Will car prices ever come DOWN?

Malaysian Automotive Association president Datuk Aishah Ahmad says although the body has repeatedly proposed to the government to lower excise duties to reduce the burden of vehicle ownership on Malaysians, she believes it is unlikely to happen in the next few years.

However, Malaysian Automotive Institute chief executive M. Madani Sahari differs, saying the government is committed to a gradual reduction in car prices. MAI, incorporated under the International Trade and Industry Ministry in 2010, is the coordinating body for the automotive industry. Tan Choe Choe and Arman Ahmad get their views

Question:Many people have lamented that inflated prices in the car industry eat into the disposable income of Malaysians. As a result, less money is available for other items and services. As a big-ticket item, often the biggest monthly expenditure of Malaysians next to property, do you think Malaysians are paying too much for their cars?

Madani:I agree that we are paying too much considering the combined loans for car and housing. But as the cost of car maintenance or ownership is spread over five years, I must say that the overall price is among the most competitive in the region.

I should also point out that the prices for the Perodua Viva S Series and Proton SV are among the most competitive in Asean. Additionally, we have seen permanent price-cuts for Honda, Mazda and other models.

Aishah:Generally, many of us feel that Malaysians are paying too much for their cars. Our existing taxes, particularly excise duties, are very high. MAA had proposed many times to the government that the duties be lowered gradually so as to reduce the burden of vehicle ownership on ordinary consumers.

We feel with a lower cost of vehicle ownership, consumers would  have extra disposable income to spend on other goods, which will benefit the country’s economy.

We, however, note that the cost of vehicle maintenance in Malaysia is still competitive compared with other Asean countries, with fuel subsidies and lower road tax.

Question:Can you share with us how an average car is priced in Malaysia?

Madani:The final car price is determined by the car manufacturer. The government does not intervene in the final on-the-road (OTR) price. And this practice has been in place since 2005. There are several factors that come into play when vehicle manufacturers determine their final car price, and these include market position, branding and margins.

In addition, there are various components that determine car prices, such as factory price, taxes (excise duties, sales tax and road tax), insurance and other costs. Factory price includes material, process, labour costs and factory margins. Factory cost is submitted to the government for excise duty calculation. Sales tax is based on the final car price.

Other costs are components that are mostly distribution-related costs, including margins. These costs are determined by the car manufacturers and the government neither sets nor regulates such costs. Given this background, it is fair to say that the car price structure in Malaysia is market-driven and is based on demand and supply.

Aishah:The car price is determined by car companies, taking into consideration various factors and market forces. The factors that will determine car prices are the free on board price, freight and insurance, and the exchange rate at the time of the price approval by Customs. Marketing and advertising costs, localisation costs for completely-knocked-down (CKD) vehicles, finance charges, assembly fees, administrative costs, dealer margins, salesmen commission and distribution profits and duties on the vehicle are also factored in. Import duty is zero per cent for cars coming from Asean countries and 30 per cent from non-Asean countries. Excise duties range from 65 to 105 per cent, depending on a car’s engine capacity, and sales tax is another 10 per cent.

It is also dependent on the positioning of a particular model within the differing models introduced by each company, their pricing strategies, the incentives the company  enjoys for the model, and others.

Question:A base model Honda Civic in the United States costs RM59,400 (US$18,000) but it is RM115,980 in Malaysia. A driveaway or on-the-road Preve in Australia costs RM49,160 (A$15,990) while it is RM59,990 here. Both cars are much cheaper in those countries, even when they enjoy higher per capita gross domestic product (GDP) than us (Australia: US$44,598; America: US$49,965; Malaysia: US$17,143). Can you tell us why Malaysians have to pay more for cars, even the ones they produce themselves?

Madani:First, we must understand that there is no direct relationship between GDP and car prices. The price of a car depends on market forces and the tax structure of the country.

While most people tend to perceive the tax structure as the dominant determinant of a car’s price, this may not necessarily be true. Let us take Thailand and Indonesia as examples. Both countries have tax regimes that are quite similar and this is particularly true for the lower-segment cars of below 1,500cc.

However, prices in Thailand are much lower than Indonesia. In fact, prices of cars in Indonesia are quite comparable with those in Malaysia. Despite this, there is a general perception that the tax structure in Malaysia is among the highest in the region.

Additionally, we should note that in countries like Singapore, where duties are
generally kept low, car prices are higher
than Malaysia. Prices of cars in Vietnam are also higher compared with Malaysia. This is proof that a low duty or tax regime does not necessarily translate into lower prices for cars.

There are many other factors and variants at play, and all of these influence the final on-the-road (OTR) prices of cars in a particular country.

In Malaysia, excise duties range between 65 and 105 per cent. As excise duties are imposed on the factory price of the car (and not the final price) a reduction in these duties may not necessarily translate into a lower OTR price of cars.

The demand for cars in Malaysia is relatively high and this is also because of easy access to financing. And the maintenance cost is also low given the cheap price of fuel.

Despite the recent increase, fuel in Malaysia is still cheaper than in Indonesia, Thailand and Singapore, where a litre of petrol is priced at approximately RM4. This is an interesting point to note as Indonesia remains one of the larger producers of oil globally.

Given this background, there needs to be a structured mechanism to reduce car 
prices. This is not something that can be done overnight as the impact is not solely on the automotive sector.

The government has to consider many factors, including the impact on current 
car owners, the used car industry, financial institutions, infrastructure availability and readiness like whether existing infrastructure is adequate to bear more cars on the roads, and others. Such impact will also have an effect on consumers.

Aishah:As mentioned earlier, the car price is determined by car companies themselves, taking into consideration  various factors. One of the most important factors is the 
prevailing excise duty rate of motor vehicles payable by car companies.

Our excise duties are very high. In the case of Proton, it is generally known that the export price of their cars is sometimes cheaper than domestic prices because of the need to penetrate the export markets, as well as the intense competition faced in overseas markets.

Question: The government has recently announced that it intends to reduce car prices gradually in the next few years. How do you foresee this impacting the market?

Madani:There have been lengthy discussions on the prices of cars and the government’s proposal to gradually reduce them. Unfortunately, this also led to some misunderstanding on the subject, with some Malaysians adopting the “wait-and-see” approach, which consequently had some negative effects on the market. International Trade and Industry Minister Datuk Seri Mustapa Mohamed had to explain the government’s idea behind the gradual reduction, our rationale to adopt this approach, the current status of reduction... etc. Encouragingly, this was  followed by vehicle manufacturers, who made their own price reduction announcements.

The market has stabilised since then and the total sales as in August indicated a five per cent increase, compared with the same period last year. Again, I could not stress enough why gradual reduction is important. This will allow markets to respond in a pragmatic manner and lead to natural adoption of price reduction as a result of more open markets for both new and used cars.

Aishah:There appears to be some misperception on this subject. The government has said there will be no changes in the excise duty rates of motor vehicles. Therefore, as to whether consumers will enjoy lower car prices because of a reduction in excise duties, we do not think this is likely to happen in the next few years.

Any price reductions thus far are just seasonal incentives offered by car companies to customers at a particular season or time. Car companies conduct campaigns and promotional activities to push sales and gain market share. During such campaigns and promotions, car companies may provide all sorts of deals and incentives, including discounts.

The discounts differ by model and company. Some are because of lower specifications, a switch from a completely-built-up (CBU) to a CKD model, while others were to finish stocks of old models.

Question:The issuance of approved permits (APs) has long been an issue of discontent. The government has agreed to phase out APs by 2015. Yet, there have been reports stating that this might be extended to 2020. What is your view on this?

Madani:As far as we are concerned, the policy to terminate open APs by 2015 and franchise APs by 2020 remains, as contained in the National Automotive Policy 2009.

Aishah: MAA members would like to see a level playing field for all automotive players in the country. We hope the government will commit to its decision on the AP issue. MAA members would also like to see liberalisation brought forward with certainty so that they and their principals would be able to strategise future plans.

Question:Some parties state that even if the government lowers taxes, Malaysians will still be subject to high car prices because manufacturers here take a higher margin of profit compared with their counterparts in other countries. If a comparison is made between car models in Thailand and Malaysia, there is a huge difference despite the lowering of taxes and duties. For example, a Honda City in Thailand is approximately RM57,000 for the base model. Is it true that profit margin for local manufacturers are higher compared with their counterparts in Thailand?

Madani:Margins are not within the prerogative of the government. Industry players should determine their own margins based on market forces. The government’s role is limited to ensuring that there is an open and dynamic market that is free, fair and open to competition.

Aishah:Not true, as the local sales and excise duties imposed on motor vehicles are still very high. As mentioned earlier, the car price is determined by car companies themselves after taking into consideration various factors, market forces and the peculiarity of each country’s automotive industry. We are not in a position to comment on the car pricing strategies of local car companies. Also, the taxes reduced under the Asean Free Trade Agreement and all various free trade agrements are only referring to import duties. The excise duty remains very high.

Question:One of the arguments that has been used repeatedly is that used car owners will suffer if car prices come down drastically. Is this a valid excuse?

Madani:First, it is not an excuse! It is the responsibility of the government to ensure a balanced outcome that is mutually beneficial to all the stakeholders within the automotive industry once car prices come down. Such stakeholders include consumers, the new and used car industry, financial institutions and the employees in this entire value chain.

While many have argued that lower-priced cars are consumer-friendly, few have stopped to think that there will be an overnight depreciation of value for existing cars, and this is likely to have disruptive effects on car owners, particularly those who are planning to sell their cars or trade in an old car for a new one.

There are 100,000 people who depend on the second-hand car industry for their livelihood. At any given time, there are about 200,000 units of second hand cars piled in the stockyard. In terms of value, this amounts to more than RM10 billion. Let us also not forget that the hire-purchase value of new and used cars also amounts to billions of ringgit.

Now, let me be clear: I am not saying that the government will not reduce car prices in order to keep the second-hand car industry alive. What I am saying is this: reduction of car prices in Malaysia is not a simplistic, straightforward decision. There are many factors to be considered and the livelihood of 100,000 people is one of them.

This is why the government is committed to a gradual reduction of car prices, so as to enable us to mitigate the negative effects that will accrue from the reduction of car prices.

For example, the government needs time to put in place tools and mechanisms to facilitate the second-hand car industry on one hand while it reduces the prices of cars on the other. Similarly, a gradual reduction plan will also afford sufficient time to car owners and financial institutions to evolve and respond adequately to a market of cheaper new cars.

Aishah:MAA had always advocated that there shouldn’t be any drastic changes in policy. Any announcement of duty reduction in order for car prices to come down must be done gradually over a period of time. It must also be handled with great care so as to avoid confusion in the automotive market, which can cause a severe disruption in sales of new motor vehicles. Any change in policy on taxes of motor vehicles can have serious impact on the industry, in particular, and the economy in general.

The issue of used car owners suffering is just one of the factors that need to be taken into consideration. This is because if the used car market is badly affected by the sudden reduction of car prices, the new car market will also be hit. Ultimately, it may impact the overall automotive ecosystem, such as the component suppliers, banks and others.

Question:The value of a car depreciates tremendously. If we consider the depreciation in a span of 10 years and a loan that can be stretched up to nine years, we will see many people with cars that depreciate faster than their loan payments. In the end, they may need to ‘top up’ the loans before selling the cars. Do you think loans should be stretched that long?

Madani:This is related to the fact that financing is easily accessible to Malaysians. The tenure period of nine years has been implemented for some time now.

I think a study is required to under-
stand the positive and negative impacts of such a lengthy tenure for car loans, after which we can look at the way forward in this area.

Aishah:The loan tenure is within the prerogative of the financial institutions. While the nine-year loan tenure is permissible, some banks do not encourage such a long period of repayment. We also need to take into consideration the high prices of vehicles in Malaysia, which have implications to consumers in terms of payment, whether for downpayment or their monthly repayments.

The prices of cars are determined by manufacturers after taking into account various factors and market forces.

NST