China's Zhejiang Geely Holding Group has agreed to buy a 49.9 percent stake in Malaysia's national carmaker Proton from its owner DRB-HICOM Group, the two sides announced at a press conference on Wednesday.
Geely also agreed to buy a majority share of 51 percent in Lotus, a former British sports car brand which was acquired by Proton in 1996.
The price of the stake sales was not disclosed, and the two sides expected to reach a definitive deal before the end of July.
With Proton and Lotus joined the Geely Group portfolio of brands, Geely will strengthen its global footprint and develop a beachhead in Southeast Asia, said Li Donghui, executive vice president and CFO of Geely.
Proton, which was founded in 1983 by former Malaysian Prime Minister Mahathir Mohamad, has been under-performing in recent years and relied heavily on government loans to continue its operation.
Geely, headquartered in east China's Zhejiang Province, rose to stardom in 2010 when it bought Volvo Cars from Ford. Since then, it has successfully revived the struggling brand.
In 2016, Geely sold 1.3 million cars globally, including around 766,000 in the Geely brand and around 530,000 Volvo cars.
"Geely is full of confidence for the future of Proton," said Li, adding Geely also aims to unleash the full potential of Lotus cars thanks to experience accumulated through Volvo's revitalization.
Syed Faisal, DRB-HICOM Group managing director, said this deal will be the catalyst to elevate a brand that Malaysians resonate with.
"Our intention was always to ensure the revitalization of the Proton nameplate. It was Malaysia's first national car brand and has more than 30 years of history," he said.
Yet Geely still has a long way to go on Proton, even if they have successfully managed to revive Volvo.
Data from the Malaysian Automotive Association shows that Proton produced some 100,000 units of cars in 2016 but only sold some 72,000 units, with a market share of 14 percent, behind domestic carbrand Perodua and is on the edge of falling behind Honda.
A binding condition for the Malaysian government to grant credit to Proton is to seek a foreign strategic partner (FSP). DRB-HICOM said in a statement in February that it hopes a FSP can immediately increase the production capacity of Proton's manufacturing plant in Tanjung Malim, which now has a low utilization rate.
"The Malaysian automotive market is not big enough, and with a small market, it becomes more challenging to put in a lot of money to fund R&D without proper volume in return," said Johari Abdul Ghani, Malaysia's second finance minister, when attending the event on Wednesday.
He noted that Proton also lacks economies of scale to bring down their cost in order to remain competitive with ability to lower the selling price.
Mohd Shanaz Noor Azam, an analyst with Malaysia's CIMB Bank, estimated that Proton may need an annual production of between 150,000 to 200,000 units to break even.
"It's very positive for both parties, because Proton will get back on track for recovery, Geely will have a good entry point for the right-hand drive markets, and it's also a good deal for DRB-HICOM as it won't have any drag from Lotus cars," he said.
