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June 15, 2013

Impact of car price drop


THE promise of lower car prices has been made and the question is when?

Judging by a move Proton Holdings Bhd is going to make, it may start at the lower end of the price range for cars first.

Igniting the cut in car prices will be the Proton Saga.

Sources close to national carmaker Proton say the company is looking at slashing the price of entry level Proton Saga by RM5,000 from its list price. The price of the basic manual transmission Proton Saga is listed at RM38,361.

This was confirmed by Proton deputy CEO Datuk Lukman Ibrahim on the sidelines of the Proton Preve launch in Jakarta on Thursday.

In May, International Trade and Industry Minister Datuk Seri Mustapa Mohamed pledged that the Government would stay on course to reduce car prices gradually by 20%-30% over the next five years.

Will the reduction in car prices start with completely knocked down (CKD) or completely built up (CBU) units?

As we know, popular Japanese marques are already enjoying substantial tariff cuts via localisation of parts and free trade agreements.

More clarity will be made when the revised National Automotive Policy (NAP) is announced in the third quarter, with details of the proposed revision to be unveiled pending a review by the Cabinet.

Meanwhile, data provided by the Malaysian Automotive Institute (MAI) indicated that car prices had indeed experienced reduction to a certain extent.

MAI chief executive officer Madani Sahari explains that the overall prices of popular cars have reduced by some 4% from January to May this year.

“Based on our analysis, prices of cars would not be reduced further anytime this year, as it would be a gradual reduction. If you want to buy a car this year, you should not adopt the wait-and-see approach,” he says.

It's envisaged that with the Asean Free Trade Area (Afta) coming into the picture soon, liberalisation of the automotive industry is a key factor for car price reduction.

The trickle-down impact, however, would not only be felt in the primary market among the franchise holders. The broader effect will be on the overall market which also includes the second-hand car market.

Madani: ‘Whatever we do, we need to consider the secondary car industry’.
Impact to secondary market

With a total industry volume (TIV) of about 600,000-odd units annually, some feel the influx of new cars to public roads is already reaching a saturation point.

More cars are traded on the secondary market, adding a further 500,000 units per annum to statistics.

Federation of Motor and Credit Companies Association of Malaysia (FMCCAM) president Datuk Tony Khor says the secondary market has indeed been impacted by speculation as buyers adopt the wait-and-see approach.

FMCCAM is the sole voice for the second-hand car industry, representing about 5,000 used car dealers nationwide, with about 60% of them registered under the FMCCAM umbrella.

“With Miti coming out with a clear statement, the reduction would work out to 4% to 5% annually, and this would provide a soft landing for second-hand car dealers,” he says.

On a constant basis, second-hand car dealers countrywide hold 120,000 to 150,000 units of rolling stock in their showrooms, and he expects business to bounce back to normal in two to three months as consumers begin to know what is in store in the future.

“Second-hand car prices would follow the gradual reduction in prices, and if it is a second-hand car, the value has already depreciated somewhat, and the impact of reduction in prices has been somewhat mitigated. The reduction of car prices according to Afta has been discussed between us and the Government many years ago, and we have proposed a gradual reduction, which is happening now,” he says.

Frost & Sullivan partner and head of automotive and transportation practice for Asia-Pacific, Kavan Mukhtyar says second-hand car dealers earn the difference between their vehicle purchase and selling prices.

“If prices were reduced suddenly, they may get stuck with vehicles purchased at much higher prices, putting their business at a serious risk. A gradual reduction in new vehicle prices would soft-land the second-hand car market. In any case, there will be some short-term adverse impact on the second-hand car market,” he says.

When the NAP was first launched in the middle of the last decade, there were adverse impacts on market development as a reduction in excise duties by 20% had been announced according to policy, but in reality car prices only fell by 5%.

“We believe the revised NAP will set a milestone-based liberalisation plan, with the AP system eventually phased out. It may be difficult to abolish in one go,” he says.

He says that while car prices are being reduced, the Government will also see a reduction in tax collection, which ultimately impacts the Government's coffers and its ability to allocate funds for economic and social development purposes.

“Its quite possible the Government may compensate for this revenue loss by reducing subsidies on fuel. However, this negatively impacts the rakyat and as such, the Government will have to carefully consider the decision,” he says.

Depreciation curve to steepen

RHB Research analyst Alexander Chia says with the gradual reduction being implemented, the depreciation curve would steepen and the reduction of residual value would accelerate.

“Ways to protect your wallet from the accelerated depreciation would include utilising public transport or buying a used car that has seen the worst of the depreciation. New car options include the cheapest models, likely a Proton or a Perodua. The cheaper options would limit your absolute loss from the steepening of the depreciation curve,” he says.

On the secondary market, Madani says about 60% or 360,000 car buyers annually are dependent on selling their used cars to purchase new ones. He says it also provides jobs to 100,000.

“In view of the above, it is imperative that whatever we do, we need to consider the secondary car industry. We were very concerned about earlier proposals to slash prices of new cars immediately as we knew the negative impact that will bring to the secondary industry,” he says.

Assuming if the secondary market bears the brunt of reduced prices, he says it will directly hit the manufacturing sector as well due to the 60% factor.

“In 2006, when the excise duty was reduced by 20%, the automotive industry (manufacturing) took two years to recover from the impact of consumers' wait-and-see approach. And an impact on this can be felt throughout the economic chain as the contribution from the automotive industry (manufacturing) is significant,” he says.

He says the automotive industry has a total direct employment of 250,000 (1 million household), contributing an average of 3% to the country's gross domestic product.

“For most consumers having a hire purchase loan of five years and above, this will be translated into a lower car value against the loan amount. As a matter of principle, the financial institution will be in a less favourable situation in the event of payment defaulters,” Madani says.