He said the cost of designing and producing a new car model had gone up significantly.
"A car company needs to market more than one model, we will need at least five models. As Proton is not that big, the profits are not enough to produce many models," he said.
Mahathir was speaking to reporters after being awarded an honorary doctorate in automotive engineering by Universiti Malaysia Pahang at a special convocation ceremony here Thursday.
The event was graced by UMP Chancellor, the Tengku Mahkota of Pahang, Tengku Abdullah Sultan Ahmad Shah.
Dr Mahathir said Proton had successfully contributed to Malaysia's vision to become an industrial nation.
"Not only employment opportunities have increased by leaps in the car producing industry but there has also been a rise in the efficiency of Malaysians in the engineering field," he said.
Governments in countries like Japan and South Korea have also provided tax cover for their national cars, he said.
"Although the cover level is not that high, Proton has managed to capture 82 per cent of the domestic market. Indeed Proton has made large profits and has been able to pay back its loans from the government besides contributing significantly to the country's income tax collection," he said.
He nevertheless admitted that there had also been erosion in Proton's profits at times, saying: "This is because we opened our market to other Asian automotive companies which are much more bigger than us.
"They have the economies of scale which have made their cars cheaper despite the taxation.
Their capitals are also large and they too ensure indirect protection to ensure that their domestic markets are led by cars produced by them."- Bernama