Is DRB-Hicom Fiddling While Lotus Burns..?

For any business to function it needs to produce a product or service, sell it to customers, develop new offerings and promote them in order to generate demand. It also needs working capital to pay its suppliers, develop its staff and motivate all involved in its organisation to outperform its competitors.

Lotus appears to be doing none of these, and to all intents and purposes is like a patient ‘surviving’ on life support – not ‘living’ – because that would involve actually getting up and doing something, but surviving – as in artificially being kept alive.

The problem stems from a number of factors, not least the delay while DRB agree new terms for the $270million syndicated loan that was the company’s lifeline up until last July.

During the past few weeks we’ve been unravelling the knots in this story, gathering the facts and exploring how, if indeed anyone, has been complicit in the Norfolk-based company’s demise.

During this time we reached out to DRB-Hicom Berhad in Singapore, specifically Global Head of Corp Communications, Sulaiman bin Yahya, offering him the chance to challenge our findings and offer an alternative rationale.

Despite an exchange between us last Friday and Sulaiman’s promise to “provide their comments this week”, I’ve heard nothing further – instead we heard he has re-engaged London-based PR consultant, Phil Hall, to try and smooth over the ripples.

We also reached out to UK Business Secretary, Vince Cable’s office, to understand what support they’ve been able to provide during the past few months. We continue to await their response.

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So let’s start by outlining some of the issues.

Were you to read the major automotive press, you’d be forgiven for believing that Lotus was back on track building cars, with production of the new Exige S underway and the company busy developing new models – such as was demonstrated by Autocar’s recent drive of the Evora 414E Hybrid.

This is indeed what Lotus would like you to believe, and I understand the reason why they’d choose to keep the message upbeat, but by delving a little deeper it soon becomes clear this is far from being the truth.

The message from DRB-run Lotus has remained the same since they took over the sports car maker in May, with Chief Operating Officer Aslam Farikullah telling the media; “Our plan is to grow the business, getting the basic quality right on the Evora, Elise and Exige, before looking at new products”

Farikullah also says that “Lotus is committed to staying in Norfolk and to a turn-around plan that will see it doing what it does best, namely building class-leading, high-tech, cutting-edge sport scars and providing the best automotive engineering consulting in the world.”

Taken at face value, that all sounds quite reassuring, but during the past two months several cracks have begun to show.

This is one of those new variants, developed as an interim step while the New Era models were developed and originally planned for launch at the Goodwood Festival of Speed in June. In terms of specification and desirability, I thought it was one of the best cars Lotus had ever made.

You’ll no doubt remember ex-CEO Dany Bahar, who was sacked in early June for alleged gross misconduct, who’s now suing Lotus for wrongful dismissal. As are Kerry Dugan and Sarah Price (the former Heads of HR and Legal) who were fired shortly after and have complained of sexual harassment, racial discrimination and intimidation since DRB/Proton managers arrived at Hethel.

The remaining senior managers at Lotus have either left, are on extended sick leave, or hidden from view – with one telling me he was being placed under intense pressure to resign.

And while there is certainly some truth to the tension between Lotus management and their new owners, there is also good reason behind some of DRB’s actions. Under Bahar’s stewardship, Lotus haemorrhaged cash, racking up costs in a manner which made it clear they were spending someone else’s money.

In this image you’ll spot the 2002 Lotus Esprit V8 (second from front), re-built for the 2010 Paris Motor Show and Dany Bahar’s ill-fated New Era launch. It was recently put up for sale, then curiously withdrawn.

One supplier told me that in early 2011, Lotus were on a spending spree that would make Tamara Ecclestone blush and it’s this that DRB obviously discovered when they first looked at the company’s finances.

The good news is that positive steps have been made to improve quality and reduce costs, but this is of little use until the company is able to completely fulfill customer orders.

But the rot wasn’t limited to expenditure controls.

When flexible working was introduced at Hethel last year, it seems to have been introduced without employees full consent. In theory it would align the workforce with production demand which is a sensible move in the current economic climate, but in practice it enabled Lotus to send its workforce home, but require them to make up lost time when their skills were needed again. In practice it’s a system which is open to abuse, and I understand has been used as a way of transferring business risk onto the workforce. Perhaps it’s no surprise that morale has dropped so low at Hethel.

This provides an idea of the legacy DRB-Hicom has inherited, and while I have every sympathy with the challenge they face, the market is an unforgiving mistress and Lotus has done itself no favours in persisting with the pretence that everything is under control.

Back in July, Dato’ Sri Hj Mohd Khamil Jamil, Group MD of DRB-Hicom said “..DRB-Hicom has invested £100 million of new funds and it is our job to make sure that investment is used in a way that can drive the company forward. We are working on a number of new developments and are confident of the company’s bright future as we continue to leverage on our engineering excellence and innovation culture.”

If that were so, then why have suppliers not been paid for a very long time?

We know of several who are threatening legal action over non-payment, while others have threatened to terminate their relationship with Lotus. But despite this, Farikullah said recently that “..we continue to receive strong support from our parent company and suppliers are confident to deal with Lotus.”

A source inside the company told us of a recent meeting with suppliers, where the company tried to negotiate new terms and was then ‘surprised’ by the hostile response to their proposals. Sources inside the company tell of concerns in finding good suppliers having burnt bridges with those they’ve previously relied upon. Indeed the agency responsible for supplying contract staff recently terminated their agreement with Lotus due to persistent payment arrears.

Lotus has tended to rely on contract staff, because of the difficulty in retaining full-time employees. This changed somewhat under Bahar, when there was an especially strong technical team in engineering, but a lot of these staff have now gone, with some areas now back to the level they were at two years ago – before Bahar’s New Era plan was commissioned.

Farikullah outwardly says this is not a problem, but in truth the factory was closed again recently and workers sent home because of insufficient components to complete the build of cars on the production line. Cars are being built when a full set of parts is available, but often these arrive out of sequence, so assembly can sometimes be difficult to complete. We hear that some parts of the business are now under-resourced, limiting their proper function, so while this is fixable it’s clearly not a desirable situation.

Despite Lotus’ PR offensive at the end of July, we understand that production of the new Exige S has not started in earnest. There were initially some minor issues which delayed the completion of customer cars, but now these have been addressed the assembly team lack all the correct parts to complete the build.

Subsequently, no customer orders have been fulfilled (which is one reason why you’ll not see any cars on the road), so deposit holders and dealers are losing patience, with several promising never to buy from Lotus again. After such strong press reviews of the Exige S, it’s such a shame to hear that much of this early momentum has all but disappeared.

Lotus has long relied on the support of its dealer network – something Bahar famously undermined when he announced his New Era plan at the 2010 Paris Motor Show. Earlier this week, dealer principals were invited to Hethel for a ‘meet & greet’ with Farikullah, in which he sought to calm the backlash that’s been growing ever since the factory stopped fulfilling new orders. At the meeting Farikullah gave his assurances that the factory would begin fulfilling orders again sometime in November/December, although this would depend on the availability of funds necessary to pay their suppliers.

Dealers have asked for these assurances ‘in writing’, with some even talking about providing a temporary line of credit to help finance the outstanding orders.

Most dealers we spoke with chose to remain anonymous. Bell & Colvill, Britain’s longest established dealer shared the following details – they sold 48 new cars during 2010, one of the highest of any franchised dealer, however this dropped to 16 cars in 2011 and they’ve only managed to sell 6 cars so far in 2012. The situation is even worse for others:

Product and market development

So far we’ve established that Lotus are currently not producing new cars, nor delivering them to customers (at least not in any sense that could be described as satisfactory). As far as new developments are concerned, Farikullah continues to say “.. we will only announce new products when they are ready, and where there is a robust business case matched to a sound future plan.”

We know about some of the new variants, which we reported on back in July, but the one remaining model from Bahar’s New Era plan – the Esprit – now needs re-developed to reflect the new management team’s goals and re-engineered to reflect the likely change in components and materials of new suppliers.

Of course, the business case for such a model will also have changed. Where it was previously part of a five-model development plan, it will now either be built on its own unique platform (very unlikely), or be redesigned to use an existing platform. In most respects this is likely to mean starting again, perhaps retaining the design language developed by Donato Coco and his team, but engineering it in a more evolutionary way from today’s model range. Either way, as far as we know a decision has yet to be taken, so the likelihood of it appearing before 2015 (or ever) is looking slim.

Although Lotus development engineers are concentrating on variants of the Elise/Exige and Evora, these have yet to be signed off by Farikullah, so even these may well be delayed until well into 2013. With Lotus having withdrawn from next March’s Geneva Motor Show, they clearly don’t expect the new variants to appear anytime soon, which is a real shame, because together with the Exige S, I am confident these are the best cars ever developed by Hethel.

Ironic eh? Just when the products are genuinely desirable and of competitive quality, customers aren’t able to buy the cars and dealers can’t supply them.

Where’s the business plan? And who’s steering the ship?

With the products unable to speak for the brand, you’d expect Lotus’ new management team to be all over their brand image, maintaining the goodwill of their customers and providing encouragement to suppliers and retailers that their current troubles are being managed under the umbrella of a ‘grand plan’.

However despite Farikullah saying that “..our plans include strengthening our dealer network, increasing product visibility and brand awareness”, most outsiders would acknowledge this is the polar opposite of what they’re actually doing.

Throughout the conversations we’ve had with staff, suppliers and dealers, the consistent theme that’s arisen is “..we don’t know what the plan is” and “we’re not aware of any plan”.

Farikullah insists it’s “..confidential” and that “..they expect to communicate their plans in the near future”, but they’ve been delivering the same line since June and one gets the clear sense that Farikullah is merely a middle-man in the scheme of things, charged with containing the damage, but not empowered to actually steer the company in a new direction.

Last week, former Prime Minister of Malaysia, Dr. Mahathir Mohamad Putrajaya visited Hethel, followed the next day by DRB-Hicom’s Chairman, Dato’ Syed Mohamad Syed Murtaza. Their visits were brief and they spent most of their time with Proton and DRB staff. Did their visit signal a move to approve new plans, or merely to check whether the controls put in place were effective? Perhaps we’ll find out soon.

One insider told me “..I am an optimist, but it’s a real struggle at the moment. I think many people are looking for opportunities elsewhere. I don’t think it will get better until we have a CEO and a fully funded 3-5 year plan.”

There’s an overriding sense of gloom conveyed by everyone we spoke to that’s been involved with Lotus. They know that without leadership and the necessary finances, they won’t be able to meet customer demand. And if they can’t even satisfy their existing customers, then they stand little chance of growth and therefore survival. DRB-Hicom on the other hand remain stony-faced, denying there is a problem and continuing to claim they can turn the situation around.

It’s difficult enough to start a new business in a challenging market, far less one that comes with such baggage of false promises, missed deadlines and a distinct lack of realism. As far as we can see DRB-Hicom don’t have any experience in running a car company, and before someone says “but Proton do..”, remember, this is the same Proton whose profits were down 85% in 2011 and were rescued from imminent demise by DRB’s money.

It’s time for common sense to prevail, for DRB to partner with a successful global car company, who can offer a robust supply and distribution capability, in exchange for some type of market-based collaboration in Asia.

Even if DRB-Hicom had the necessary capital, they’ve yet to show any understanding of the sports and premium vehicle market in which Lotus operates. I’ve not been able to find any evidence to prove otherwise, and DRB-Hicom seems reluctant to contradict that viewpoint.

As I’ve outlined above, it may already be too late – key staff have left, suppliers are withdrawing and customers have little faith in the company or its ability to deliver on its promises. This is not a situation that can be quickly fixed, nor should it be, for once in Lotus’ long and troubled history, it deserves a realistic plan, one with the funding and resources to achieve its outcomes and a management team with the understanding to produce cars which real enthusiasts will choose to buy.

I’ll leave the final word to Aslam Farikullah, the man who DRB-Hicom appointed to lead one of the world’s best known racing and sports car brands, “The Elise, Exige and Evora are cars that appeal to all sorts of people, we will not compartmentalise ourselves as an enthusiast’s marque.”

Read that last sentence and weep.

Note: We are grateful to Bibs from The Official Lotus Forums for providing some of the insights used in this article, together with numerous others who’ve asked to remain anonymous. Throughout the process of this review we’ve sensed nothing but enthusiasm from all those we’ve spoken to, with a real eagerness to see Lotus return to form.

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