IF there is one car that can turn around and re-invent loss-making Proton Holdings Bhd, it has to be the Iriz that has been exceptionally well-received by motoring critics. But one month after its launch, the favourable reviews have not translated into strong demand and Proton’s hope to dethrone Perodua’s MyVi from the top of the B-segment appears to have stalled in the pit lane.

No one else has more to lose in this game than Tan Sri Syed Mokhtar al-Bukhary’s DRB-Hicom Bhd, which acquired Proton in 2012 and has been trying to staunch the bleeding since. In fact, DRB-Hicom is in the process of issuing RM2 billion in perpetual sukuk that will mostly fund the former’s working capital and development expenditures.

So what has gone wrong for Proton this time?

Preliminary demand for the Iriz was very encouraging, with over 17,000 bookings in the week leading up to its launch on Sept 25. However, these were merely online bookings with no deposit put down. To date, actual bookings with paid deposits are estimated to be fewer than 4,000 units.

This revelation comes as Proton’s vendors estimate Iriz production to be around 2,700 units a month, based on Proton’s demand for parts. This is only 60% of the 4,500 units a month that vendors were told to expect, in the request for qualification (RFQ) from Proton, vendors tell The Edge.

In fact, some industry players estimate that only several hundred units of Iriz are on the road so far. Proton did not respond to questions sent by The Edge.

“Proton is very focused on delivering a quality car. This time, they aren’t just pushing it out to the street. This has slowed down production somewhat. They want to ensure that the public will not find any quality issues with the Iriz, but poorer than expected demand has also slowed production,” explains one vendor.

However, vendors point out that Proton has been advising that production capacity will soon be increased to 4,000 units a month on anticipation of increased demand for the Iriz.

Although Perodua’s Axia is in a completely different price range due to its smaller 1-litre engine capacity, it is tough not to draw comparisons between the two. Off the starting line, Axia sales have been phenomenal since its launch two weeks before the Iriz, with waiting lists for Axia variants reaching almost six months.

In fact, it is estimated that Axia bookings, with deposits paid, have already exceeded 46,000 units, while over 12,000 units are already on the street.

Notably, the Axia does not compete head-to-head with the Iriz, which comes in 1.3-litre and 1.6-litre variants. The Axia is also much cheaper, starting at RM24,600, while the Iriz starts at RM42,438.

Nonetheless, the Axia has been so successful that it has been cannibalising sales from its big brother, the MyVi. Seeing that the Iriz is positioned and priced as a direct competitor to the MyVi, it is no surprise that it will have to fend off the Axia, on top of breaking the MyVi’s tight grip on the B-segment.

In fact, many industry players question Proton’s strategy of investing so heavily in a car to compete head-on with Perodua in the B-segment.

On top of that, industry players note that despite vast improvements to Proton’s cars, as exemplified by the Preve and Suprima-S models, it has failed to gain traction with the buying public due to a long-standing negative brand perception, especially when it comes to quality.

“The timing of the Iriz’s launch could have been better. In the past year or so, there have been several new built-in-Malaysia models launched, starting with the Nissan Almera last year. This year, we saw the new Toyota Vios and the Honda City launched. Then Proton decided to launch its car two weeks after the Axia. In hindsight, this may not have been the best idea, especially if their production wasn’t prepared to ramp up to full capacity,” notes one industry player.

The abundance of new models has been driving automotive sales. For the first half this year, total industry volume (TIV) of passenger vehicles rose by 7.5% to 296,779 units, driven by Toyota and Honda sales. During this period, both Proton and Perodua saw a slight decline in sales volumes, as buyers waited for the Axia and Iriz — Proton’s sales fell 2.7% to 63,040 units while Perodua’s fell by 2.4% to 94,480 units.

However, including an additional three months until the end of September, the growth of TIV of passenger vehicles narrowed to 1%, with 492,302 units sold over the nine-month period. Considered in this light, Perodua saw a significant improvement in sales, advancing its numbers from 94,480 units sold during the first six months of the year, to 140,317 units sold in the nine-month period, while Proton advanced from 63,040 units to 90,749 units.

It is worth noting that the nine-month figures would have hardly factored in sales of the Axia, which was launched on Sept 15, and the Iriz, two weeks later.

With brisk orders, it would seem that Perodua will be quick to make up for lost time with the Axia, and is on track to meet its 193,000-unit sales target for this year. Proton, on the other hand, will be struggling hard to match last year’s sales figure of 139,299 units given the Iriz’s sluggish start. Note that Proton’s sales figures will have a role to play in DRB-Hicom’s fundraising exercise.

According to the preliminary rating report by MARC on Proton’s RM2 billion perpetual sukuk Musharakah Programme, “the sales performance of this model (Iriz) as well as its older ones would remain key to improving Proton’s credit profile.”

The report placed a preliminary Ais rating, but notes that “the ratings are, however, constrained by the group’s large borrowings and its continued reliance on external funding to accommodate expansion and acquisition plans. Additionally, the group’s automotive segment remains sensitive to regulatory policy changes and consumer sentiment in an increasingly competitive environment in which DRB-Hicom continues to face challenges to improve the business and financial profile of its wholly-owned car manufacturing subsidiary, Proton.”

For the financial year ended March 2014, Proton posted a loss of RM461.6 million. While this was lower than the previous year’s loss of RM821.7 million, it was mainly due to lower administrative and impairment charges on intangible assets related to its British sports car unit, Lotus.

This article first appeared in The Edge Malaysia Weekly, on November 17 - 23, 2014.

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