rm down1 logoIt’s polling day today. A lot of you would have casted your votes. Both the government and opposition parties have issued manifestos with points that concern motorists, and those who keep themselves informed would have already gone through them.

There is plenty to dissect and debate on in regards to what both parties offer in their manifestos, but since this is an automotive website in order to stick to the topic, we will only comment on the matters related to motoring. Here is a gist of the motorist related points from their respective manifestos.

Barisan Nasional [BN Manifesto]

  • Revamping the National Automotive Policy to gradually reduce car prices by 20-30% and increase the competitiveness of our national cars.
  • Gradual reduction of intra-city tolls

BN’s approach is softer and more gradual. It doesn’t touch on issues like fuel price or toll, standing by their previous stance that reduction of subsidies are necessary because of inflating annual cost of the subsidy bill. There is however a mention of reduction of intra-city tolls.

These are some measures that have been already happening, albeit perhaps the feeling is that it is happening at a much slower pace than the people would like it to go. The most recent toll reduction that we reported is that of the KESAS Highway, an average drop of 20 sen.

Pakatan Rakyat [PR Manifesto]

  • Petrol and diesel prices will be lowered.
  • Lower electricity charges (relevant to motorists using EVs)
  • The gradual abolishment of tolls
  • Abolish excise duty
  • Cars priced as low as RM25,000
  • Abolishment of AES and revocation of AES summons

The Pakatan Rakyat manifesto is sure to be popular with the people. They all involve reducing taxes and increasing subsidies, which means less revenue and more expenditure for the government.

Generally, the explanation given for how these measures will be implemented without bankrupting the government’s coffers is the reduction of corruption, which will result in more budget freed up by both reducing costs incurred by the government, as well as taking back many potential revenue sources that are currently now in the hands of private individuals.

What’s with our car prices and how can they come down?

No matter who wins (we’ll find out tomorrow), both sides have promised us cheaper cars, so we’ll just assume that we’re going to get lower car prices either way. It is very common for angry motorists to compare the prices of cars in Malaysia with that of the USA and Europe. Government officials argue that import duties for cars have gradually been coming down, and there have been announcements of the reductions of import duties from various countries.

However, the difference may not be as big as perceived, as car pricing works very differently in USA and Europe compared to the ASEAN region. In the ASEAN region, we buy whatever the product planners in the car companies dish out – specs are frozen. The OTR prices of cars in USA and Europe are very much variable, as the trend is to customise the equipment in your car.

2013_Toyota_Vios_ 001

To put things in a better apple to apple perspective, if you compare ASEAN to ASEAN, the recently-launched Thailand market 2013 Toyota Vios was introduced with price tags of RM59,117 for the 1.5J Manual model up to RM77,625 for the top of the line 1.5S Auto.

In Malaysia, the previous generation Toyota Vios – which is still on sale – goes for RM72,417 for the 1.5J and RM91,231 for the 1.5 TRD Sportivo. So that’s a difference of between 18% to 20%. So where does this 18% to 20% difference come from?

The reality is that announcements of reduced import duties have minimal effect on the prices of cars here in Malaysia. The duty contributors to the cost of cars here in Malaysia is sales tax, excise duty, and import duty. We get most of our CBU cars and CKD assembly kits from Japan, Indonesia or Thailand, and under the Malaysia-Japan FTA as well as the ASEAN FTA, import duties are already minimal.

Isuzu D-Max Artic 5

Excise duties are currently between 75% to 105% for passenger cars, 60% to 105% for MPVs, and 65% to 105% for 4X4 vehicles. Duties are calculated based on engine capacity, with the lowest band being engines with displacements below 1,800 cc and the highest band being engines with displacements above 3,000 cc. So basically, the high prices are because of excise duty.

According to Malaysian Automotive Institute CEO Madani Sahari, the average effective rate of excise duty applied to most major car brands here in Malaysia is claimed to be about 40%. This reduction of effective rate is said to be due to value added activities in the CKD process. Basically, the more of your car that you build in Malaysia, the less excise duty you pay.

Quite simply, companies basically have to take out their calculators and decide if it’s worth it incurring the additional cost of local assembly and sourcing versus the reduction of duties, and if it makes financial sense, they have the option of working on it. The Industrial Adjustment Fund that was established with the 2006 NAP review is one mechanism that allows rebates/credits to be given based on domestic content.

This is where national makes like Proton gets an advantage – despite an equally high excise duty, it gets rebates because its cars are developed locally. Supposedly, anyone who meets the fund requirements are able to get the same incentives, but it’s safe to say only companies like Proton and Perodua are that much invested in the Malaysian auto industry.

Driven_Web_Series_2014_Honda_City_vs_Toyota_Vios_vs_Nissan_Almera_004

It’s still possible to work some magic here though. I was told the Nissan Almera is ‘kicking ass’ in terms of localisation and that’s how ETCM was able to price it at RM66.8k to RM78.8k, which is quite comparable to how the Vios is priced in Thailand. I can’t find a reference price point for the Almera in Thailand because it’s only available with a 1.2 litre engine there, priced between 429,000 Thai baht (RM44k) to 599,000 Thai baht (RM61k).

So in reality, while Proton’s 50% excise duty rebate was removed when NAP 2006 was announced, in a way the income lost thanks to the 50% rebate was converted into the IAF mechanism, and naturally Proton (and Perodua) qualifies since a lot of the manufacturing and R&D are done in Malaysia. In Proton’s annual reports, R&D grants received from the governemnt amounted to RM297.7 mil in 2011, RM143.7 mil in 2010 and RM80.6 mil in 2009.

Long story short, the only way for car prices to come down is to significantly reduce excise duties, and even then, it’s not a guarantee, because policies only open the path and industry players have to walk down the path opened for them. Let’s turn the clock back to 2006’s NAP announcement, which reduced duties. The government opened the path for CKD car prices to be lowered but Datuk Seri Najib Razak (then Deputy Prime Minister) said he was not happy with the extent of how much the prices had been lowered.

At that time, Toyota prices dropped by between 5.6% to 11%, Proton prices dropped by between 2% to 5%, Perodua prices were cut between RM800 to RM1,500 per car (except the baseline EX660 and EX850 models), while Mercedes-Benz CKD car prices dropped between 6.5% to 10% – for example, the E240 price dropped from RM428k to RM388k, and the C180K price was revised from RM256k to RM234k.

Perodua Axia launch

After Najib said the government was dissatisfied with the level of the price drops, further price drops were made – Proton cut prices further between 5% to 7.2%, while Perodua extended the price cuts to its baseline EX660 and EX850 models. Hyundai prices dropped between 1.42% to 10.73%, with the biggest price cut being with the Sonata, with RM13,555 slashed off its price tag. Volvo announced price cuts of up to 7%, which represented RM10k to RM20k off various models.

Nissan slashed prices up to a massive 15% – the Sentra had a 5% price reduction, while the Cefiro had a price tag reduction of about 12% to 15%. Mitsubishi reduced its Lancer 1.6’s price by RM2,000. BMW reduced prices of cars like the 320i from RM278,800 down to RM249,800, the 530i from RM472k down to RM438k, and the 530d from RM579,980 down to RM438,000.

The 2006 price drop across the board caused a furore with existing car owners as well as used car dealers. Banks were also affected as the value of the cars under hire purchase loans dropped significantly lower than the outstanding amount, putting them at higher risk if a default happened.

As you can see, automakers certainly need a little coaxing to drop the prices of cars even when the duties levied on them have been reduced. There is a matter of stock management, as well as taking care of existing customers resale value, and we all know how important resale value is to certain people.

It’s certainly not an easy thing to do, and I think if you ask anyone in the decision chair, if a price drop across the board is not imposed, they’d rather keep prices the way it is and use the new margins obtained to simply increase their coffers or make their products more competitive by increasing equipment levels.

In fact, I think that’s exactly what’s going on now, or else I wouldn’t have any other explanation for the huge disparity in equipment levels at similar price points between products from different brands in the B-segment.

There is also the matter of investor confidence. The Malaysian NAP policies are still seen to be somewhat volatile in this region, which is why investment opportunities are going to Thailand and Indonesia instead.

But it’s not to say that there hasn’t been any investment here. Honda finally set up a hybrid assembly line and have started CKD-ing the Jazz. And of course, there’s the Nissan Almera, which underwent heavy localisation under the rules set by the NAP – that localisation investment will be meaningless if tariffs are removed. I think Volkswagen still hasn’t started any significant CKD operations in this country because it is adopting a wait-and-see approach in terms of any policy changes after this elections.

There’s a lot of frying pans and fires to choose from here, and the trick for the new government, whether it is from BN or PR, is to pick the best route to take. It would certainly be very nice for new car prices to drop overnight (overnight in reality probably means in a week or two due to the recalculations needed), but I think it’s really not going to be as easy as it sounds.