Excise Duty Unchanged; Government In A Bind After Promising Lower Car Prices

The Malaysia Automotive Institute (MAI) clarified yesterday that there will be no change in Malaysia's excise duty structure for motor vehicles. MAI's response comes after repeated reports by many government owned newspapers saying that new car prices are starting to come down.

One week earlier, Malaysian Automotive Association reported its second consecutive month of falling new car sales as consumers adopted a wait-and -see approach, withholding their purchase. The oppossition is also pressuring the government to reduce excise duty rates.

MAI reasoned that the current provision for rebates to car companies to conduct CKD (completely knocked down) local assemblies meant that the nett excise duties paid through Customs is already similar to that of neighbouring Thailand and Indonesia.

Using a 1.5-litre passenger car as an example, MAI'S CEO Madani Sahari said "Excise duty for 1.5-litre passenger cars in Thailand is between 30 to 50 percent. In Indonesia, it is between 30 to 75 percent. This is it, they don't reduce it. They don't have any mechanism to reduce it, and their calculation is the same (with Malaysia)."

"Our 75 percent (excise duty), can be reduced, and this is what the government has been promoting for many years already," said Madani during a press event at the Ministry of International Trade and Industry's (MITI) office in Kuala Lumpur yesterday.

Madani also explained that all local assemblers operating in the country are involved in value added activities, including vendor development for production and procurement of critical components and research and development.

"85 percent of cars in Malaysia are CKD. All these CKD (operations) have value added activities in their operations. I can tell you that all the CKD operators in Malaysia, in terms of excise duties, because of all these value added activities, the nett excise duties paid through customs is between 40 to 50 percent."

Madani added that some assemblers have such an extensive list of value added activities in the country that the nett excise duty paid is zero.

"Excise duties at this point of time, cannot be the component to reduce car prices. For the time being, the government is not going to reduce excise duties, because we are equivalent (to Thailand and Indonesia)."

The Malaysia Automotive Institute is a think tank body appointed by MITI to draft the country's third national automotive policy. The institute is staffed by industry technocrats and not politicians. It is important to note that MAI is merely an advisor and does not dictate Malaysia's vehicle duty structure. MITI has the final authority on this matter.

Madani also explained that the government does not control the selling price of cars, but merely sets the import and excise duties and sales tax, which are merely among the many components that affect car prices. Other components like ex-factory prices, distribution cost, manufacturer's profit, dealer's margin, accessories, marketing and promotions are beyond the government's control.

Without naming any specific brands, he also hinted that studies by MAI suggested that some leading brands in the country are operating with an unusually high profit margin, which the think tank suggests could be attributed to the relative lack of competition in the local car market.

"Even if duties are reduced, there is no guarantee that car prices will be reduced," he added, explaining that without sufficient competitive pressure, car companies are likely to maintain their prices.

Liberalization, Not Excise Duty Is The Key To Lower Car Prices

"Liberalization started from 2006. Liberalization is going to be undertaken until 2016, so it is a ten year time frame," said Madani, referring to the 2006 ASEAN Free Trade Agreement (AFTA).

Under AFTA, new vehicles originating from ASEAN member countries like Thailand and Indonesia are exempted from import duty (excise duty still applies), provided that at least 40 percent of the model's parts are sourced within ASEAN.

The Malaysia-Japan Free Trade Agreement will also see import duty for vehicles imported from Japan to be reduced in stages until it reaches zero percent by 2016.

"Liberalization will create market force. We need market force to reduce car prices," he added.

A Promise That Should Not Be Made

In the preceding months leading up to the 13th General Election, opposition party Pakatan Rakyat's strategy director Rafizi Ramli had been provoking the incumbent government by promising lower car prices in exchange for voters' support. Malaysia holds the dubious honour for probably being the only country where car prices takes a higher precedence over education, healthcare and jobs in pre-election debates. When Barisan Nasional leaders responded with a similar manifesto, it had already set itself up for slippery slide down, a slide from which recovery would be very difficult.

The late military general and strategist Sun Tzu, author of Sun Tzu's Art of War, would have been proud of Rafizi's tactical strategy.

Like a small army on an offensive, the team within Pakatan Rakyat knew that it couldn't challenge the much larger Barisan Nasional's force directly. Instead, it tapped on its opponent's ego, provoking it to respond and luring it down from its commanding position to the open ground, where neither party had an advantage.

When the government countered the opposition's challenge by promising to lower car prices between 20 to 30 percent in stages, it had already set itself up for a battle that it couldn't win.

Pakatan Rakyat's small team had little to lose, it could always retreat. Even if it lost the election battle, it could always return without losing much ground. It was after all, the underdog. The opponent's larger army however, was now out in the open field, no longer in control of the high ground and is now open to attack.

"Bravery without forethought, causes a man to fight blindly and desperately like a mad bull. Such an opponent must not be encountered with brute force, but may be lured (out of high safe position) into an ambush and slain," said the military strategist from 600 BCE Ancient China.

If the government fails to honour its promise, it will only provide further ammunition for the opposition to return stronger. Even if the government manage to honour the promise, the opposition will still not lose any ground.

In explaining its election manifesto, the government stressed that due to the complexity of the car industry and its close links with the financial sector, car prices cannot be slashed overnight without imploding an entire eco-system of industries. It was a fair point.

But an election period is a time when the people see themselves less as an individual and more as a crowd. As one of the longest ruling government in the world, one would expect its incumbent politicians to be very familiar with the irrational nature of crowd psychology.

They ought to see it coming that when such promises are made, many will latch on to the simple promise of lower car prices. The supporting message that reduction in car prices has to be gradual rather than immediate will be relegated to the back of a voter's mind.

From Offensive To Defensive, Government Now In A Tight Position

Nearly two months after winning the Elections, the government is now finding itself in a bind, forced to honour its promises.

Nobody, neither the government, nor the opposition, not even car companies can say for certain that car prices will come down across the board within the next few years.

The government estimates that car prices are likely to fall by around 5 percent per year, but car companies, especially non-national brands, have been distancing themselves from that comment. Exactly how is this 5 percent reduction in price will be achieved and which car company has agreed to back the government's estimate is not explained.

As we've mentioned in an earlier post, introducing a cheaper entry level model variant cannot be equated to a reduction in car prices across the board.

To date nobody can say for certain which mode will see a reduction in price, by when and by how much. Without a clear answer, consumers are withholding purchase of new vehicles.

This is hurting not just car companies but the government as well. Keep in mind that several GLCs including Sime Darby, UMW, DRB-Hicom are heavily involved in the motor vehicle trade. Let's not forget national brands like Proton and Perodua too.

This partly explains the impromptu press conference hosted by MITI yesterday, and not forgetting a similar response by Perodua following the Utusan Malaysia cover story fiasco.

Irrespective of which party forms the government, these issues are too complicated to be addressed within one government term. 

Car companies, who understand their business very well are standing firm saying there is no way they can reduce car prices without any changes to the current vehicle tax structure. We must remember that car companies are business entities and we cannot expect them to act like an egalitarian socialist body.

Many local car companies are joint ventures with their foreign principals. Hundreds and millions have been invested in building flagship 3S (sales, service and spare parts) centres and assembly plants. Their shareholders and foreign partners expect the local management to deliver a certain rate of return from their investment.

Check back here on Monday next week. We will attempt to explain the mechanics behind a vehicle's price structure.

Update : Read about the mechanics behind car pricing here and here.