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Saturday, November 06, 2010

ARTICLE: Revving it up

The Star: Saturday November 6, 2010

Revving it up


New vehicle sales may hit a record this year but key issues remain unresolved

The country’s car industry is poised for record sales this year and with the changes brought about by the revision of the National Automotive Policy to set the industry on liberalised mode, the pace is set to quicken.
Galvanising the industry further are the fresh moves to abolish taxes and excise duties for hybrid and electric cars and motorcycles to push the green agenda on high gear.
Even so, there are many other key developments set to emerge on the forefront which could further alter the industry landscape. They include the government-led initiative for a Proton-Perodua merger, the issuance of more manufacturing licences in the country and the much-hyped about entry of Volkswagen to assemble cars in Malaysia.

Meanwhile, auto players are basking in the possibility of seeing a record year in terms of new vehicle sales.
“The main reason for this growth in sales is a result of the strong economy in Malaysia, which emerged from a “V” shaped recovery,’’ says UMW Toyota Motor president Kuah Kock Heng.
Naza Group’s SM Nasarudin says the new licences will boost competition.
“New model offerings, reasonable interest rates that make car ownership relatively affordable and a young population with a strong desire to own a car – all these factors combine will make 2010 a record breaking year,” says Kuah.

According to Frost & Sullivan consultant Ahmad Faridz Dzulkarnain, growth in the first half of this year was largely driven by strong sales of MPVs (multi-purpose vehicles).
In this segment, the big numbers came from Perodua Alza and the Proton Exora which has led to a rise of 80% sales year-on-year.

Ahmad expects the growth rate to maintained for the remaining months of 2010, albeit at a slower rate compared to the first half of the year.

The supporting factors for rising sales include the launch of Proton Inspira this month, year-end festivity and the price reduction of hybrid vehicles.

“Moving forward, we hope consumers look for vehicles that are both more cost efficient as well as environmentally conscious. Awareness of the capabilities of automotive technologies today and the need to take pre-emptive steps to address global challenges such as sustainability will become more prevalent,” says BMW Group Malaysia managing director Geoffrey Briscoe.
MAA’s Aishah ... ‘Fuel quality should keep up with global trends.’
Budget 2011 which was unveiled not too long ago had included the abolishment of taxes for hybrid and electric cars for one year from a tax cut in the previous budget. Still, this is too short a period, says Malaysian Automobile Association president Datuk Aishah Ahmad.

“The validity duration should be at least 3 years for better business planning purpose,” she opines, addings that the incentives should not be limited to certain engine capacity only (2.0 litre and below).

“It should be given to all engine size.”

New auto licences

A key development that could potentially alter the industry landscape further is the awarding of new manufacturing licences issued by the International Trade and Industry Ministry.

As it stands now, Berjaya group has received a licence to manufacture commercial vehicles, hybrid cars, electric cars and luxury passenger vehicles in Malaysia.
UMW’s Kuah says Malaysia needs to do more to develop the component makers.
Although the licence does not grant Berjaya the permit to make cars under 1,800cc and below RM150,000 per unit, which represents a huge segment, it still is a milestone for the company.
Following this, Berjaya, which currently contracts out the assembly of vehicles, will now be allowed to conduct assembly on its own in a single plant. This will enable it to reduce costs through higher economies of scale in the long run.

In line with this, the company plans to assemble other makes of Mazda, beyond the Mazda 3, throwing in commercial vehicles into the mix as well.

The new licence is a signal that the Government is open to allowing more players in the commercial vehicle market, which Aishah says will heighten competition as brands from China would likely make inroads into the Malaysian market.

“There could be some rationalisation of existing assembly plants producing commercial vehicles in terms of production mix between commercial and passenger vehicles,” she says.

Protectionist – or not?

While many deem the government’s reluctance to allow car makers to penetrate into the national car segment as protectionist, Naza Group of Companies Joint Group executive chairman SM Nasarudin SM Nasimuddin still believes the new licences will enhance competition among the existing players, ultimately benefiting the industry and consumers.

Briscoe echoes this sentiment: “The introduction of new manufacturer’s licences will inevitably encourage greater investment into the Malaysian car industry by foreign producers and also aid in developing a more competitive industry, both of which are likely to have significant benefits to the Malaysian consumer.”
But market observers are not jumping to such conclusions – just yet at least.

They say for global car makers to be drawn into the Malaysian market, they will first need to assess if there is sufficient volume to justify committing considerable sums to build a full-fledged manufacturing plant in the country.

Without the right to dip into the segment long ring-fenced for the national car makers, which still accounts for the lion’s share of the market, the case for volume could be a little harder to make.

Lest we forget, neighbour Thailand has long been benefiting from the protectionist policies of Malaysia to grow their own car industry which includes component makers.

Any policy measures in Malaysia to woo foreign car makers will be benchmarked against the successful steps Thailand has taken thus far towards that end.

Even though the new licences may not allow new competition in the below 1,800cc segment, assemblers in the country have already ramped up their CKD (completely knocked down) operations in the country in accordance with the tax reduction brought about by the revision of the NAP.

Still, Kuah says the market for vehicles with an engine capacity greater than 1,800cc remains small as in 2009, it was only 6% or 23,178 units of 407,005 cars sold.

“Therefore, if there is an increase in the number of players for 1,800cc and above vehicle, it will be very crowded. Even today, there are far more active players than compared to five years ago,” he says.

Gearing up for green

Despite the limitations of any manufacturing licence in the country, Ahmad says the presence of new players will no doubt provide long-term benefits to the industry.

He says new manufacturers will offer consumers choice and existing players need to remain competitive to deliver better products to consumers.

“Consumers will also be able to purchase locally-assembled hybrids, electric cars and luxury segment vehicles at relatively cheaper prices – hence better penetration rate of these segments are expected,” he says.
For the industry and country, the new licences will be basically for green vehicles and commercial vehicles which could lead to increased sales and investments by the industry.

The industry is still new and this segment would also see direct competition from Thailand which has its own eco-car development. Toyota will be assembling its best selling Prius in Thailand from this month due to the strong yen.

Just never enough

While the granting of licences is a first step, market participants feel more is needed to liberalise the sector to woo investments into the country.

“We certainly need to have policies that can compete with our neighbours in terms of attracting new investments. As the largest passenger car market in the region, we have a very attractive market and if our policies are competitive, we will see more investments coming in,” says Nasarudin.

Edaran Tan Chong Motor Sdn Bhd executive director Datuk Dr Ang Bon Beng says the industry cannot depend on domestic market alone to achieve strong growth.  “It is imperative to have a level playing ground for all auto players where survival and success are based on competitive edge, in order to prepare one for regional expansion,” he adds.

Market observers say the industry, which saw existing companies increase assembly of cars in the country from lower taxes imposed on CKD operations, would be open to even more cars coming from Japan and Korea from 2015 onwards once Free Trade Agreements between Malaysia and Asean come into effect in the future.

Aishah says that in the absence of a level playing field in Malaysia, global automotive players have been making their presence felt though contract assembly of their models in Malaysia, shying away instead from direct investments.

“Inconsistent policies have created fear among automotive players on whether or not to invest in Malaysia,” she says.

Case for component makers

Another outstanding issue is the competitiveness of the local component makers.

Calls have been made to develop the Tier 1 vendors to have them innovate and plough in more resources into research and development to create a more vibrant supply chain.

Due to a lack of scale, a number of the component makers in Malaysia are basically still nut and bolt assembly companies, importing the components and assembling them for car companies in Malaysia.
“Presently, not many first-tier suppliers can compete on a global scale. Malaysia needs to do more to further develop the first-tier, second- and third-tier parts components suppliers,” says Kuah.

He says within the Asean region, Thailand has a larger automotive base for parts components manufacturing, and hence, enjoys greater economies of scale.
“The challenges facing the local automotive parts components manufacturers is cost competitiveness, apart from quality and access to latest technologies,” says Kuah.

One component maker claims that protectionist policies have resulted in components from Malaysia attracting higher import duties into countries in South-East Asia.

One way for components makers to up the ante is by forging Technical Assistance Agreements (TAA) with leading global OEM companies to enable them to access design capabilities, best practices in production and quality control.

“The government should consider providing incentives to Malaysian companies to enter into such agreements,” he says, adding that UMW Toyota Motor Sdn Bhd (UMWT) is aiming to export more than RM1bil worth of automotive parts components to Toyota affiliates worldwide. It is a 43% increase over the more than RM700mil the company earned in 2009.

Another perennial issue is the high cost of vehicle ownership in the country, no thanks to high taxes. Such taxes may be a significant source of Government revenue but they remain a sticky issue, one that has also made things difficult for policies such as the vehicle end of life due to the high cost to buy cars.

Fuelling the situation

The poor quality of fuel in Malaysia is another touchy subject.

Energy companies say offering higher quality fuel involves higher costs which ought to be recouped through a small increase in fuel cost to end users.  Opponents of the passing the buck argument say legislation should be sufficient to compel companies to provide better quality fuel without having to burden the consumer.

For one, Nasarudin hopes for higher grade fuels, especially diesel, in the near future: “Global carmakers have stepped up efforts to develop new highly fuel efficient models that run on EURO IV or V diesel and by 2014, EURO VI will be introduced.

“These cars will greatly reduce fuel consumption and CO2 emissions, which need to taken seriously.”
Briscoe laments that for far too long, Malaysian automotive users have been compelled to utilise substandard fuels, even compared to their neighbours in the Asean region.

“Lower grade fuels leads to higher emissions of harmful gasses, not to mention cause higher wear and tear on engine components. With the government committed to reducing carbon emission intensity per gross domestic product (GDP) by 40% to 2005 levels by the year 2020, the adoption of Euro IV standards is a vital step in ensuring effective widespread reductions from throughout the passenger and commercial vehicle segments,” he says.

“The quality of our fuel in our country, particularly diesel, also ought to keep up with the latest global trends,” says Aishah.
“Otherwise it will hamper the car companies from introducing the latest design and technologies into Malaysia.
In addition our country may end up a dumping ground for cars with obsolete technologies and old designs.”

The BIG merger

The merger between Proton and Perodua is no longer a matter of if, but simply when.

But not all are for the marriage. Its detractors say a merger could be a setback for the industry as it would only benefit Proton. One analyst is concerned that with the merger, Perodua’s historically high return to shareholders could suffer a beating.

Naturally, not all agree. “I don’t think consumers care. If Daihatsu remains in the picture, then there is no difference to them,” says an auto player. “This deal depends on what Daihatsu would do.”

Related Stories:

Proton MD’s vehicle end-of-life policy proposal received a lot of brickbats

Used car sellers hit by margin squeeze

2010 car sales performance in major Asean markets

Rebadging – a step forward or back?

Calls for faster liberalisation


That's all folks, thanks for having the time and patience to read this blog entry.

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