Struggling Malaysian carmaker Proton is in talks with France's PSA Peugeot Citroen on a deal to collaborate in the development and manufacture of much-needed new models, a report said yesterday.

The Edge business weekly said that negotiations between Germany's Volkswagen and Proton's shareholders and the Malaysian government have also resumed after being shelved in January when VW failed to win control of the Malaysian firm.

Critics have warned that Proton, which suffers from a reputation for poor quality, must allow a strong partner with the necessary technological expertise to buy a controlling stake if it wants to secure its long-term survival.

The carmarker said last month that it was in talks with several partners for a "strategic core alliance" and that a deal could involve "equity partnership".

The Edge said that the talks with PSA Peugeot Citroen involve the development of a car for the Southeast Asian market that could be marketed under either brand, and is likely to be a compact model like the Peugeot 107.

Equity stake

It quoted sources as saying that eventually PSA may take up an equity stake in Proton, although the investment would fall short of a controlling stake, much like its former relationship with Mitsubishi Motors of Japan.

The senior management of both companies are likely to ink a memorandum of understanding in a few months, which would be one of multiple alliances forged by Proton with various industry players to meet its different requirements, it said.

The Edge said that even as Proton worked on hammering out a detail with PSA, renewed negotiations with VW were continuing at high levels.

VW was believed to be looking at establishing a new company with Proton which would jointly develop Proton-badged models that would be sold across Southeast Asia and in India.

Proton and VW would have a 49:51 ownership structure of the new firm, with Proton injecting its manufacturing, engineering and sales divisions into it, it said.

The German automaker has already designed a new platform to develop at least tow new Proton cars which could go into production "in a matter of months", it added.

The Edge said the PSA deal would allow Proton more flexibility to forge alliances with other carmakers, while the tighter alliance envisaged with VW would effectively mean losing control over the national carmaker.

Proton is struggling to reverse a steady decline in market share, which fell to 41 percent in 2005 from 60 percent in 2002, as foreign competitors embark on aggressive campaigns to woo Malaysian drivers.