17 February 2006.

Proton Holdings Bhd (Proton),

Perusahaan Otomobil Nasional Sdn Bhd,

HICOM Industrial Estate

Batu Tiga

40000 Shah Alam

Selangor Darul Ehsan

Malaysia.                                                                                                              BY HAND/ Fax : 03-5191 1255

Dear Datuk/Tan Sri ,

Proton was synonymous with Malaysia’s ambitious drive towards import-substitution and heavy industrialization programme in the 1980s and 1990s when Malaysia was chanting the mantra of Malaysia Incorporated, using huge government funds to form huge Government-linked corporations (GLCs) in critical sectors to lead Malaysia towards developed status.  The symptoms and failings suffered by Proton now are symptomatic of other Government-linked corporations that have not performed optimally or sustained large losses that have drained public coffers.

Huge public funds invested were not limited to physical capital such as steel but also speculation in commodities market as evidenced by the reckless attempt to corner the rubber, tin or oil palm commodities markets and even foreign exchange trading. Past instances included the notorious Malaysia Mining Corporation scandal in the 1980s, the RM 5 billion ringgit losses suffered by Perwaja Steel and  Bank Negara forex losses of more than RM 10 billion ringgit in the 90s as well as the present losses suffered by Malaysia Airlines Bhd (MAS) expected to be as much as RM 1 billion ringgit this fiscal year and Proton..

As the most visible and successful symbol of this Malaysia Incorporated mantra, the present failings and losses sustained by Proton represent not only a vision turn sour but also a refusal to face up to reality and address these failures. As the symbol of problems plaguing GLCs in general, Proton must fulfill their responsibility to address questions raised by 26 million Malaysians. Such responsibility is not limited to answering Malaysians who are the stakeholders of Proton but also to uphold transparency and accountability to ensure optimal management performance.

In the public interest, Proton must answer 20 questions  on why Volkswagen refused the strategic alliance with Proton,  Proton’s new co-operation with Mitsubishi Motors Corp(MMC) as well as answer Proton Advisor Tun Dr Mahathir Mohamed and former Proton CEO Tengku Tan Sri Mahaleel Tengku Ariff’s 16 questions posed on January 3 and  February 13 this year on the RM 510 million loss incurred from the sale of MV Agusta Motors SpA for only one euro(RM4.50)..

To lose up to RM 510.24 million in less than one year has caused anger amongst Malaysians including Mahathir and Mahaleel, who felt their credibility, honesty and intergrity questioned because they supported the purchase of Agusta. Both men clearly wanted personal vindication for spending RM 76 million euros or (RM 340 million) to buy Agusta which is now deemed as a bad investment by the new management.

The national car maker posted a loss of RM12.35mil in its first quarter last year, and another RM154.3mil for its second quarter, blaming the huge losses on Agusta, disputed by both men. Proton's entire 57.75% stake in MV Agusta bought in 2004 sthat old to GEVI SpA for 1 euro (RM4.50) cost much more than 76 million euros or (RM 340 million). If we include financial assistance pumped in by Proton to Agusta the losses amount to RM 510.24 million as appeared in Proton’s cash flow statement in its 2005 annual report.

National interests are more important than the petty requirements of saving or face sought by both men but even though Proton can ignore the cheeky request to buy the Lotus car for one pound, both men have the right to the truth. Accordingly Proton must address the 20 questions:

1. Why did VW refused to co-operate forcing it to turn to previous partner MMC, the second choice?

2. What are the benefits of choosing the MMC, when it had sold its 7.9%  equity in Proton on March 9, 2004, when VW rejected Proton so that Proton will not be a continuous drain on national resources?

3. Why is MMC needed to work with Proton in product development of new Proton vehicles, supply of car components, technical support for production, engineering and quality control as well as optimisation of Proton’s manufacturing facility when after 20 years of such co-operation Proton can still not handle these problems?

4. What were the loss provisions of RM137 million and RM161 million respectively during the two quarters of its financial year when the provision for MV Agusta was only RM45 million in the first quarter. 

5. Who offered to sell or who offered to buy Agusta at one euro? 

6. Were there other bidders for Agusta?

7. Was there an attempt to get the buyer of Agusta to pay a higher price? 

8. Was there an announcement that M.V. Agusta was up for sale?

9. If not, did Proton approach only one bidder?

10. If other bidders were offered, did they reject?

11. Who in fact made the decision to sell?

12. Can Proton explain how selling Agusta bought at 70 million euros for one euro would not cause Proton to lose money as is claimed?

13. Proton faces an uncertain future in Malaysia with auto policies that are inconsistent and not transparent;

14. How is Proton’s need of RM500 million a year to maintain its level of investments for new products and market expansion be funded without the yearly RM200 million/RM300 million coming from Lotus and Agusta?

15. What is Proton doing to arrest its declining market share in Malaysia from 60% in 2002 to only 40% in 2005 when its future cash flows would not be sustainable if its domestic market share fell below 30%. With almost non-existent exports and Proton is totally reliant on a shrinking domestic market, how can Proton be viable?

16. How is Proton going to build its brand globally with declining sales in its home market in Malaysia despite spending almost RM1 billion on advertising and promotion.

17. Is it true that unsold stocks in October 2005 remained at 24,000 units amounting to holding costs of RM900 million leading to the possibility of a clearance sale at discount prices which will affect the second-hand value of such cars.

18. Is it true that Proton’s share of loss in Agusta was only RM28 million as at Oct 30, 2005 and did not contribute to the net loss for the first half  ended Sept 30, 2005 where Proton's net loss stood at RM166.69 million compared to a net profit of RM365.38 million a year earlier. Proton had made a provision of RM 160.7 million for that quarter, out of which RM90 million was from the Italian motorcycle unit. Both had suggested that the discounts given to buyers of the 54,000 Proton cars in the three months could have cost Proton an estimated RM108 million, which was never answered by Proton

19. Did Proton explain to the Securities Commission over the sale of Agusta for RM 4.50 resulting in huge losses of RM 510 million; and,

20. 20. Why did Proton took only 2 months to sell Agusta for RM 4.50 when they earlier took 14 months to buy Agusta for a total investment of RM 510 million?

Malaysians have paid much in tens of billions of ringgit for giving protection to Proton in terms of huge investment outlay by the government, paying very high prices for more efficient, economical and better engineered foreign cars through high excise and import duties and even paying higher prices for Proton manufactured cars here than those Proton cars sold overseas.

As Khazanah Malaysia, the Malaysian government's investment arm, holds about 38 percent of Proton and Malaysian investors are the majority shareholders, public interest requires an answer.  Proton’s refusal to give a satisfactory explanation is unacceptable and we hope that you would uphold good corporate governance and social responsibility towards the country and the people with an answer

Yours faithfully,

LIM GUAN ENG

SECRETARY-GENERAL