By Soraya Permatasari and Haslinda Amin

Oct. 12 (Bloomberg) -- Proton Holdings Bhd., Malaysia's biggest carmaker, will collapse unless it finds an international partner such as Volkswagen AG, said former premier Mahathir Mohamad, who set up the company more than two decades ago.

``At the rate it is going, it's not going to last long,'' said Mahathir, 80, who became an adviser to the Shah Alam, Malaysia-based automaker after stepping down as prime minister in 2003. ``Proton is reporting losses all the time, and they still have a lot of cars which they cannot sell.''

Proton has been losing market share to overseas rivals including Toyota Motor Corp., and needs to gain new technology and designs to compete. Volkswagen ended talks with the Malaysian carmaker in January because the two sides couldn't agree on issues including control of the company.

``The government may need to offer a bigger stake or give up management control,'' said Raymond Tang, who manages $1.7 billion as chief investment officer of CIMB-Principal Asset Management Bhd. in Kuala Lumpur. Those are ``the main points which they failed to agree on in previous talks,'' said Tang, who doesn't own the company's shares.

Proton's Chairman Mohammed Azlan Hashim and Managing Director Zainal Abidin Syed Mohd Tahir weren't immediately available for comment, the company's head of corporate communications, Faridah Idris, said by telephone today.

Proton, which produces eight car designs under its brand and two types of Lotus sports cars, has been seeking a foreign partner since Mitsubishi Motors Corp. and Mitsubishi Corp. ended more than two decades of investment in the company in January 2005.

Volkswagen

Proton and state-owned investment agency Khazanah Nasional Bhd., which owns 43 percent of the automaker, are studying whether a foreign investor could revive its fortunes, Malaysia's Second Finance Minister Nor Mohamed Yakcop said Sept. 5.

Selling a majority stake isn't ``absolutely necessary,'' Mahathir said in the interview. Volkswagen, based in Wolfsburg, Germany, didn't want control of the company, he said.

``I still think Volkswagen is willing'' to talk, he said. ``Despite my initial intervention,'' Proton ``seems to be not keen at all to have anything to do with Volkswagen.''

Proton is also in talks to make cars with China's Jinhua Youngman Automobile Group Co. and Chery Automobile Co., as well as India's Mahindra & Mahindra Ltd. Those companies may be allowed to buy a minority stake in the company in return for helping it expand in the world's two most populous nations, Deputy Prime Minister Najib Razak said on June 19.

``We were working with Volkswagen and we had nearly completed'' the negotiations, Mahathir said. ``We would be manufacturing Volkswagen cars here and also using Volkswagen technology here. But the new management wants to work with China and India, thinking that they can enter these markets. I don't think they are going to get very far.''

Tariff Protection

The Malaysian carmaker's competitiveness has been eroded by the government's new auto policy, introduced in March, which made it cheaper to import cars into Malaysia, Mahathir said. The government cut import taxes to 5 percent from 15 percent.

``Proton cannot survive'' without protection, he said. ``When you go to Korea you don't see foreign cars. It's the same in Japan. They have ways and means of ensuring that foreign cars do not compete with their cars in their country.''

The company's share of Malaysia's car market fell to 40 percent last year from as much as two-thirds during the 1980s.

Malaysia, aiming to become a regional hub for car manufacturers such as Toyota and Isuzu Motors Ltd., offers incentives and tax breaks for overseas carmakers to assemble their products in the country.

Honda, Toyota

Proton's loss widened to 58.6 million ringgit ($16 million) in the first quarter ended June 30, from 12.4 million ringgit a year earlier as a lack of new models damped sales, the company said in August. Revenue fell 31 percent to 1.42 billion ringgit.

``Proton needs a strong partner,'' said CIMB-Principal Asset's Tang. ``The best partners could be something like Honda or Toyota. Those companies are very good at what they do but they may want to be able to institute changes.''

Proton last month signed an initial agreement with PSA Peugeot Citroen to study the possibility of developing new models together. The agreement is Proton's third this year with an overseas carmaker for possible joint product development.

``If you merely make an arrangement in order to get the platforms from some company, that is not a transfer of technology,'' Mahathir said, referring to the Peugeot accord. If ``that's what they intend to do now, that's not going to do any good for Proton.''

New Models

Proton is also developing a new model using Mitsubishi Motors' components and technology, which it plans to start selling early next year. The Malaysian carmaker, which last year posted its lowest profit since 1991, aims to introduce six models, including its first multi-purpose vehicle, this year through 2008 to reverse slumping sales.

Auto sales in Malaysia are set to decline for the first time in three years as falling prices of used cars, stricter lending rules, higher interest rates and an increase in fuel prices curb demand, the Malaysian Automotive Association said in July.

The reduction in import taxes earlier this year pushed down prices of new and used cars.

``The problem is the government insisted that the price of cars should be lowered, which is fine for the buying party but what they didn't realize is that they lowered the price so much that they lost money,'' Mahathir said. ``Proton certainly lost a lot of money.''

Proton will collapse unless it finds an international partner such as Volkswagen, said Mahathir Mohamad, who founded the Malaysia-based company twenty years ago. "At the rate it is going, it's not going to last long," Mahathir told Bloomberg. While Proton cars are not sold here in North America, they are sold in the United Kingdom, South Africa and Australia.

Perhaps more important to car enthusiasts, however, is the future of Lotus, which Proton acquired in 1996. Just three weeks ago, Proton said it would not consider selling Lotus, even if the financial situation worsens.

One possible partner for Proton/Lotus is Volkswagen, which Mahathir says is still willing to talk. VW has reportedly said it does not want control of the company. Interestingly, Volkswagen was said to be collaborating with Lotus on the now-cancelled GX3 three-wheeler.