Sunday, October 21, 2012

Cheaper cars wanted

By Azam Aris of | The Edge Malaysia – Thu, Aug 9, 2012 DO Malaysians deserve cheaper cars? After having to pay so much more than consumers in other countries for so many years to buy a car, the majority would say, "Yes! We want cheaper cars!"

I remember in the early 1980s when my brother bought his first car — a Mazda 323, which only cost about RM17,000. The other options were the slightly-cheaper Nissan Sunny and the slightly pricier Ford Laser.

A fresh graduate's salary then was RM1,200 to RM1,500 — not very much lower than today's starting pay — but he definitely had greater purchasing power.

In addition, cheaper cars and houses — one could find a double-storey house for RM60,000 to RM80,000 in many areas in the Klang Valley then — meant lower loan commitments. The disposable income of a graduate was much higher.

Those were the days when the nation was just an assembler of foreign cars. Later, we decided to venture into the unknown territory of heavy industries to become a car manufacturer, in a bid to emulate the economic quantum leap of Japan, South Korea and Taiwan.

Proton, the national car maker, was incorporated in May 1983. By July 1985, along with the lesser-known Japanese car manufacturer Mitsubishi as a partner, the nation's pride — the Proton Saga — was launched at an entry level price of RM17,800.

The price was competitive initially but the national car manufacturer needed to be protected so that it could gradually grow into a regional and, perhaps, global player. An almost sure way of protecting Proton was to increase the duties of its competitors, hence the introduction and imposition of a high excise and sales tax regime for locally assembled foreign cars and fully imported vehicles.

Today, nearly 30 years after Proton was set up, the price of the equivalent of a Mazda 323 is RM100,000, a Ford Fiesta sedan goes for RM80,000, and the Nissan Sentra and Latio cost about RM90,000 — or nearly five times more.

Proton's low-end Saga 1.3, priced at RM38,000, is among the cheapest cars in the country, but still costs more than double what it did when it was first launched.

But wages have not doubled for many, let alone increased five-fold during the same period. Salaries have remained relatively low for the majority of the population, with about 70% of households in the country earning below RM3,000.

As public transport — which is in the midst of an extensive upgrade — is still inadequate, many are still forced to buy a car. Dollar for dollar, the prices they have to pay are among the highest in the world.

A Toyota Camry 2.5 litre that costs about US$30,000 (RM90,000) in the US is priced at about RM182,000 here. A Volkswagen Golf GTI costs RM120,000 in Germany, but RM200,000 here. The sporty Peugeot RCZ 1.6 turbo goes for £21,000 (RM102,000) in the UK, compared with RM223,000 here.

Excise duties for cars can be as high as 105%. On top of that, there is an average sales tax of 10%. According to one estimate, if a Malaysian consumer pays RM100,000 for a car, as much RM55,000 goes to paying for various duties.

So, it is not surprising that Malaysians spend a substantial portion of their disposable income on monthly car instalments and maintenance. That is a high price to pay — 20% of the RM581 billion in household debt is due to cars, the second highest percentage after housing loans.

It was thus not surprising that when the opposition coalition, led by PKR, proposed a massive reduction in excise duties, many supported the move, which would result in lower car prices, lower monthly instalments and higher disposable income.

Ruling party members called it an election gimmick and warned that such a move would result in the loss of RM7 billion in revenue, which is much needed by the government as it has been running a budget deficit for the last 14 years.

Proton will lose a lot of money, a lot of jobs will be lost and the second-hand car market will stall, the critics claim. In short, they say, the proposal will not be viable and cannot be implemented.

Yes, any reduction or removal of duties, if not replaced with new or higher taxes elsewhere, will directly decrease the government's revenue. However, all is not lost if a cut in duties results in higher disposable income for many.

Let us assume that of the RM7 billion in revenue, 50% is cut. That would mean RM3.5 billion would be put back into the pockets of consumers, which they would likely spend and plough back into the economy. In an economy that relies on domestic consumption, the multiplier effect of RM3.5 billion would be immense.

The loss in revenue can also be compensated through a further revamp of the approved permit (AP) system for imported cars, which has been consistently abused in the past. AP documents, which cost nothing, were traded among bumiputera and non-bumiputera car dealers for up to RM40,000 each.

Now, the government has imposed a RM10,000 fee for each AP but a further increase would not hurt those who can afford imported vehicles — the rich and upper middle class.

An open bidding system that has been recommended would give the government higher revenue.

As for Proton, it will not be on the losing end as the prices of its products will also drop and remain the cheapest in the country. Cheaper cars mean a bigger market. That will also get Proton ready to compete in a more liberalised domestic, regional and international market.

The message to Proton should be that if it cannot compete domestically and internationally after 30 years of protection, then it can never be ready to compete even if it continues to enjoy such a privilege for many more years.

Many people feel a gradual removal of duties is doable immediately and this will allow the used car market to adjust accordingly.

In the past few weeks, there has been a lot of debate on the pros and cons of this issue. But after all is said and done, the one inescapable conclusion is that we do deserve cheaper cars, plain and simple. Azam Aris is managing editor at The Edge. This story appeared in The Edge on Aug 6, 2012.

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