Reducing the Price of Cars – How it affects us

 

 

General election periods have always been interesting. You see all sorts of slander/counter-slander, suing/counter-suing and of course, candies and sweets; goodies and promises flying around on all sorts of media. . One of such promise recently made by the Opposition party related to the automotive sector is the campaign to reduce the price of vehicles sold in Malaysia.

 

 

 

 

While it sounds like a noble idea, what are the implications? On a larger scale, how does it affect the country’s economy, on a medium scale, how about businesses and on a more personal scale, what does it mean to the average Malaysia who may or may not be currently owning a vehicle? Let’s discuss its demerits/merits here (no, this is not a political discussion. Let’s keep it to automotive related only)

 

 

Now, if you do not already know, Malaysia is one country where cars, particularly imported models are insanely expensive, no thanks to the National Automotive Policy (NAP) which was put into place to protect national car manufacturers and stem the outflow of cash overseas. Also, coupled with how a select few individuals who have manipulated the Approved Permit (AP) System (explanation on AP can be found HERE) to their advantage, it’s small wonder that many Malaysians have felt that the NAP has failed to benefit the general public.

 

 

Just to illustrate an example, a Honda Civic may cost about RM50-60k in the US but we pay double that price here at around RM120k (don’t ask me why a locally assembled model such as the new Civic with more than 60% local content components still costs a whopping double what Americans pay for a similar model; that’s probably another story another time). Volkswagen, a brand known to produce “The People Car” by means of making its models priced within easy affordability is seen as a luxury brand with a Polo costing more than USD31k and a Passat CC would set you back double that amount at USD70k.

 

 

 

 

The bad

 

 

• By torching the excise duties and other automotive related taxes, Malaysia would be losing between RM6 to 8 billion annually.

 

• If you are a vehicle owner now and wishes to sell your car in a few years time to upgrade to a better model, the second hand value of your vehicle would have suffered a tremendous hit while you paid a higher price at the time of your purchase.

 

• Second hand car dealers would be deep sh*t since no one wants to buy a 2nd hand vehicle if the new car price is relatively lower and more affordable while at the same time, they have purchased the pre-owned vehicles at a much higher price prior to the change in policy.

 

• Us, the owners will be having a tougher time selling our cars because selling price will no longer be the same and the trade-in value to 2nd hand car dealers will dip tremendously as the industry takes some time to adjust to the new selling price. So you might have to wait a little longer for that Beemer you’ve always wanted in your garage as you try to sell your aging Toyota Camry 2.5V which, “IF” by the time the policy is in full effect, your 4-airbags/no-VSA sedan has become far less attractive if UMW takes this opportunity to introduce a face-lifted model with all the bells and whistles at a lower purchase price than what you paid earlier.

 

• Traffic jams will be rampant as we will see more 2 wheelers going 4 wheels (I don’t quite agree with this unless P2 comes up with a model that sells for RM1-3k like a motorcycle) and this, in turn would result in everyone being late for work which means productivity of companies fall & making less profit which then leads to less taxes collected by the government which will then lead to the country going bankrupt and anarchy will happen, crime increases and the End of the World.

 

 

 

 

The Good

 

 

Let’s face it, a significant amount of our income goes to our cars. Banks require a minimum of 1/3 of our income to qualify for a car loan and those earning less may have found some means to over-declare their income with some car loans taking 50% or more of their monthly income. By reducing the price of cars, we can probably expect the following benefits:-

 

• More income towards purchasing a better home
• More saving for children to pursue better education
• Better standard of living for the family (food, clothing, savings) which means economy is stimulated with more spending
• Increase features and quality of all vehicles, particularly safety aspect as the automotive playing field becomes leveled
• An increase in traffic is unavoidable but I won’t be surprised to see 4 wheelers going 2 wheels as they realise how much more quick and efficient it is for them to travel on a bike. This means those taukeh, politicians, big shots who have to rely on drivers gets stuck more often and complains to the government who tend improves public transportation to get more cars off the streets

 

How about the loss sustained from purchasing a car full price and selling it at a much lower price if the new car price goes down? Well, you’d be buying a new car at a lower price too so the price difference is somewhat offset. But here’s the problem: when you’re trading in an old car for a new, you worry about 2 things:-

 

 

1) Fully settle the outstanding car loan with the bank

2) Fork out a minimum 10% downpayment CASH for the new car

 

 

So, here you are, happily thinking that you’ve worked your butt off paying for the car and finally, you’re down to RM40k loan outstanding and last you checked, your 7 year old Camry still fetches around RM60,000. Great, you can still get back RM20k and upgrade to a more decent car that costs around RM200k. Then, the policy came into effect and your Camry’s value suddenly dropped to RM30,000. So if you insist on going ahead with the purchase, you’d need to come up with:

 

 

Additional RM10k loan settlement + RM20k downpayment = RM30,000 cash

 

 

Sucks, doesn’t it?

 

 

The solution? Don’t change cars until your loan is fully or partially settled so that you don’t have to pay the bank anything. It’s not like your current ride is going to die on you immediately … and if it does, well, you’d still need to do what you need to do regardless if there is such a policy or not anyway so the point is moot.

 

 

I’m all out for improved public transportation. Despite owning a car, I do commute down to KL in a train or two every once in a while and I see a different side of Malaysians who are kind and peaceful, made up of different race and color. My gripe with the national transportation system is that it’s unpredictable which may cause me to be late for my appointments, making it not a feasible option for my daily job.

 

 

I strongly agree that the price of vehicles must come down. A car is a depreciating liability, therefore it seems rather ridiculous that we have to allocate 20-50% of our monthly income to pay for something that costs less with each passing day; those monies can be put to better use and make life more meaningful than on 2-pairs of wheels. But I feel this is not a simple YES/NO answer to the excise duty. There are a lot of vehicles currently on the road. Not only do we have to consider the increased traffic on the road, there are also a lot of Malaysians currently serving a loan tenure with the bank.  Dropping the car prices like a pile of hot crap without giving it a period of adjustment may cause further stress on Malaysians who’re deep in debt. There are various other means that can be done to achieve this goal such as gradually reducing the excise duties over a period of a few years. This would mitigate the losses of current owners while every party in the automotive sector have time to adapt to prices that reflect the true value of vehicles.

 

 

 

 

By the way, I am surprised that there are a lot of Malaysians out there who believe that for this to become real, something else have to go and have suggested to float the price of fuel. IMHO, we are an oil producing country. No one has to pay us anything for us to get the oil from our own soil. The subsidy is in the form of oil companies loss of revenue if (the oil) exported. Floating petrol prices may indeed increase the country’s revenue but it would cause more problems than solving it.

 

 

If tomorrow RON95 doubles, your roti bakar & teh tarik may go up 4-fold, taxi, bus & train fare jumps as operation costs increase (or more bus operators decides to fold)  …. essentially, the entire logistics of the country would be affected and as long as the average income of the rakyat does not improve, tampering with this may have severe negative repercussions. Before you condemn this thought, consider the nasi lemak makcik/pakcik who rides a motorcycle and fetches their 3-4 children to school while trying to make ends meet. The price of cars go down but they still can’t afford it. Suddenly petrol prices goes up, the cost of riding the bike increases with similar mark-ups at the cost of vegetables and other food materials. How does this help them? Think about it …. how many Malaysians are in the lower income group & earning less than RM3,000 a month with 6 to 8 mouths to feed back home?

 

 

 

 

So therefore, if it’s revenue the government wants, then I would agree that those who has more than 1 car under their names should either be taxed higher at the point of purchase or a higher road tax be collected from them. If you’re a company with a fleet of cars, the government is happy with more money from you while you’re happy to declare lesser profits on the P&L statement as the cost of business is transferred here. Win-win situation for everyone. Some might say they can buy their 2nd or 3rd car under another name but really, eventually, that boss is gonna run out of mothers, fathers, uncles, aunties who doesn’t drive … other siblings who do drive (or have kids who’re going to drive) won’t be so willing to pass this privilege to another.

 

So what do you think?