Ttroubled national carmaker Proton may sign a deal with Volkswagen allowing a "full-fledged" audit of the company ahead of a possible tie-up, state media Bernama said today.

Citing unidentified sources, Bernama news agency said the German automaker could emerge as the frontrunner in Proton's long search for a partner, seen as crucial to the carmaker's future.

"The German carmarker could sign a preliminary agreement to enable it to do a full-fledged due diligence audit on Proton just before Christmas," Bernama said.

In Volkwagen's favour are plans it has outlined to take advantage of Malaysia's free trade agreement (FTA) with Japan to export made-in-Malaysia Volkswagen cars there by 2010, said Bernama , citing its sources.

Under the FTA, which came into force in July this year, cars made in Malaysia above 2000cc can be exported to Japan without duty, with the deal extended to all types of Malaysian-assembled cars by 2015.

Bernama said the German carmaker had also proposed to Proton that it will start off with assembling its popular mid-range Passat model, and that it was willing to pump in a large amount of money to help the Malaysian company.

Volkswagen is believed to be willing to commit as much as RM2 billion to acquire a 51 percent stake in Proton's manufacturing operations, it said.

It also said the government's investment arm, Khazanah Nasional, which owns a 43 percent stake in Proton, was the key driver in roping in Volkswagen as a strategic partner.

Local suitors

Besides Volkwagen, three Malaysian companies have expressed a interest in a stake in Proton, while the government is also in talks with PSA Peugeot Citroen to discuss possible collaboration.

Proton's managing director Syed Zainal Abidin Syed Mohamad Tahir last week said he was currently looking at "international partners" first.

Analysts say Proton needs to find a strong partner to help revive its fortunes after posting a quarterly loss of RM250.34 million in its second quarter to September 2006, as sales dwindled.

Prime Minister Abdullah Ahmad Badawi said last week talks to finalise a partnership for Proton will be postponed until the first quarter of 2007.