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Explaining The Mystery Behind High Car Prices in Malaysia - Part 2

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Explaining The Mystery Behind High Car Prices in Malaysia - Part 2

This is the final instalment of the two-part series to explain the mechanics behind vehicle pricing. Among the topics discussed in the first part include why the prices of national models remain high and how this is related to the high prices of locally-assembled foreign models.

The second part of this story will attempt to explore the reason behind the big gap in prices of cars in the U.S. and here, and to debunk some myths regarding Approved Permits (APs).

APs Driving Car Prices Up

Last year, the same politician who made the claim about a certain RM24,860 Perodua Myvi also blamed the RM10,000 cost of Approved Permits (APs) for pushing car prices up, using his colleague's Nissan Juke as an example.

While his statement is true, APs don't drive car prices up in the way the politician described. Plus, the Nissan Juke is not a good example because it is a parallel-imported (PI) model. A PI, sometimes called a grey import, is a privately imported unit. Usually, manufacturers don't provide warranty coverage as that particular unit may not have the necessary adaptation for our local driving conditions. More importantly, there is no fixed price for PIs as these are all technically used/reconditioned cars.

When speaking of APs, one must make a distinction between Open AP and Franchise AP. The former is used by PIs and costs RM10,000 each to procure while the latter is given free of charge to franchise holders.

PIs are very unhealthy to the industry as PIs invest in little other than showrooms, instead riding on the brand building and investment made by the franchise holders. Some countries like Australia have banned PI cars since 2000, following intense lobbying by car companies.

For this subject, we will only concentrate on Franchise APs, which are only given to Bumiputera companies or the Bumiputera partner within a joint venture.

Some wholly-owned subsidiary car companies with no Bumiputera partner will have to purchase their APs from an affiliated company.

Mercedes-Benz Malaysia, for example, gets its APs via it's dealer and importer NZ-Wheels, while Volkswagen Group Malaysia has appointed DRB-Hicom Auto Solutions (DHAS) as its importer. Even in such cases, the AP holders will only charge a small nominal processing fee before handing the cars over to the franchise holders. The proportion of the processing fee is too small to be blamed for bumping up prices of imported cars.

APs drive up prices of imported cars when their availability is artificially limited. The simple rule of supply-demand means that whatever little units imported into the country are now worth more than what it would on an open market.

Each year, the total number of APs allocated is capped at just 10 percent of the total number of vehicles assembled locally in the year before. This is then split in a 60:40 ratio between Open APs and Franchise APs.

Why are PIs, which contribute little to the industry, receiving more APs than the franchise holders, which invest heavily to grow the local automotive industry? This is a question that MITI has avoided answering.

The opaque manner in which APs are allocated to different companies is another point of contention.

As there aren't enough cars to cater to the market's demand, car companies have to choose between setting a lower price and disappointing customers with a very long waiting period, or to limit its sales by charging higher prices. As a business entity, it is obvious that car companies will choose the later option.

Take the 2013 Toyota 86 for example. In most countries, the 86 is priced only slightly higher than a Corolla sedan. In Malaysia, the 86 is the most expensive Toyota model on sale, at RM243,015.

UMW Toyota only has a limited number of APs, split between its fully-imported Lexus range, the Prius family, and the 86. Among these, the 86 was too niche and has the least market potential. It was a simple business decision.

With APs as a limited resource, the company has to find ways to satisfy the most number of customers - which would be eyeing its mainstream Lexus and Prius family models.

The same reason is also driving prices of the 2013 Toyota Prius and 2013 Toyota Prius c up, despite both enjoying hybrid vehicle tax exemption on import and excise duty.

Toyota does not need to price its hybrids any lower. By putting an artificial limit on the total number of Prii (Toyota's plural word for Prius) Toyota can sell here, the government has indirectly given Toyota a green light to raise prices.

Plus, the full series-parallel Prius and Prius c do not have any strong competitor in this market anyway. Its closest competitor, the mild-parallel Honda hybrid models sit a class lower in terms of technology.

Can you imagine the impact on the sales of its locally-assembled, bread-and-butter model 2013 Toyota Vios if a fully-imported, higher-specification Prius c is priced any lower? What is going to happen to the company's committed order volume with its suppliers? Is the company going to idle its plant and see unsold cars piling up in its showrooms?

Malaysians Are Subsidizing Car Buyers In Other Countries

While Malaysia proudly claims that it offers investors the largest passenger car market in the ASEAN region, seventy per cent of it made up of passenger cars, investors, however, have a different view. To them, this claim, even if factually correct, means little.

With more than 50 per cent of the car market controlled by national brands, the volume potential that is realistically open to foreign brands is much lower. 

This is compounded by import restrictions placed by the afore-mentioned AP system.

The low-volume potential makes it very difficult for local franchise holders to negotiate for a cheaper ex-factory price of a new imported model.

An ex-factory price, in simple terms, can be likened to a wholesale price negotiated between a country franchise holder and the manufacturer. Before a new model is introduced, distributors from each country will be invited by the manufacturing principal for a price negotiation meeting.

Consider a hypothetical case in which a Malaysian franchise holder is negotiating to import a new global model from Japan. The Malaysian company will try to negotiate for the lowest possible price, but due to his small order volume he has little leverage.

The way his Japanese counterparts see it, it takes about the same amount of resources to support a market like USA, which sells over 230,000 units of Prius a year and Malaysia, which sells only about 1,000 units of Prius a year.

Despite the big difference in sales volume, the Japan office will still need to provide a similar level of marketing support, after-sales and legal documentation support for both countries.

To put it bluntly, even if the Japan office agrees to offer discounts, how many units the Malaysian company can actually sell are still limited by his AP allocation. Granting him a cheaper ex-factory price would not improve the business any further.

Conversely, small discounts for a large open market will deliver a significant jump in sales.

What usually happens is that the Malaysian distributor gets an inflated ex-factory price, one even higher than the selling price of the same model in other countries.

The AP document below explains it all. FOB price is ex-factory price plus transport charges to the exporting port.

The Prius' FOB price of around RM86,000, is already higher than selling price of a Prius in the U.S., which starts at an equivalent of RM77,000. In other words, Malaysian consumers were given the shorter end of the stick the moment the cars left the factory.

Both the U.S. and Malaysia import the Prius from Toyota's Tsutsumi plant in Japan.

In Thailand, the locally-assembled Prius starts at an equivalent price of around RM124,000, higher than the price in the U.S. but still lower than in Malaysia.

While priced lower than a Malaysian model, Thailand's base model Prius also misses out on a 6.1-inch touch screen audio system, Bluetooth connectivity and steering wheel control buttons for hands-free telephone function.

Like Malaysia, Prius is not a big seller there, at around 1000 units/year. Recall the earlier point made about the higher cost of local assembly and economies of scale.

Again, I want to stress that the problem does not lie with car companies. Going down the anti-business route is counter-productive as it doesn't address the root cause: an opaque import restriction that artificially inflates the value of imported cars.

Cars are not controlled goods and allegations about profiteering is moot. A company has an obligation to maximise returns to its partners and shareholders by optimizing its revenue stream.

Governments, on the other hand, have an obligation to set clear and transparent standards.

The Forex Factor

Our Malaysian ringgit has lost a significant portion of its value since the '90s. In 1995, the Malaysian ringgit was valued at RM2.54 per US dollar and RM2.45 per 100 Japanese yen. Today, the Malaysian ringgit is only valued around RM3.20 per US dollar and RM3.28 per 100 Japanese yen.

With our weaker ringgit, it now costs more for local car companies, be it foreign and national brands, to purchase key components like engines, transmissions and completely-knocked-down kits. These items are usually traded in US dollars, although there may be instances where the Japanese yen is used.

Government Control Over Selling Price Of Non-National Cars

It is difficult to ascertain this allegation. MAI says MITI does not set the selling price of cars but car companies are required to submit the necessary documents in order for Customs to calculate the appropriate amount to be taxed.

In the case of locally-assembled cars, MITI needs to ascertain the amount of rebates given to each model, based on the value-added activities rebate under the Industrial Adjustment Fund mentioned in Part 1.

The Lack Of Competition

In the opinion of the MAI and MITI, the cause for high car prices in Malaysia is lack of competition in the market, with some car makers taking advantage by raking in higher profits. There is some truth to that, but only regarding a few top-selling models for obvious reasons.

To say that promoting market competition will lead to significant reduction in prices across the board is a bit ambitious.

Car companies don't make much from selling cars. They earn more via after-sales. Remember that for every brand, there are between three to four different companies taking a cut from the profit. There is the manufacturing principal, the regional office, the importer/distributor and lastly the dealer. 

When asked to comment on the profit margin of locally-assembled cars, a pricing manager at a local franchise holder rubbished claims by the government that car companies are raking in huge profits.

"In some months, especially during promotion periods, the profit contribution on certain models is actually negative. Of course, we will try to maintain a healthy balance sheet with other models that may be returning profit."

Another product manager explained, "We need to consider also the amortisation cost for the assembly plant, assembly charges, distribution costs, salesmen commissions, dealer's margin, rental costs, marketing and promotion costs before we can claim our share of the so-called profit," adding that Malaysia's smaller size meant that they don't enjoy the same economies of scale as other countries.

"We are lucky if we can make a few thousand per car," he added.

The profit contribution of each model also fluctuates wildly, depending on promotion costs and the model's age.

A multi-brand dealer explained that every time a car carrier arrives at his dealership with new stock, he has to issue payment for all these cars in full. "No credit term," he said.

He added that every few years he needs to purchase new test drive units, purchase new service tools and upgrade the facility to comply with the brand's latest corporate identity and service standards.

"I am only in this business because I like cars and I don't know what else to do; this is not the business to be in if making a big profit is what you are after," he explained.

Another dealer of a German brand explained "We are losing money on nearly every car sold. Out of 10 dealerships (for this German brand) probably only two are making money. A few smaller ones can't sustain the business and have given up their dealerships."

When asked why he continues to be in the business despite the losses, he answered "We are in it for the long-term. The idea is to hang on until there are enough cars on the road for us to make a profit from after-sales."

Even big companies find the car business to be too challenging. Sapura Resources gave up its BMW dealership in 2010 and the KLSE second board-listed Permaju Industries gave up its Chevrolet master dealer status in 2011.

Based on the comments shared by industry players, it is not realistic to expect increased competition to deliver any significant reduction in car prices. How much more does the government expect car companies to trim their profits? 

Transparency, Or The Lack Of It

High car prices are not unique to Malaysia. Hong Kong and Singapore also impose draconian measures to curb the use of private vehicles and to promote public transport. However, car companies don't complain about it as the same hurdle is applied equally across the board.

At the end of the day, no brand gets an unfair advantage over another.

Over here, the mechanics behind car pricing are very opaque. For example, aside from Proton and Perodua themselves, no company really understands how MITI decides on the value of IAF (mentioned in part 1) rebates given to national car companies.

Another common contention concerns the values of ex-factory prices submitted by car companies. Does the Customs have the necessary mechanisms to prevent under-declaration by certain brands? Who oversees these submissions?

Information, like any resource, can be used to manipulate prices if it is scarce. Scarcity of information puts the buyer at a disadvantage and allows the seller to manipulate the market using the information only they have access to.

This scarcity of information limits the ability of the market to self-regulate.

At the other end of this spectrum is Singapore, which has a very transparent system detailing the cost breakdown for nearly every car model on sale.

The island state's Land Transport Authority (LTA) is analogous to our JPJ. The LTA's One Motoring is an online portal for motorists.

Under One Motoring's Information and Guidelines section, is a cost breakdown of each model on sale, The list details a model's open market value (ex-factory price plus shipping insurance and delivery charges), Customs duty, GST, registration charges, COE value before adding up to its final selling price at the dealership.

The information is pulled from the Singapore Customs and is updated every month.

With this level of transparency, consumers know exactly how much of their money goes where. If they find that a brand is making too much profit out of them, they are free to take their money elsewhere. This transparency had indirectly resulted in the shrinking sales of non-luxury cars.

COE or certificate of entitlement is an open-market bidding system that limits the total number of new cars registered every month. COE prices have been increasingly over the past few years and it has come to a point where consumers don't see the point of buying a regular car anymore.

As information on taxes and other charges levied for each model is made public, car buyers can see that buying a car is no longer worthwhile when taxes and COE cost alone is more expensive than the car itself. Thus, the demand for private cars in Singapore is now heavily tilted towards luxury brand. BMW, not Toyota, is now Singapore's top selling car brand. It is an example of how transparency of information can have a big impact on the market.

By making every model's open market value public, the Singapore Customs also reduces the need to police against under-declaration as competing car companies can easily monitor one another's open market value.

This will put an end to allegations by car companies that certain competitors are given an unfair advantage (an often heard complaint here).

Hopefully, after reading this two-part series, you are now better informed of the mechanics that influence the price of your car.

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