON with latest engines that meet the Euro 6 standards. Just like all of other Geely’s cars in China, PROTON’s car quality will also be bench-marked against Volvo’s international standard. PROTON is planning to launch new hybrid and electric cars, where Geely will provide the transmission systems suitable for such cars18 (Augustin, 2017). With these new models, PROTON hope to beat Perodua and grab bigger market share.

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2.6 Industry Analysis Matured market: According the MAI’s report, “Updates on the automotive industry 2017 and outlook in 2018”, the automotive market in Malaysia is facing maturity. Malaysia’s vehicle to 1,000 people ratio is 348.6 which is higher than Thailand 228.1 and Indonesia 87.3.

New market trends: MAI also reported that future automotive trends are electric vehicle, plug-in hybrids, green cars with intelligent mobility. As mentioned earlier, PROTON is launching new products in line with this trend to fulfill the needs for new market segments. Automotive Association (MAA)19 reported that the total industry volume (TIV) of newly registered vehicles declined by 0.6% in 2017.

Slow market growth: For 2018, MAA projected only a 2% growth. Compared to Thailand and Indonesia, Malaysia’s TIV is lower, which is 576,635 units in 2017. In Thailand, its TIV is more than 1.9 million units and in Indonesia it is more than 1.2 million units. Hence, PROTON’s strategic should include international expansion through exports.

3.0 Internal Environmental Scanning 3.1 Partners PROTON have many partners in the past. Currently, PROTON work with key partners namely, Honda, Suzuki, and Geely. PROTON collaborated with Honda Motor Company, Ltd. in producing the second generation PROTON Perdana, launched on 11 December 2013 at Putrajaya20 (Tan, P. 2013). In 2016, PROTON produced PROTON Ertiga, in partnership with Suzuki21 (Tan, D. 2016). PROTON benefits from Geely’s expertise on advanced automotive technology and Geely can help increase PROTON’s utilization rate in Tanjung Malim’s plant by using it as the main hub to produce its right-hand cars. PROTON-Geely will produce a new SUV model named Boyue by end of 201822 (Tong, M.H 2018) and many other new models. PROTON is converting all of its 1S (only sales) authorized dealers to 3S (sales, service and spare parts) or 4S (the fourth

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‘S’ includes body and paint) service centers. PROTON targets to increase its authorized dealers to 109 by end of October 201823 (Aziz, A. 2018).

3.2 Organization and Employees Below shows PROTON’s Directors, Senior Management and Head of Companies.

Picture 1: PROTON’s Chairman and Board of Directors (Source: www.proton.com.my)

Picture 2: PROTON’s Senior Management and Head of Companies (Source: www.proton.com.my)

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To date, PROTON has 9,600 employees comprising of engineers, researchers, designers, managers, and mechanics. According to Malaysia’s Deputy International Trade and Industry Minister, Datuk Ahmad Maslan, PROTON’s transformation program projected 500,000 annual production in the next 10 years. Therefore, PROTON aims to increase the number of workers to 20,000 to meet this production volume24 (Carvalho, M. 2017). As part of employees’ learning and development strategy, Proton employees will go through training at Geely's research and development centers and plants, which are located in Shanghai (China), Gothenburg (Sweden), Coventry (the United Kingdom), Barcelona (Spain) and Los Angeles (the United States).

Picture 3: PROTON’s employees and Tanjung Malim Plant (Source: Google Search)

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3.3 Product Offerings As part of its transformation plan, PROTON aims to launch three new cars in the near future. The table below illustrates PROTON’s current car models. Currently, PROTON has eight models and price ranging from the cheapest RM36,800 (Saga) to the most expensive RM113,438 (Perdana).

Table 2: PROTON’s products offerings...