Explaining The Mystery Behind High Car Prices in Malaysia - Part 1

Malaysians often complain that because of high taxes, they have pay some of the highest car prices in the world. There is some truth in that argument. Take for example a Japan-made 2013 Toyota Prius, which starts at RM140,000 in Malaysia. A similarly equipped Prius sells for only around RM80,000 in the US and Japan.

In truth, the subject of high car prices is actually quite complicated and goes beyond just taxes. This post will attempt to explain to Malaysian car buyers on the mechanics behind vehicle pricing, and along the way debunk some myths.

Considering the complexity of the topic, this post will split into two parts to keep it short.

As the Malaysian government has a direct interest in the automotive industry via national car makers like Proton and Perodua, the touchy subject of politics cannot be avoided but great care is taken to ensure impartiality, as evidenced by the earlier posts made.

For ease of reading, quoted prices of cars in other markets have been converted into RM. This does not imply its relative affordability as affordability is also a function of other economic indicators such as purchasing power parity and average household income. This post will not touch on affordability but only on the mechanics behind vehicle pricing.

The RM24,860 Perodua Myvi 

In one pre-election message made in March 2013, a politician claimed that a RM46,000 2013 Perodua Myvi only costs RM24,860 without taxes. The short answer is this assumption is incorrect.

When contacted, Perodua politely declined to comment on the politically charged topic but explained that the price of a Perodua Myvi before tax can be found by referring to the Myvi's Labuan price list, which lists the 2013 Perodua Myvi 1.3 EZ at RM41,037. That is RM6,008 cheaper than a fully taxed Kota Kinabalu registered model.

The CEO of the Malaysia Automotive Institute (MAI) Madani Sahari explained that the assumption that excise duties are applied in the same manner across board is incorrect.

Madani explained that the Ministry of International Trade and Industry (MITI) offers various grants to car companies, both foreign and local, to promote value added activities like research and development and vendor development. The Industrial Adjustment Fund (IAF) and Automotive Development Fund are two examples.

All car companies that carry out completely knocked down (CKD) local assembly of motor vehicles qualify for these grants. The scale and value of the work carried out will determine the value of the grant given.

These grants are used to off-set the actual excise duty paid through Customs. The considerations used in determining the value of grant given however, are rather opaque. A brief comparison of prices between national and non-national cars suggests that in some cases, these grants are even used as subsidies.

Perodua, being one of the largest car manufacturers in the country conducts a very extensive list of product development work at its headquarters in Rawang. With Malaysia as its base, Perodua conducts more R&D work than any other foreign brand.

Thus, Perodua receives one of the highest rebate values and it effectively pays little or no excise duty for its models. This applies to Proton as well.

As Proton does far more extensive R&D work than Perodua, the rebates received by Proton are even higher. This allows Proton to price its sedans, which traditionally cost more to build, slightly lower than Perodua's hatchbacks.

Instead of the claimed RM24,860 for a Myvi, RM40,000 is a more likely figure.  

In other words, our national cars are not that cheap and can only be sold at the current prices because of heavy subsidies (indirectly) from the government.

In case you are wondering why foreign car companies don't do more R&D work here, the simple answer is because they already operate far more advanced facilities in other countries and duplicating the same work in Malaysia, which is not their main market, would not be very prudent.

New product development work typically happens either in the car maker's headquarters or major overseas markets like China, Europe, USA or Thailand.

High Cost Of National Cars, Not High Taxes Behind High Car Prices

I am now going to throw a suggestion that is going to shock many readers. What if I tell you that foreign brand cars are expensive not because the government inflates the prices, but because our national cars are expensive and this sets a base level price for other brands to follow suit.

The perception that foreign cars, even when locally assembled, are taxed higher than national cars is not true.

As you can see from the table in the beginning of this story, Malaysia's vehicle tax structure only makes a distinction between locally assembled and imported vehicles. A similar size Proton, Perodua and Toyota is placed under the same tax bracket. 

This is where things start to get complicated. 

Based on announcements by Proton and Perodua, both companies produce about 200,000 vehicles a year, which is far below the commonly suggested break-even volume of 1 million units/year.

In the case of Proton, the company's cost efficiency is even lower as its already low production volume is split between two plants. The general consensus is that a mass production car plant, similar to the setup and scale of Proton and Perodua's plants, can only achieve optimal efficiency from 400,000 units/year upwards.

To keep up with the competition, car companies need at least three model lines and each model needs to be changed every five years or so. Development of new products can go in hundreds and millions of Ringgit.

Honda for example, spends over USD 6 billion a year on research and development, but recovers nearly USD 79 billion in revenue (fiscal year ending March 2013) from selling over 4 million cars per year.

A smaller company is also required to spend heavily in R&D just to remain competitive, but it lacks the economy of scale. As a result, its cars cost a lot more to manufacture.

Honda is able to develop the 2013 Honda Jazz 1.5 Grade S from concept to reality, manufacture and sell it at a profit for RM59,800 in tax-exempted Labuan.

A similar size but lesser equipped (without electronic stability control and brake assist) Perodua Myvi 1.5SE sells for RM52,611 without tax.

Feature for feature, the Myvi isn't that much cheaper. This is despite the generous rebates and minimal R&D expenses required as critical components like engines, transmissions and platforms have already been developed by Daihatsu.

National Brands Raised The Value Of Foreign Brands In Malaysia 

The cheapest Toyota Vios 1.5J manual sells for RM72,417 here. Over in Thailand, they already have the all-new 2013 model, which starts at an equivalent price of around RM57,000, about the price of a Perodua Myvi 1.5SE here. Why the disparity?

In Thailand, a Toyota is driven by anyone from taxi drivers to first time car buyers so the company can't charge a similar brand premium as in Malaysia. Over here, Toyota has a strong aspirational value. This allows Toyota to charge a higher prices than a Perodua, which unfortunately because of its higher unit cost, has set a high base line for Toyota to start pricing its products.

From a brand positioning and market value point of view, the principals of a well-established globally recognized brand would not agree to their cars being priced at the same level as a Proton or a Perodua.

Surely even the cheapest entry level 1.5-litre Toyota five seater would have to be priced higher than the most expensive 1.5-litre Perodua five seater. It's a basic marketing maxim - never sell below what you are worth.

All marketers know that once a high value brand engages in a price war and drops its price to match other value oriented brands, it will be very difficult to return to its former position and convince consumers to pay any higher for its future models.

It is a vicious cycle, until national brands up their game by matching the foreign brands in terms of technology, brand appeal and improve their manufacturing efficiency to lower their cost per vehicle, there will always be enough consumers who are willing to pay a premium for a foreign brand, who will continue to price their cars above our national brands.

Before anyone accuse car companies for being greedy, it is important to see the subject in its totality. This is the unintended consequence when a government tries to limit foreign brands to a smaller segment of the market. The limited availability only serve to raise the value of these brands.

This is why economists often advise that role of the government is to set standards and it is the role of business entities to find solutions and make a profit and create jobs within this standard. When governments get involved in businesses, that's when things start to get complicated.  

The Reverse Is Happening In Neighbouring Countries

I once interviewed the staffs at a second tier Japanese brand in Indonesia, where Toyota is a very well respected and top selling brand by a very wide margin.

When asked about how they determine the prices of cars sold in Indonesia, they replied simply "Keep it below Toyota."

This is the total opposite from Malaysia. Rather than enjoying the benefit of a baseline where prices can almost never fall below, Toyota in Indonesia is a victim of its own success. Its popular models have set a ceiling price for other brands and the company is constantly pressured by competitor brands in limiting any price hikes. 

Local Assembly Does Not Mean Cheaper Prices

The Japan-imported Honda Jazz Hybrid used to sell for RM94,888 before it was replaced by a locally assembled CKD model at RM89,900. The reduction in price was accompanied by a deletion of four airbags, paddle shifters, rear disc brakes and S-mode function in the CVT transmission.

During the launch of the 2013 Honda Jazz Hybrid CKD in November, Honda Malaysia's managing director Yoichiro Ueno explained that local assembly does not bring any real cost benefit in the short-term, explaining that the motivation has more to do with maximizing local content and supporting the government's policy to promote local assembly of energy efficient vehicles.

Taking the Malaysia-assembled 2013 Toyota Vios for example, UMW Toyota produces about 32,000 units of Vios a year in Malaysia. Its Thai counterpart, Toyota Motor Thailand, produces nearly twice that amount, about 62,000 units a year - 50,000 units for domestic sales and 12,000 units for export.

Between the two Toyota plants, which do you think is able to negotiate a lower price for parts like seatbelts, tyres, batteries, power window motors, automotive glass, tail lamps, headlamps etc?

This is related to the earlier point made about economies of scale and partly explains the disparity in prices. 

Check back here again tomorrow to read the next part of this story. Among the hard questions raised are :

• How is it possible that imported cars in Malaysia cost twice as much as in the US?
• Do APs really drive up car prices? Is it true that car companies have to buy APs that costs over RM10,000 a piece?
• Does the government control the selling price of cars?
• How much do car companies make from each car?

Update : Follow this link for Part 2.