Impact on car sales and prices from 2005 onwards

Impact on car sales and prices from 2005 onwards

Industry officials are hoping that there would not be a repeat of how the duty structure for 2004 was announced and implemented, which led to uncertainty and a big dip in car sales. There is expected to be an announcement on the duty structure for the local automotive industry under AFTA beginning 2005, under which import duties of Asean made cars will be reduced to 20%. In addition, a national automotive policy is expected to be announced to facilitate the liberalisation of the automotive industry in Malaysia. Currently, there are four national car manufacturers, nine assembly plants, twenty-four franchise holders, and 350 component makers in Malaysia.

                                                                   

The likelihood of effective tariffs on automobiles being lowered appears slim with the Government still running a budget deficit. This is due to the fact that tax revenue from automobiles is one of the top sources of government income. Apart from that, a sharp decline in new vehicle prices would have an impact on the stock of used cars and vehicles that have been financed by bank borrowings. According to the head of research of a local brokerage, lowering tariffs on automobiles would be difficult with analysts not expecting car prices to change. Although effective tariffs may not be lowered, analysts feel that money saved from paying lower prices for cars could be used to spur domestic consumption, which is an important aspect of future economic growth. Furthermore, analysts expect more new cars will be sold if prices fall, which could lessen the drop in government revenue from automobile tariffs. Industry officials have added that lower tariffs would also sway some non-national car-makers to establish manufacturing facilities in Malaysia. 

                                                                   

Malaysia was originally the only protectionist country, with the other three adopting liberal policies (Thailand, Philippines and Indonesia. Still, both approaches (liberal and protectionist) have their strengths and weaknesses (Table. 2), though the weaknesses tend to be more visible, firstly because demand, while growing, was still small in absolute terms and second, because industrial base in the region were rather too frail to push ahead with domestic production. The “National car” program so far indicates that by doing so it will enable the country to:

(1)   have more control in what happens, and

(2)   enable support industries to grow (to achieve higher local content).

Some of the merits and demerits of liberal and protectionist approaches adopted by the four ASEAN countries are highlighted in the following Table.

Table. 2: MERITS AND DEMERITS OF LIBERAL AND PROTECTIONIST APPROACHES

Approach          Merits                                                            Demerits

Liberal             • Small burden as the government        •    Leadership in the hands of foreign capital

                                                                                                •    Smooth response to market expansion    

                                                                                                •    Difficult for large production lots to come about

                                                                                                •    Difficult for support industries to follow up

Protectionist

•Large production lots possible                       • Large burden as the government

•Relatively easy for support industries            • Over protection inhibits business to grow    

                                                                                   diversification causing delayed responses to liberalization

•Leadership by host country                               liberalization

Source: Adopted from Bank of Tokyo-Mitsubishi Review, Vol. 1. No.4. September 1996

                                                                    This study has focused on the Malaysian automobile industry and the possible disadvantages and advantages that may be caused by the introduction of AFTA. The disadvantages can include loses incurred by the alleviation of protectionist measures, reduction in overall import, as well as having a negative affect on the marketing position. On the other hand, it may open greater opportunities for the automotive industry through regional cooperation and allow the industry to penetrate both regional and global markets. In order to achieve this, the goals of the automobile industry need to be focused on how to become cost competitive, improve quality, maintain dominance on the domestic market and become competitive in the international market.

 Though it is competitive now, the increase in competitive pressure, stronger yen exchange rates, and reclassification of multi-purpose vehicles (MPV) will cause competition to increase even more with the advent of AFTA in 2005. To stay in the game, carmakers are aggressively introducing new designs complemented by celebrity endorsements. Consumers are not only placing priority on pricing but also a premium on quality. As such, car manufacturers and producers need to ensure that they constantly come up with new models. In Malaysia, car companies have pursued an offensive strategy, offering numerous debates, discounts, and promotions, with the sole purpose of maintaining market share. One of the most obvious changes caused by AFTA and the partial liberalisation of the Malaysian car industry is the introduction of new models, especially among non-national producers and manufacturers. When AFTA arrives, many foreign carmakers would be able to produce their cars in other Asean countries such as Thailand and Indonesia, which have cheaper production costs and components sourcing, and sell them in Malaysia for almost the same price.