Monday, July 30, 2012

The Downside of Removing Car Taxes

This article by SM Nasarudin SM Nasimuddin was published in the New Sunday Times on July 29, 2012.


THE Malaysian automotive market's recovery continued last month with a year-on-year 35 per cent increase in volume to 50,067 units. June was the second straight month of growth in the industry, which had been in decline for the first four months of the year.
More importantly, the total industry volume (TIV) for the first half was 1.35 per cent higher than the corresponding period last year. A big factor in the higher volume in May has been the resumption of production at Thailand's automotive plants which were affected by the devastating floods last year.
Thailand's auto industry revival, which follows Japan's post-tsunami recovery in the industry, has been contributing positively to the global automotive market. Several reports noted that global auto sales last month reached 41.5 million units, up 5.9 per cent from the same period a year earlier. Toyota Motor Corp has also reclaimed its position as the world's largest car maker.
Back home, of late, there has been plenty of debate on approved permits and the reduction of taxes for cars. While much of this debate has taken a political tone, one thing cannot be denied: car prices in Malaysia are higher than many other countries as a result of the high taxes.
Naza Group has benefited from affirmative action policies put in place by the government through its New Economic Policy. With the support from the government, Naza now employs about 4,000 people directly, and double that figure indirectly through vendors. In terms of manpower management, our academy in Gurun, Kedah, trains staff in technical and management courses. We have been improving corporate governance to ensure transparency. Key performance indicators have been set so we can measure and improve our performance in all areas.
In the course of expanding over the years, we have come in contact with several auto makers from Europe, North America and South Korea. We've learnt from the best practices of our principals, applying these to the Malaysian market successfully and they are now encouraging us to enter into markets which are underserved. It's encouraging to look back and see how we've progressed from being an auto trader to the franchisee of several brands, to a manufacturer and exporter.
More than 35,000 lives are directly affected by what we do. We contribute to consumer spending, business investment in the country and the automotive trade balance through exports. All these are factors which affect the country's gross domestic product. We can't run away from the fact that people have abused the system, but it would not be accurate to say that the system failed in the case of legitimate businesses which resulted in job creation, domestic business investment and exports.
It is true that lower car prices would increase the disposable incomes of car owners and lower their debts. Higher disposable incomes would increase private consumption, which in turn would boost the gross domestic product.
Unfortunately, one key point that seems to be missing in the debate is the effects an immediate, outright removal of car taxes would have on resale values.
Here's an example: consumer A purchases a car for RM80,000 with 90 per cent (RM72,000) of the payment made through a hire purchase loan. A month later, taxes on all cars are reduced and that same car is now priced at RM50,000. As a result, the resale value of the car has plummeted but the amount owed to the bank remains the same. As such, should A decide to sell his car and buy a new car, he would still have to fork out an extra RM22,000 to pay off his debt. He would most likely put off selling his car.
This scenario transpired the last time car taxes were reduced in 2006. As a consequence of the lower taxes, the used car market tanked and brought down the sale of new vehicles. The TIV in 2006 fell 11 per cent to 490,768 units. In 2007, it contracted by a further 0.7 per cent to 487,176 units.
It took two years for the market to correct itself. It is important to note that this was the effect of a minor reduction in car taxes. Imagine what the effects would be if there is an immediate, outright removal of car taxes.
Many say that the biggest losers in 2006 and 2007 were the automotive companies but I believe the real losers were the consumers, many of whom inevitably had to come up with extra cash to pay off their loans to sell their cars. Ultimately, while a debate on reducing car taxes is much welcomed, there are a lot of questions that need to be addressed and the consequences of such measures must be taken into consideration so as not to hurt Malaysian consumers.

(SM Nasarudin is Naza Group of Companies joint executive chairman.)


Anonymous said...

May I add my 2 sen to the debate. I am a retired malaysian. My take, some, not all but, may be a high percentage will still buy a car above their mean. In general if a proton now cost rm40k instead of rm80k. They will now buy a honda at rm80k. They will always live above their mean.

Anonymous said...

I disagree with SM Nasarudin. Impact of "resale value" is only once-off. If you ask Malaysians, I bet you majority will prefer to "suffer" one time loss than perpetual payment of high car price.

Having said that, I think the sequence & timing of change is very important.

1. Improve (exponentially) public transportation
2. Remove fuel subsidy
3. Reduce car price


Anonymous said...

What can we expect coming from a person whose family empire was built from low tech "car assembly" protected by the government in the name of having some Bumi multi-millionaires? Sure, >35,000 lives are directly affected by what they do. The question is: how about the lives of >10 million Malaysian households who have to pay through their noses for so many years to "protect" Naza, Perodua & Proton? Obviously Mr Nasimudin has vested interest to protect. The reality is that we Malaysians have been forced to become "poorer" in the name of protecting the national and pseudo-national car assemblers. It just doesn't make sense to us Malaysians to pay RM100K (US$34K) for an outdated model of Naza Ria when one can buy a brand new Toyota Alphard for the same amount of money. Or, having to pay RM60K (US$22K) for a Waja when one can get a brand new Toyota Camry for the same price! And a lot of consumers in a lot of countries are getting exactly that! Why must we protect certain "brahmins" of the auto industry in this country at the expense of the masses?


Anonymous said...

what a weak argument from a spoon fed multi millionaire entreprenuer who benefitted from a con job that gave his cars national status.....

and no suggestions of what should be done either.....

Anonymous said...

bodohnya !!!


prabha nayar said...

good morning

has he forgotten what happened circa 1990?

the kia carnival was introduced at rm150k+.

soon after,the naza ria was introduced at rm90k+.carnival, cbu; ria, ckd and 'localised'.

the value of my friend's one-year-old carnival dropped rm70k, almost overnight.

and he was stuck with a rm120k loan.

i may be totally wrong, but with the writer of the article being a businessman, his company must have have had the 'ria' deal all sewn up with kia even before the introduction of the 'carnival'in malaysia; agreements such as 'localisation' are worked out way in advance.

then again, i may be totally wrong...

Anonymous said...

Lets remove cost of Approved permits AP then !
The cost of vehicles will be drastically reduced leaving a higher household income balance.

Anonymous said...

Of course he wants the current trend to continue . Continue to milk the poor rakyat dry till their last drop.
Did his father not benefit from the AP scheme that drove prices of cars skywards. He made millions off the backs of poor Malaysians and he has the cheek to defend the system that made crony's super rich while the rest of the poor malaysians were saddled with huge car loans.
Time to get rid of such parasites.

Anonymous said...

Parasite! Enuff said!

bruno said...

Nuraina,the writer of this article must be having wet dreams.How can there be a downside by removing car taves.Downside to who,cronies?

Less taxes,whatever taxes they may be is always good for the people.Because with more money in the pockets,people tend to spend more.More spending means more business.More business means more jobs.

Then the wealth will be evenly well spread out.Nowadays because of cronism there is monopoly of certain industries.Therefore the concentration of wealth will end up in the hands of a favored few.

Anonymous said...

SM is an idiot!! merit to even write that article

Anonymous said...

this is what someone calls a greedy bastard that continues wanting to be greedy instead of trying to quickly strategize his organization

Anonymous said...

what a fuktard!

NEPAbuser said...

Now is a good time to discuss on the failure of the NEP. The NEP was borned out by the frustration of the Malays which boiled over in 1969.

By no means of the imagination can the Malays think that giving tens of thousands of APs to Naza can be said to be part of NEP.

The NEP is meant to involve the majority of the Malays into business and not for the benefit of Rafidah clans.

Therefore it is timely for the next Government to dismantle the APs from current monopolisers and distribute them to more small and medium Malay enterprise.

Time to go Nasarudin. You have benefitted unfairly at the expense of the Malays. This is not NEP but an abuse of the spirit of NEP. A bastardisation of the NEP. It was never meant to benefit your familys wiith hundreds of millions worth of APs.

Alyaniff said...

Dear all,

I agree with this post. And Anon 6.00PM. I don't agree with some who say that the writer of this article has already benefited from the car industry in Malaysia(accused to benefit from being a crony), so he was not qualified to write this article. That is not a clever argument.

If I may quote this wisdom words:

"Great people talk about ideas. Average people talk about things. Small people talk about other people."

This should sums up the notion that people who support abolishing car taxes didn't think broadly about this issue, they just think in term of themselves, very selfish. Thank you.

-Alyaniff, Putrajaya

Outside looking in said...

Nasa summed it up well... It took 2 years for the market to correct itself. He is trying to prevent his companies from suffering loses due to the drop in the market.

My tHought is that we need to swallow the bitter pill, no medicine is taken without resistance. Look at the Australian market as an example when they removed their tariffs.

We can live on subsidies forever. We will never learn to fight.