PROTON Marketing Strategy Analysis

PROTON commands a substantial share of the domestic market for passenger cars and over the years has been building up distribution networks in key market centres across the four regions:

• South-East Asia
• Middle East
• United Kingdom / Western Europe
• Australasia.

The main business activities of the Group encompass vehicle engineering, research & development, manufacturing, distribution and after-sales services. The Group is also involved in financial services and property management in supporting the main business activities. The Group designs and produces cars for diverse consumer preferences. T

The portfolio of Proton models includes the reliable MPV Exora, the stylish Gen.2, the elegant Perdana V6, the versatile Arena, the proven Saga range, the fun-to-drive Savvy, the desirable sporty Satria Neo and the ‘2008 Best Model of the Year’ winner, the Persona. The Group also has in its portfolio, the world-renowned Lotus sports cars,with models such as Elise, Esprit, Exige, Europa and the recently unveiled Evora (which will be available in the first half of 2009) to suit a range of customer demands and preferences. The Group conducts research in its centres in Malaysia and the United Kingdom on new technologies to create cars that are unique in both design and driving performance. Through Lotus, the Group provides comprehensive and versatile consultancy services to many of the world’s OEMs and Tier 1 suppliers.

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Currently, the Group has almost 12,000 employees who are involved in the whole value chain of the business, from research, design, development, testing, stamping, casting, machining and assembly to marketing, distribution and after-sales services. Strong customer orientation and competitively priced products are the foundation of our business and essential to our success. We aim to maintain market leadership by continuing to develop innovative products and satisfy our customers needs better and enhance profitability.

MARKET SEGMENTATION

Quality is about customer satisfaction and meeting customers’ expectations. It is indeed challenging, to say the least, to improve quality in the market given the ever-changing expectations and quality perception among car buyers today. As such, the key to improving quality in the market is to understand the needs and perceptions of our customers.

Towards this end, the Group established a ‘Voice of Customer’ framework to facilitate feedback on quality issues from the market. This is vital in order to establish quick and effective counter-measures to resolve critical quality issues in the market in a timely manner while preventing recurrence of the quality issues in future models.

During the year under review, a new feedback mechanism called Customer Priority Index (CPI) was introduced with the aim to help drive and resolve quality issues in the market. CPI is a matrix that calculates and prioritises customer feedback based on aspects such as technical data, warranty claims and severity of the quality issue. The Group also gauged feedback on product quality in the market via indicators such as concerns per car (CPC), delivery quality defect-per-unit (DPU) and warranty provisions.

On this scoresince the Persona and new Saga were introduced into the market, customer complaints have reduced significantly and quality perception for PROTON products has greatly improved as reflected in the notable improvements in the CPC and DPU levels. Additionally, from the market feedback gauged via warranty provisions and Product Quality Report (distributors’ feedback), we have recorded remarkable improvements that reflect PROTON’s strong commitment to satisfying our customers’ needs.

MARKET POSITIONING

• Launch of New Products

The engine of growth for any car manufacturer lies in its products. PROTON’s single-minded approach to renew its product line-up to meet the evolving needs and requirements of the buying public resulted in the roll-out of the Persona and subsequently the iconic Saga during the year under review. Having invested much time and effort in the three years that are typically required to conceive and develop new models, PROTON is indeed pleased to note that the response to date from car owners has been extremely positive, to say the least.

Proton Exora, instead of taking Japanese engines and simply putting it into a Proton body shell, Malaysia’s national carmaker Proton has achieved a significant milestone in all 24 years of its existence. The Exora is not only Malaysia’s first locally-produced MPV, but also the first to be built entirely from scratch. Instead of just ploughing monies to invest in some already-established German carmaker’s renowned technology, Proton worked on developing its own entire car production process. Over a span of just 18 months, Proton created and produced the 1.6-litre seven-seater Exora from initial R&D to design and concept, engineering to manufacturing and production, and finally sales. In fact, almost 90 percent of the Exora is made from locally-sourced parts and components.

Safety is another key attribute of the 4-star EuroNCAP-rated Exora – it has features like automatic hazard light activation (during emergency braking from speeds above 96km/h) and self-unlocking doors in the event of airbag deployments

• TARGET MARKETS

Proton is the biggest Malaysian automobile manufacturer. Proton automobiles are available in many countries such as China, Singapore, Australia, Algeria and United Kingdom. Proton has commanded the local automotive market.

Malaysia’s Proton sets ambitious car export target.

• MARKETING STRATEGIES

It is imperative that PROTON keeps its focus firmly on the road ahead. The Group must not only be flexible and adapt to the constantly changing environment, but must also be committed to carry out long-range initiatives aimed at further strengthening its engineering and manufacturing foundations. With its expanded product range, improved quality and value for money product positioning, the PROTON brand will become increasingly attractive. This is what will drive sustainable growth for PROTON and positive returns for its shareholders. Most certainly the road ahead will be paved with challenges, but PROTON now has the benefit of experience and is rapidly strengthening the foundation for its future growth.

However, PROTON cannot depend solely on the domestic market to grow. As indicated in the previous year’s report, to prosper and thrive, PROTON has to expand its export potential further. Tangible and sustainable growth in the international market will be the mainstay for PROTON as it aims to expand its market share and sales volume in the export markets. Whilst PROTON has already gained a foothold in some markets, there is a need to explore new emerging markets to tap into. In line with PROTON’s 10-year roadmap, the Group is committed towards expanding its regional presence in terms of sales and distribution, particularly in ASEAN, China, India, and the Middle East. Already, its strategies to grow the brand beyond Malaysian shores are beginning to show progress in terms of sales growth. It must now also source components and identify manufacturing facilities that will optimise costs and efficiency.

The Chinese automotive market in particular, remains a very important market for many automotive manufacturers. PROTON, like other automotive manufacturers, regards China as an important market and one that it should participate in to be a competitive automotive player in the long run. In July 2007, PROTON entered into a business arrangement with Jinhua Youngman Automobile Manufacturing Ltd (Jinhua Youngman) to supply 30,000 units of Gen2 CBU cars over a period of 20 months. These cars will be rebadged and sold in the Chinese automotive market under the Europestar brand. Although the numbers are modest compared to other automotive manufacturers, this is a significant achievement for PROTON, representing the largest single export order of PROTON cars since its establishment in 1983. There is also large growth potential in this arrangement with Jinhua Youngman, both in terms of CBU units to be exported, licensing of engine and platform, as well as expanded scope of opportunities in engineering services and technical assistance.

For the Malaysian vendor community, this will also represent significant additional volume for their manufactured components.PROTON is also expanding its non-manufacturing business by optimising revenue that can be obtained from its Group intellectual property. An example of this strategy can already be seen in the business arrangement entered into between PROTON and Jinhua Youngman. This business arrangement not only enables PROTON to indirectly enter the expanding Chinese automotive market, but also enables its subsidiary, Lotus Group International Ltd, to gain a strong foothold in the Chinese automotive engineering services market.

PROTON is also mindful of the need to improve operational efficiency, particularly with regard to improved capacity utilisation. Towards this end, PROTON has identified contract manufacturing for other OEMs interested to enter this region as a possible means to supplement its own manufacturing volumes.

MARKETING MIX

• Product

Proton Exora

The importance of ensuring Proton have a strong product portfolio is all the more crucial as it has a pivotal impact on our turnaround plans. This is reinforced by their winning strategy of introducing ‘the right car, for the right market, at the right price and at the right time’. This strategy was reflected in newly introduced MPV, Proton Exora. Its emphasizes the three main feature elements – comfort, performance and safety, which were translated into the design and quality of the vehicle The car is a new lifestyle family mover which combines advanced styling, space and multi usage, high quality design, and good performance without neglecting the value for money factor. The car is a product designed and developed by Proton with engineering technology from its subsidiary, Lotus. It is built with a spacious interior which sits 7 adults comfortably. The dual blower air condition with individual vents for each row adds comfort for all passengers. Its safe cabin features high tensile steel cage coupled with hydro forming sub-frame providing high level of safety. It also features several intelligent functions such as programmable door lock and programmable front wiper speed which are controlled by an integrated module.

Furthermore, Proton have continued to update and refresh our existing product lines to entice and attract customers. Persona and Saga models, with the latter powered by the new CamPro IAFM engine during the year under review and suffice to note, these two models are performing tremendously well in the market to date. In addition, the re-energised Waja and Gen.2, with their new look and powerful CamPro CPS engine, and the economical Savvy re-designed to give better value proposition to the buyers of the Savvy Lite, have successfully managed to excite car consumers in Malaysia during the year under review. Staying on course, PROTON will be launching our first MPV in early 2009, further solidifying our product line-up to include a high quality multi-purpose vehicle that can cater to the family-oriented contemporary lifestyle.

Other exciting offerings are also in the pipeline with replacements for the Waja and iconic Perdana on the drawing board. To sustain this positive momentum, the company have to continue research and development (R&D) efforts and comprehensive market surveys to gain a deeper understanding of the needs of the customer base. By harnessing the right technology and keeping their finger on the pulse of customers’ requirements, goals of a dynamic product portfolio is not difficult to achieve.

• Product Development

With robust product planning, the company were able to introduce both new and improved PROTON cars in the year under review, marked by the successful launch of the Persona in August 2007, followed closely by the unveiling of the new Saga in January 2008, nad the latest Proton Exora.

• Promotion

The year under review saw PROTON aggressively augmenting the International Sales & Services Division with additional human resources, focusing primarily on technical support as well as after-sales and customer services. Clearly, this investment reflects the importance of the export market in PROTON’s long-term growth. In terms of market expansion, the Group successfully penetrated into China and Thailand, while expanding our reach in Iran, the Middle East and Indonesia.

At the same time, Proton re-energised the Saudi Arabian market, which is crucial to their success in the Middle East. The year also saw the implementation of a special programme for semi knocked-down (SKD) and completely knocked-down (CKD) exports to Iran and China, which are expected to contribute positively towards thenew financial year’s export volume growth PROTON’s technical support and after-sales service capabilities must be of high standards in order to further enhance PROTON’s brand equity in the international market. Towards this end, several ‘Service Campaigns’ were held during the year under review in our key export markets. Also known as PROTON STAR, these campaigns included customer-focused initiatives ranging from a 43-point check to discounts for spare parts.

Naturally, these campaigns are ideal platforms to bring PROTON closer to the international customer base. During the year, there was also a marked increase in the frequency of visits by both the sales and technical teams to the various countries in which PROTON has presence, to enhance our understanding of the markets and provide better response to the customers.

• Place

Indonesia

• Performance and Operations

PT Proton Edar Indonesia registered higher sales of 1,422 units compared with 546 units in the previous fiscal year. In July 2007, the company launched the Waja and Neo models in conjunction with the Indonesia International Motor Show 2007.

• Prospects

The Indonesian Automotive Industry Association (Gaikindo) had forecasted a steady total industry volume growth over the next three years from 500,000 units in 2008 to 600,000 in 2010. The Company is expected to perform better in the next financial year with the launching of the Gen.2 Persona in July 2008 and the new Saga before the end of 2008. To achieve the anticipated sales increase and improve the after-sales support, the Company has expanded its network by an additional four branches and five dealers.

Thailand

• Performance and Operations

PROTON made its entry into Thailand on 30 January 2008 through its wholly-owned subsidiary, Proton Motors (Thailand) Limited. Within a short span of time, PROTON managed to successfully penetrate the Thai market with sales of its cars exceeding 1200 units within the first six months of its launch. Since making in-roads into the Thai market, PROTON captured 1.3% of the market share in the passenger car segment and was ranked 8th overall.

• Prospects

For financial year 2008/09, PROTON aims to achieve sales of 4000 units through the sale of various models including the Savvy, Gen.2, Neo and Persona.

Singapore

• Performance and Operations

The Certificate of Entitlement quota for cars in Singapore was lower by 3.1% in 2007. This reduction signaled the end of bumper quotas in the island state and resulted in distributors reducing their margins to clear outstanding stock. The year also saw the introduction of Chinamade cars into Singapore. Currently, 80% of cars in Singapore are less than four years old while 90% are less than five years. The reduction in quota, coupled with the introduction of China-made cars led to a 43% reduction of brands operating in our segment.

Sales were also further affected by the increased petrol prices and tightening of credit due to the sub-prime fall-out in the US, as banks were more cautious in lending money. On another note, the PROTON Persona launched in October 2007 received encouraging response and drew accolades from both thepress and customers.

• Prospects

Given the market conditions in Singapore, a number of initiatives are in the pipeline to increase our operational efficiency here.

United Kingdom

• Overview

Contrary to concerns surrounding the automotive industry, the overall UK total industry volume (TIV) in 2007 increased by approximately 2.5% to reflect over 2,400,000 sales. The increase was due to the business and fleet sectors where sales rose by 5.5% and 3.3% respectively, while private buyer sales were static, contributing only 43% of the total market share. Sales of diesel cars continued to rise, capturing over 44% of market share by end-2007, and is forecasted to sustain its momentum. With regards to body types, the only significant growth came from MPVs which rose by over 16%, usurping sales from the more traditional three, four and five-door segments.

The year 2007 also saw the top ten market leaders focusing on private buyers with all of them seeing a substantial rise in sales, now accounting for over 70% of the entire UK volume between them. One of the key topics that took centre-stage in 2007 was the ‘green issue’ which influenced the perception of the UK buying public. Sales of ‘green’ cars were spearheaded by both the Government through vehicle taxation and manufacturers of highly fuel-efficient and low CO2 emission vehicles marketing its benefits. Sales of low CO2 tax band vehicles rose by 15%, while high tax band CO2 vehicle salesdropped by 17%.

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Performance and Operations Overall, Proton Cars (UK) Ltd saw a reduction in sales by 8% during the year under review. Nevertheless, despite reduced marketing expenditure, retail sales increased by 3.5% during the period, which bodes well for the brand in the long term. Sales of the Gen.2 model improved during the year and the Satria, which was launched in March 2007, was well-received by dealers, motoring press and the general public. However, sales for Waja were impacted due to a drop in demand throughout the segment while the Savvy faced severe competition from other brands in its category.

• Prospects

In the second half of 2007 and early 2008, the operating environment in the UK became more challenging with higher interest rates, a slow-down in the housing market and rising cost of living. Given these market conditions, Proton Cars (UK) is adopting a number of initiatives which will lower operating costs, while maintaining a high level of support for our dealer network and customers.

Australia

• Overview

The total Australian vehicle sales grew by 9.1% and reached a record 1.049 million units. Sales of smaller fuel-efficient vehicles accounted for the majority of the increase due to the increasing price of oil and rising interest rates. The small and light segments, which PROTON competes in, grew by 10.2% and 5.9% respectively whilst PROTON’s retail sales increased by 16%. The current shift of sales towards smaller vehicles is expected to continue as fuel prices continue to rise and the economy slows down. Performance and Operations The positive financial results were due to improved Lotus vehicle sales and reduced operational costs by Proton Cars Australia. In addition, the company also managed to increase retail sales during the financial year in the face of heavy discounting by its main competitors.

• Prospects

Automotive sales in the coming financial year are expected to ease slightly on the back of rising interest rates. On top of this, high fuel prices are projected to shift customers’ preference to more fuel-efficient models which could translate to increased sales in the small and light vehicle segments. However, the launch of Persona in May 2008 and the subsequent release of the face-lift Gen.2 are expected to boost volume by 22% in the new financial year.

The number of dealers is also estimated to increase slightly. However, Proton Cars Australia will be implementing an aggressive rationalisation programme to improve dealer throughput and increase the yield in under-performing regions. The strong focus on these two key areas is expected to result in increased revenue and better operational returns. Proton Cars Australia successfully increased its dealer network to 41 dealers nationally during this period. Currently, all main regions throughout Australia are covered. Sales of the Savvy and Jumbuck also improved significantly towards the end of the year under review as a result of several innovative marketing campaigns. The Savvy in Australia.