Not As Protectionist As You Think

It seems that whenever we write about a local-brand car being a favourable option, many Malaysians will immediately comment on our country's taxation system and the word "protectionism" will inevitably pop up. We can understand the perspective – after all, cars from non-local manufacturers are considerably more expensive than even the cream of the local crop.

That being said, perhaps protectionism isn’t the word you should be using. It’s easy to think of the current taxation and excise duty schemes as heavily favouring local cars, but here are a couple of things that you should consider:

• Luxury car tax used to sit at 200% to 300%
• These taxes have been around since before Proton or Perodua
• We pay far less percentage wise in terms of tax and duties now

Now if these three simple facts aren't enough to make you stop and think for a moment, let us re-examine the idea that Proton and Perodua have been protected.

In the beginning

Yes, there's no doubt that both of these companies benefitted from not having to pay duties and taxes. Unfortunately it isn't as simple as that, because these companies still used a fair amount of foreign manufactured content that was taxed - just as how the government currently taxes CKD car components for locally assembled models.

But this has changed as over time, the government has had policies like the Industrial Adjustment Fund, which allows for companies to enjoy the same tax breaks as Proton and Perodua if they choose to invest in our country - things like Research and Development centres, manufacturing facilities, test tracks and so on. The option is there, but few if none actually see the value in investing more in Malaysia, although that's a story for another time.

Our weak currency

It may surprise you to know this but back when Proton first launched the Saga, it wasn't that different in absolute pricing compared to Japanese models of the time. It was a little cheaper, sure, but not nearly the kind of price discrepancy you see today.

There are a couple of reasons for this. The more obvious one is that cars now come with more features than ever, which generally means a higher cost of production. But the larger reason for this was an explosion in Japanese Yen value through the late 1980s- in the span of a decade, imported car values rose by 50% and it had nothing to do with changes in taxation or duty structure.

This applies to other currencies as well. The ringgit saw a decline from the 1970s to the 1980s against the German Deutsche mark, with only a quick bounce back from 1980 to 1985, before sharply declining in value again. By the time 1990 rolled around, one ringgit would get you half as many Deutsche marks as it would in 1970.

We don't even have it that bad

While it may seem like the government favours local car brands, few people have any context of how difficult other countries make it for their automotive industry. Let's run through a quick list:

- China has insane import rates and to set up a car manufacturing or assembly hub locally you MUST have a local partner. These rates were as high as 260% or more during the 1980s and 1990s, although more recently they have relaxed as a result of trade negotiations.

- Korea heavily restricts foreign auto manufacturers from either using product placement in recreational media or outright advertising at times. This was a more serious legislation up until 1995, but even until today Koreans tend to abhor foreign car brands by virtue of patriotism.

- The United States is severely protective of their local automotive industry - but this is more in terms of manpower and workforce than brand. They even created a specific tax to limit the import of pickup trucks, and auto manufacturers tried hard to circumvent it with all kinds of crazy ideas.

- Thailand has even higher import rates than Malaysia, forcing manufacturers to assemble locally if they want a chance at all. Unless you’re selling ultra-luxury cars, it will be hard to stay competitive with a 200% tax rate levied against your imports.

- Singapore practically hates cars and you end up paying more than double what the car is worth and then some for specifications that aren't even comparable to our cars. You also have to pay a huge sum every 10 years to keep your car legal thanks to the Certificate Of Entitlement system.

Revenue is revenue

If you haven't realized yet, car tax is one of the largest sources or income for our government. That money goes to a variety of things that may or may not be automotive related, but it is still money that the government needs to run effectively.

In the eyes of many Malaysians, there should be no automotive tax. This would mean a huge loss of revenue for the government, which in turn increases tax on other goods or reduces the subsidy on petrol - which will inevitably lead to everything becoming more expensive. The other option is to make Proton and Perodua pay the same amount of duty (despite being largely locally manufactured) - but then many would no longer be able to afford a car.

What’s the takeaway?

Of course, everyone is entitled to their own opinions on the system we currently have. What we have written here doesn’t dive into the details of CKD production – which is taxed differently from fully imported cars – but there is also a distinction between a car that is assembled here and one that is entirely manufactured here.

We can only hope with what we’ve said, it will help you broaden your perspective on how our tax and duty structure works here, as it isn’t always as clear cut as people make it out to be. If you agree or disagree, let us know in the comments below.