Price cut in M'sia: Promise or pipe dream?

For certain, the price cuts will not come from the reduction of excise tax, as widely speculated by buyers who are currently holding their car purchases to “wait and see”. MITI explained that although the nominal rates of excise tax could go up to between 60 and 105 per cent, the current “net” excise tax is already in line with neighbours Thailand and Indonesia – at around 40- 50 per cent. The “net” excise tax includes government subsidies for value added activities inside Malaysia from supporting measures such as the Industrial Adjustment Fund and the Automotive Development Fund. 

In fact, 85 per cent of cars sold in Malaysia are locally produced, and thus receive some form of privilege on excise tax reduction. This is especially true with national OEMs Proton and Perodua, which conduct other value added activities not limited to assembly. The two account for roughly half of the vehicles sold in the market. Proton is expected to be the OEM benefiting most from the subsidies, as its operations include design and research. Therefore, it is unlikely that the already competitive excise tax would be slashed further, lowering car prices. 

Adding to this rationale is the fact that the Malaysian government has been running a fiscal deficit for the past five years, and is not expected to forego around $2.2 billion (Bt68.2 billion) from the automotive excise tax.

MITI went on to explain that the gradual reduction of car prices should come from further liberalisation of the automotive industry and the promotion of Energy Efficiency Vehicle (EEV) production, two key points of the new NAP. The idea is that liberalisation will not only promote competition in the market, thus leading to price cuts, but will also encourage OEMs to produce EEVs locally, which will also lead to cheaper production costs and lower prices. 

While details of the EEV promotion will be disclosed with the new NAP, market liberalisation, as shown at the conference, roughly means: 1. further reduction of custom duties under trade agreements, including AFTA (already 0 per cent), FTAs with Japan and Australia and the Trans-Pacific Partnership Agreement (under negotiation); 2. the abolition of import quotas, or the AP (Approved Permit), which is currently limited to only 10 per cent of local production in the previous year.

The flaw in the idea to cut car prices, however, is that competition does not always bring prices down and local production does not necessarily reduce cost. As pointed out in an explanation of the car price structure in Malaysia by LiveLifeDrive.com, pricing of a car model is more about market positioning and brand image, while after-sales services are where OEMs make most of their profit, with little made from actual car sales. As long as non-national OEMs are branding themselves above national OEMs, it is unlikely that the prices of these non-national brands will come down as a result of competition only.

Neither does the localisation of production mean definite cost benefits, as quoted by Honda Malaysia managing director Yoichiro Ueno during the launch of the Honda Jazz Hybrid CKD last November. Although the price of the CKD model was lowered compared to the imported model, a few features, such as airbags and rear disc brakes, were removed. 

In contrast, procuring parts for a comparatively smaller scale of production in Malaysia could lead to higher costs than sourcing parts for larger production locations. We see that the key factor in high car prices is essentially down to uncompetitive high production costs of the national OEMs, which are currently strongly subsidised by the government. The problem has been addressed by a prior review of the NAP to enhance strategic partnerships for national OEMs, especially for Proton. While we have yet to see any significant progress on this, we suspect that the partnership strategy for Proton will be included in the new NAP, which if successful will truly help bring car prices down. 

 

Kon Thueanmunsaen is a senior analyst of Asean affairs at LMC Automotive. He can be contacted [email protected]