Malaysia is searching for a white knight for struggling carmaker Proton but analysts say it will be a long hunt unless the government is willing to trade in its dream of a national car industry for a pragmatic foreign tie-up to reverse its fortunes.

State investment arm Khazanah Nasional, the single largest shareholder, is reportedly considering plans to allow a foreign carmaker to hold up to 20 percent equity in Proton to boost its competitiveness and improve sales eroded by foreign rivals.

The move follows the withdrawal of its Japanese partner Mitsubishi after two decades and the recent appointment of former premier Mahathir Mohamad, who created Proton in 1983 as part of Malaysia's drive into heavy industry, as adviser.

Mitsubishi Motors recently bailed out but trading house Mitsubishi Corp still holds another 7.9 percent in Proton and is believed to be in talks to sell it to Khazanah.

Analysts say foreign carmakers are unlikely to be interested in an alliance unless they can have a controlling stake in order to better position themselves for the Association of Southeast Asians Nations' (Asean) booming auto market.

Many of the key players have also stationed themselves in neighbouring Thailand to cater for the region and may not be keen in establishing another large base in Malaysia, they say.

"This is likely to be a long-drawn issue. There is not much of an incentive for technology transfer if the foreign partner does not gain control of Proton, just like in the case of Proton's previous partnership with Mitsubishi," brokerage K and N Kenanga said in a report.

Song Seng Wun, regional economist with GK Goh in Singapore, said it could be tough to draw foreign interest given the government's intention to maintain Proton's local standing.

"It's an uphill battle. Almost all the major players are already in Thailand, which has become the Detroit of Asia. So what is the pull for them to invest in Proton?" he said.

Yet analysts concur that Proton's future lies in a technology, assembly and ownership tie-up with a global manufacturer such as General Motors or Ford ahead of market liberalisation in 2005 under the Asean Free Trade Area (Afta).

GM denies talks

World's number one carmaker General Motors last week denied it was in talks to buy a stake in Proton, but said there were plans for a possible product and engineering collaboration with its South Korean unit, GM Daewoo.

OSK Securities, in a report, said a foreign alliance was essential to boost Proton's brandname internationally and create a global distribution link for it to sell its cars abroad.

Proton's RM1.8 billion new plant is designed to produce a million cars a year by 2010 but with a local consumption of only about 200,000 units, exports are key to the carmaker's survival, it said.

Proton used to sell six out of 10 new cars in the country but for the first time in years, its market share shrank to 49 percent in 2003, from 60 percent in 2002, as sales tumbled 27.5 percent to 155,420 units.

Deemed a national pride, Proton has been protected for years by high tariffs on foreign cars but it will lose its edge under Afta, where import tariffs for most products in the region were cut to below five percent from last year.

Malaysia obtained a two-year reprieve for its auto sector until 2005 but it has said it would further defer reducing duties to the required level until

Proton is pinning hopes on its new GEN-2 car fitted with its own Campro engine and two other new models to be launched this year to revive sales.

RM3 billion cash pile

With a cash pile of more than RM3 billion, it is moving aggressively to expand assembly overseas, including China, India and Indonesia and has plans to put up to 20 new models on the road in the next decade.

Proton's unit Lotus Group recently signed a deal with Rover, quashing talks that Proton intends to dispose of its bleeding British arm.

Reports last week said Khazanah was expected to make more changes at Proton following the completion of its internal revamp, as news of a boardroom tussle between Khazanah and Proton chief executive Mahaleel Ariff leaked out.

But both parties have denied any bids to oust Mahaleel and sell parts of Proton. Mahaleel, a former race-car driver whose contract was due to expire April 2005, was reappointed as chief executive last Monday.

Following a three-week suspension to facilitate its restructuring, shares of Proton Holdings - a new investment firm which took over the carmaker's listing status - fell sharply by seven percent to 9.15 ringgit on Friday. - AFP