The Downside of Removing Car Taxes

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

HERE.

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.)