National carmaker Proton is in talks with Volkswagen AG to form a strategic partnership that could give the German giant a foothold in Southeast Asia's fast-growing auto market, a report said today.

"We are talking with Proton for opportunities in mutual cooperation," a Volkswagen spokesman in Germany, Hartwig von Sass, told the Asian Wall Street Journal.

The newspaper quoted sources familiar with the matter as saying that it was unclear if a prospective deal would involve Volkswagen taking a significant equity stake in publicly listed Proton, which now holds around 45 percent of the local market.

A tie-up would give Volkswagen access to Proton's production facilities to produce cars for sale in the 10-member Association of Southeast Asian Nations (Asean), it said. Although Volkswagen is the biggest foreign auto maker in China with nearly 30 percent of the market, it has a negligible presence in Southeast Asia.

Proton spokewoman Fauziyah Abu Hassan refused to confirm or deny talks with Volkswagen, citing a "non-disclosure agreement."

She indicated, however, that the 38-percent government-owned Proton would not cede management control to any potential foreign partner because "it is in the best interest of Proton to remain as Malaysia's national car company."

A Korean deal?

Proton chief executive Mahaleel Ariff earlier this week said the company aimed to tie up with a new foreign partner by the end of the year, ahead of the market opening in 2005 under the Asean Free Trade Area (Afta).

Special adviser to the company, former premier Dr Mahathir Mohamad, has said Proton was in talks with South Korean and German carmakers but did not elaborate.

Under Afta, import tariffs for most vehicles in the region were cut to below five percent in the past year. Malaysia obtained a two-year reprieve for its auto industry until 2005 but has said it would defer reducing duties to the required level until 2008.