VW set to jump-start DRB-HICOM business

Although it was a memorandum of understanding (MOU), the initial deal with Volkswagen AG (VW) signals a revival of DRB-HICOM Bhd's (1619) auto business.

However, the division may not repeat its glory days when it made most of the group's profit because of changes in the industry and stiffer competition now.

In 2005, its auto division accounted for some 54 per cent of total revenue of RM4.6 billion while its operating profit made up about 70 per cent of the total.

Fast forward to 2010, although the business made up more than half of revenue, its share of operating profit has plunged to less than half of the total.

Now, the bulk of its profits come from subsidiary Bank Muamalat and its long-term contract to operate and maintain the Tanjong Bin power plant in Johor.

But DRB-HICOM has been steadily working on its auto division.

In April this year, it signed an MOUwith Potenza Sports Car Ltd to manufacture and distribute the latter's products, including hybrids and electric vehicles, locally.

Potenza makes the Westfield and GTM marques and both parties may want to manufacture Potenza sports cars for the Asia-Pacific market.

Later that same month, it made its first overseas shipment of Suzuki Swift 1.5L to Brunei. Senior company executives said that DRB-HICOM and its 40 per cent-owned Suzuki Malaysia Automobile Sdn Bhd (SMA) plan to make Malaysia the regional hub for Suzuki Motor Corp to export its cars to Southeast Asia.

This was followed by the Malaysian launch of the fully-imported Suzuki Alto 1.0L last week.

But its major coup appears to be the MOU with VW, which may lead to the assembly of VW cars at its plant in Pekan, Pahang.

For starters, this could be the Golf, Beetle and Passat models, as they are VW's best-selling cars in Malaysia, according to OSK Research.

It also thinks that VW plans to use Malaysia as an export hub for its sedan cars.

"As the deal now has been secured by DRB-HICOM, we opine that Volkswagen's intention to make Malaysia its sedan exporting hub has been firmed up, especially with the inking of the deal with DRB-HICOM as the last resort.

"We understand that the Pekan plant has an estimated production capacity of up to 60,000 units per annum, and it currently assembles the Suzuki and Mercedes marques," said analyst Ahmad Maghfur Usman in his report.

And winners from this collaboration would be auto-part players.

"The winners from the localisation of the Volkswagen production line in Pekan is especially the auto-part players that have established strategic tie-ups /joint ventures with foreign players such as Bosch and Autoliv (a worldwide leading airbag supplier)," Ahmad Maghfur said.

DRB-HICOM operates eight assembly plants which includes Mercedes, Honda, Isuzu Motors and Suzuki Motor vehicles and Yamaha Motor motorcycles.

Shares of DRB-HICOM have gained some 13 per cent so far this year, outperforming the broader market's 7.7 per cent gain in the same period.

Its stock closed 7.5 per cent higher to RM1.14 yesterday, its biggest jump in more than four months.