I’m sure many of you who have been following the whole Proton-Volkwagen strategic tie-up soap opera are wondering, “What’s with the rather unexpected end result?”.

After all, it was only slightly more than a week ago that two financial papers reported of an imminent positive end result within a matter of weeks. All of a sudden, this bombshell, and naturally people are starting to believe the whole show was in fact an act, or a game even, to manipulate Proton share prices for the benefit of those with insider information.

In reality, things were actually looking positive – although nothing was confirmed – until last Friday or so. Sources reveal a meeting was held – one of the few final ones before the whole deal was to have been given the solid green light — so all parties involved could look at the big picture.

But sometime before this meeting, Proton’s management had a meeting with the government to appeal against this strategic alliance plan. Proton presented a road map of current achievements and future goals.

Somehow they managed to convince the government not to go ahead with the agreement, and to give them a second chance to turn around Proton, which they believed was already on the verge of a turn-around because of recent achievements such as the Proton Persona and export deals with China and Iran. The China deal was especially sweet: 30,000 completely built up Proton GEN2s in a rebadging deal with 80,000 to be assembled there by 2012 – a deal worth RM4 billion.

Convincing the government was not that difficult a thing to do considering they were not completely happy with the terms that Volkswagen had put down on the table in the first place. The people on the street — including you and me — will never know what exactly was in these terms and conditions – all we know are little bits and pieces regarding the formation of a new company that is majority held and controlled by Volkswagen and have core Proton businesses injected into it.

The terms and conditions apparently were completely skewed towards Volkswagen’s benefit and we really cannot blame them as Proton in its current state really doesn’t have much to offer other than a plant in which to build Volkswagen cars in and a few car platforms. Its dealer network is not one of the best around — too many dealers and the salesmen do not actually know how to sell cars. It would also be interesting to find out why some engineering consultancy jobs are given to LG CNS instead of Lotus Engineering. [Source]

So it was decided that Proton could still hold on and fight for the moment and any strategic tie-up should only happen when Proton is in a stronger position to negotiate. In its current weak position, anything that happens with a foreign partner would be more of a foreign takeover rather than a mutually beneficial strategic tie-up. Proton has presented a roadmap to the government on how it plans to achieve that stronger position, and they have been given strict performance targets according to the road map. If Proton succeeds, good – if not, the whole soap opera will likely start again. This is a second chance of sorts given to Proton by its majority stakeholder as per request from Proton’s management themselves.

We should give them the benefit of the doubt for the moment, considering we can now see a genuine desire to improve and positive results have come out of this desire. Proton has to improve the competitiveness of Proton cars in the international market – it cannot sell cars based on pure cheaper pricing without any other advantages forever. The Koreans are also starting to raise their prices, and Hyundai has even started to move upmarket with the RWD V8 Hyundai Genesis. This requires Proton cars to be up to date with the rest of the world in terms of technology and quality.

We are still making what are considered to be barebones plain vanilla cars. Building modern cars requires R&D. R&D requires money. Money requires more profit per car, and that is achieved with better economies of scale which reduces cost of making the car. Economies of scale requires more sales, which is one of the reasons why a tie-up with a foreign partner was seen as necessary — for reasons like sharing of key parts which improves economies of scale.

For now the decision has been made, and those who are crying over their shattered dreams of cheap Proton-badged Golfs to drive cannot really do anything about it. The next thing to look forward to from Proton is the new BLM in 2008 which is the long awaited new Proton Saga, an improved Campro engine with variable intake and CPS cam profiling, and a people carrier model expected in 2009.