Saturday August 26, 2006

EON and VW close to a deal

BY JOSE BARROCK

EDARAN Otomobil Nasional Bhd (EON) has commenced negotiations with Volkswagen Group Malaysia Sdn Bhd (Volkswagen Malaysia) to distribute Volkswagen vehicles in Malaysia, sources say. It is understood that the high-level discussions are at the tail end.

This is the second time the two companies have proposed such an arrangement. In late 2002, EON signed a letter of intent with Volkswagen AG, the parent of Volkswagen Malaysia, to import and distribute Volkswagen vehicles.

That plan, however, screeched to a halt when national automaker Proton Holdings Bhd and the German automaker commenced negotiations for Volkswagen to take up an equity stake in Proton. The Proton-Volkswagen alliance did not happen.

In early 2006, Volkswagen chief executive officer Bernd Pischetsrieder announced that the parties could not reach an agreement. This has perhaps paved the way for EON to revisit the idea of becoming a Volkswagen distributor.

“The negotiations have been progressing quite well. It’s something that should have happened some time back. When the deal fell through last time, it was not EON's fault. Besides, some of the vehicles under the VW (Volkswagen) banner are already being distributed by EON. So it’s a matter of time before a deal is worked out,” a source tells BizWeek.

EON is already distributing Audi vehicles in Malaysia. Audi AG is a unit of Volkswagen. Other cars currently being distributed by EON include Proton, Mitsubishi, Inokom, classic car TD 2000 and more recently, Tata vehicles.

Other automobile companies controlled by Volkswagen include Seat, Skoda and Lamborghini. It is not clear if EON is looking at securing the distributorship of these vehicles as well. At present, Quasar Carriage Sdn Bhd distributes Skoda cars in Malaysia, while Eminent Century Sdn Bhd distributes Lamborghini vehicles.

Despite the allure of the Volkswagen franchise, most industry players say it may not have much of an impact on EON’s bottom line.

This is largely because the current sales volume of Volkswagen cars in Malaysia is low, and EON may have to share the spoils with Cycle and Carriage Bintang Bhd (CCB).

In February this year, CCB announced through Bursa Malaysia that it is in negotiations with Volkswagen Malaysia to be a dealer of Volkswagen vehicles in Malaysia. News reports have also speculated that CCB would be distributing Volkswagen vehicles pretty soon.

“The pie will be split into two, with CCB distributing and also possibly conducting assembly works. So EON may not actually benefit much financially from the deal. As it is, Volkswagen is not a very popular marquee in Malaysia. Having two distributors would make it an even less lucrative distributorship,” the source adds.

Malaysian auto buyers are also known to be price-conscious, which would not augur well for EON and CCB.

For its six months ended June this year, EON posted a net profit of RM7.1mil on the back of RM1bil in sales, which is far cry from the RM36.9mil in net profit on RM1.4bil posted for the corresponding period a year ago.

The large dip has been attributed to the fall in Proton vehicle sales, which is EON’s mainstay.

In its notes which accompany the company’s financials, EON says, “Total Proton car sales volume dropped from 75,983 units for the first half of 2005 to 60,246 units for the first half of 2006, whilst EON's share of Proton vehicle sales reduced from 29,610 units to 18,562 units respectively.

“In addition, the write-back of certain provisions in 2005 also contributed to lower earnings for the current interim financial period.” EON ended trading last Thursday at RM2.10.

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