The government will set aside bids by local auto firms to acquire stakes in ailing national carmaker Proton, instead first choosing German Volkswagen AG or French PSA Peugeot Citroen as a partner.

The Edge financial weekly, citing unnamed sources, said the government had reaffirmed its commitment to the European companies despite attempts by Malaysian auto firms to acquire stakes in Proton.

"The assurance came as VW and PSA are confused by the lobbying efforts of the local automotive groups, whether through government channels or the media, and have asked for clarification from the government," a source was quoted as saying at the weekend.

The weekly said a decision would be made by the end of March on a foreign partner for Proton, with bids by Malaysian companies to be considered after that.

The government, through various agencies, owns 59 percent of Proton shares, including a 43 percent stake held by its investment arm, Khazanah Nasional.

Three Malaysian automotive companies - DRB-HICOM, the Naza group and the Mofaz group `- have expressed interest in acquiring all or part of the government's stake.

The Edge said discussions with Volkswagen and Peugeot were "fruitful", but that proposals for collaboration differed.

Controlling stake

Volkswagen intended to acquire a controlling stake in Proton's manufacturing division, which the weekly said could see Proton turn into a manufacturing hub for the German firm, while improving capability.

Peugeot was more inclined towards a relationship which would preserve Proton's identity, while collaborating on cheaper models for export regionally, with a controlling stake less of a priority, it said.

"PSA needs Proton just as much as Proton needs a foreign partner. As for the VW-Proton relationship, the German carmaker appears to have the upper hand," another source was quoted as saying.

Analysts say Proton needs to find a strong partner to help revive its fortunes after posting a quarterly loss of RM250.34 million in its second quarter to September 2006, as sales dwindled.