This is a continuation of old seadogs article on Proton titled Proton Bullshit.
For this post to have context, I suggest you read Proton Bullshit first.
The hardest thing to do in a turnaround is to ramp up sales. And ramping up sales is the last thing one should do.
Thus what one does, is to rapidly bring cost down to a point where one can break even at the existing sales volume and rate.
By capping revenue to the existing sales rate and volume, it forces management to take out cost and you keep taking it out until you reach BE.
In taking out cost, suddenly cash flow improves and with the improvement in cash flow, interest expense starts to drop and it can drop quite significantly. That is where the “first” profit comes from.
Once the new break even (BE) point has been achieved,then you can look at growth again. the trick is to grow revenue faster than cost.
In MAS case, MAS had an under priced service so Idris had a few buttons he could push which would improve revenue with out growing sales.
Proton unfortunately doesn’t have the same leverage as either Proton and / or their distributors (EON/EDAR) had already over priced the car with loads of stuff that customers never needed but had to pay for.
If you watch MAS carefully what they are now doing is cleverly selling “excess capacity” to partner airlines. Optically, it keeps planes full which is good and it protects the need to discount (ala air asia) to fill seats. The cheapest way to Los Angeles fron KL on MAS is to buy your ticket on Air India…Kul-Lax but you will fly on a MAS plane!
Again Proton doesn’t have the same leverage as MAS. Proton product cycle is short – 18 months. Means every 18 months they have to put out a face-lift or a new model. But to achieve economies of scale, each model must sell a least 500,000 units to achieve unit cost competitiveness.
In MAS it is refocusing to maximize connectivity. So you work with partners to fill each others planes, leveraging each partners advantage but giving customers seamless choice of destinations.
For Proton, connectivity means product range. And this is what Proton can ill afford to do. If each model needs to sell a minimum of 500,000 units to achieve economies of scale, and it has a refresh rate of every 18 months and it needs at least 4 categories of cars to offer choice then in theory proton needs to sell 2 million cars every 18 months.
The next dissimilarity between Proton and MAS is in sales and distribution. MAS can further take out significant cost form its sales and distribution network by selling on line and while agents today are groaning and moaning, the reality is as a customer I want MAS to to online so I can seriously price shop. On top of that, tickets are becoming paperless and soon we will fly “ticket less.” All there changes in consumer preferences are to MAS’s benefits as it drives down cost.
Proton on the other hand will incur massive amounts of cost in each new market it enters. The most expensive being the cost of establishing your brand. the the car has to be priced competitively relative to the competition. So price is dictated by the market and not Proton. And when the market dictates price, all inefficiencies get discounted out. Only with tariffs and protection can the cost of inefficiency be passed on to the consumer – this is the situation in Malaysia where all other brands had to price their cars relative to Protons pricing. In 1999, in the UK, for the same price of a WIRA the UK customer had more than 100 choices of competing models and variants to choose from. In Malaysia, the customer had ZERO choice. So as much as Proton wishes to export it will be forced to do 1 of 2 things – export at a steep discount so that the importer in that country has sufficient margin to make, to cover cost of marketing and sales, or export at break even and support the importer with marketing dollars to cover those costs. So selling 30,00 cars as Taxis is actually a clever move as it creates a small car parc which creates brand awareness, hence no need marketing ad distribution cost but the brand gets screwed.
So the long and short of it, if the powers that be really think Proton can be turned around, then its a reflection of how STUPID they are or how STUPID they think we are.