Shares in Proton plunged today on news that Volkswagen has scrapped plans for an alliance, raising concerns the national carmaker will not be able to survive without a foreign partner.

Volkswagen chief executive Bernd Pischetsrieder told auto analysts in Michigan that the alliance which has been under negotiation for the past year had collapsed and that any future cooperation would be very limited in scale.

"When it comes to Proton in Malaysia, we had a very specific idea of how we wanted to proceed there. Unfortunately the Malaysian government, Khazanah and Proton had different ideas," Pischetsrieder said in a presentation on the company's website.

"Therefore what we wanted in the cooperation with Proton will not materialise," he said. Khazanah is the Malaysian government's investment arm which holds about 38 percent of the troubled carmaker.

Proton's shares hit an intra-day low of RM5.10 today, down RM1.25 or 19.7 percent from Thursday's close - a record one-day drop, wiping off RM687 million from its market value.

In afternoon trade, it regained some lost ground to reach RM5.65.

Proton said it was still trying to confirm the move by the world's fourth-biggest carmaker.

"We have not received any response from Volkswagen. We are waiting for an official response," spokesman Yusri Yusuf told AFP .

The alliance with Volkswagen was seen as an opportunity to turn the business around by reversing Proton's reputation for poor quality and a lack of innovation which have seen its market share sink in recent years.

Analysts warned that Proton's survival hinged on its ability to find a suitable partner to enable it to penetrate foreign markets as the Malaysian industry becomes ever more competitive.

"We view the latest development negatively. This is a major bombshell for Proton in terms of its long-term survival," said an automotive analyst with TA Securities.

Proton "cannot survive if they do not have a foreign partner (because they lack) the technological expertise to penetrate the foreign market," she said.

"At this juncture, we don't think that Proton is in a serious discussion with any other manufacturers for a potential tie-up now."

Investors cut their losses

Observers also expressed concern over Proton's ability to manufacture attractive, high-quality models - of which it is desperately short - without the expertise of a foreign partner.

"Without a strategic partner to embark on joint development, we are doubtful on Proton's ability to develop a hot-selling new model," a local brokerage analyst said.

"Investors should cut their losses as we do not expect a strong earnings recovery, given the challenges faced by Proton without a strategic partner, such as dated models, lack of economies (of scale) and concerns on quality," he said.

Quashing intense speculation that Volkswagen was preparing to buy a controlling stake in the company, Pischetsrieder said any future cooperation between the two automakers would be limited.

"What we are investigating now is whether on a few isolated projects we can support Proton, and I would like to put the emphasis on exactly that word, to support Proton and not to have any joint programmes or joint ventures or so on but to support Proton," he said.

Proton used to sell six out of every 10 new cars in Malaysia but sales have been tumbling as the national automaker feels the bite of growing foreign competition while the government whittles away protection.

From a market share of 60 percent in 2002, Proton saw a decline to 48 percent in 2003 and then 44 percent in 2004.