This article first appeared in The Edge Malaysia Weekly, on September 28 - October 4, 2015.

AT least three carmakers — Honda, Toyota and Mitsubishi — are expected to increase prices any time now, with some looking to do so as early as Oct 1. Other brands such as Hyundai are said to have already raised the prices of their models, including for the Santa Fe and Elantra.

Second national car manufacturer, Perusahaan Otomobil Kedua Sdn Bhd (Perodua) — the market leader with a 31% market share — said earlier this month that it might increase prices as a buffer against the rising exchange rate.

The price hikes come at a time when the automotive industry is grappling with a weakening ringgit, dampened economic conditions and the implementation of the Goods and Services Tax (GST) in April — all of which adversely affected sales.

Malaysian Automotive Association (MAA) president Datuk Aishah Ahmad, for one, says price hikes are not necessarily the way to go. “Increasing prices is not going to help boost sales. On the contrary, it will worsen the situation as consumers are already tightening their belts due to inflationary pressures. However, there is a limit as to how much of the costs car companies can afford to absorb due to forex losses. It (increasing prices) is not an easy decision to make, and each company will have to evaluate its own situation,” she tells The Edge.

MAA was established in 1960 with the objective of developing and protecting the interests of its members, basically the automotive players, and making representations to the government on issues affecting the industry.

Aishah says, “Uncertainties about the Malaysian economy and the impact of other domestic issues, coupled with uncertainties in the world economy, have dampened business optimism. Consumers are getting very cautious about spending on big-ticket items such as new motor vehicles, especially in the lower and mid-range segments.”

The stronger US dollar

An industry executive says that local players fork out euros for European cars and US dollars for all other makes. It doesn’t help that the US dollar has strengthened considerably, resulting in the ringgit losing close to a quarter of its value against the greenback since the beginning of the year. The ringgit tested  4.40 to the US dollar last Friday  — the lowest level since 1998.

Likewise, the ringgit has shed about 15% against the euro since the beginning of the year, trading at 4.88 last Friday.

In a nutshell, the cost of doing business has increased, impacting those who deal with fully imported completely built-up units as well as completely knocked down units with very low local content. With rising costs, bottom lines generally take a beating.

Making things worse have been the political and economic uncertainties. In August, after three consecutive months of gains, total industry volume (TIV) plunged 8.9% month on month to 53,452 units.

“The global economic fallout was the main contributing factor for the steep drop in sales. The implementation of GST, tightening of credit by the central bank and the poor performance of the ringgit — all have affected demand in domestic and export [markets] alike, ” says SM Nasarudin SM Nasimuddin, joint group executive chairman of the Naza group,  one of the country’s biggest automotive players.

He is non-committal on when things will make make a turn for the better. “With the current market conditions, which may take a while to recover, buyers are more careful about their spending and prefer to hold on to their cash,” he adds.

It is noteworthy that Naza Automotive Manufacturing Sdn Bhd, which assembles Peugeot and Kia cars, was forced to lay off 255 workers late last month.

Another indication of the bleak situation was Sime Darby Motors Sdn Bhd scrapping its plans for an initial public offering (IPO) slated for this year, putting it off indefinitely, ostensibly due to the weak market sentiment. In August last year, Sime Darby was reported to have appointed Morgan Stanley, CIMB Investment Bank, Maybank Investment Bank and Deutsche Bank to manage the IPO, valued at slightly less than RM1.8 billion.

How bad is it?

While none of the local automotive players would provide the quantum of the drop in sales, one executive of a luxury brand says his company’s sales are down some 50%. Despite that, he adds, not all is doom and gloom.

“It’s about marketing your product. Mercedes and Honda seem to have done well despite the dip, and some Perodua models, Proton Iriz, are all right,” he says.

 Datuk Tony Khor, president of the Federation of Motor and Credit Companies Association of Malaysia, concurs, saying the situation is not as gloomy as painted. The federation represents used car dealers.

“Malaysia is fundamentally strong. Lately, after the introduction of GST, there has been a slowdown in new car and used car sales ... we were adversely impacted, but now, things seem to have picked up [again],” he says.  He points to the better numbers from Mercedes and Honda, among others (see table), as one indication that it’s not all negative.

“The buying power and the strength are there. Our per capita income is more than US$10,000 per annum, but things are more competitive now,” Khor says.  The car companies, he says, have under their belts 8 to 12 models at any time, compared with the 1990s when there were fewer companies, with each having only three to four models.

In a nutshell, it would seem the consumer is spoilt for choice.

Says Nasarudin, “The auto business is

cyclical — you have good and bad times. Naza has been around for 40 years and had been through these cycles. Unfortunately, this year, our brands were impacted by a few factors such as unfavourable forex and an ageing model line.”

Nasarudin, 32, is the son of the late motor czar Tan Sri SM Nasimuddin SM Amin. To put things in perspective, in the 19 years Naza has been assembling and distributing Kia vehicles, it has sold more than 250,000 of the marque’s vehicles. And in more recent years, it has sold  40,000 Peugeot vehicles.  

Former Proton Holdings Bhd CEO Tengku Tan Sri Mahaleel Tengku Ariff describes the scenario of the automotive sector as an overcrowding of players in a relatively small market, compared with the likes of Japan and South Korea.

“To many of these car players, Malaysia is a very profitable market. You can trace this from their market activities where huge discounts [are given] to drive sales or their companies’ financial results,” he says.

A check on the Companies Commission of Malaysia website shows that UMW Toyota Motor Sdn Bhd, the 51:49 joint venture by UMW Holdings Bhd and Toyota Motor Corp, registered an after-tax profit of RM962.3 million on revenue of RM10.7 billion for the year ended December 2014.

As at end-2014, the company had current assets of almost RM3.3 billion, non-current assets of RM982.5 million, short-term borrowings of RM1.4 billion and long-term debts of

RM30.5 million. UMW Toyota Motor had in excess of RM2.7 billion in reserves.

Honda Malaysia Sdn Bhd, which is 51% controlled by Japan’s Honda Motor Co Ltd, 34% by DRB-Hicom Bhd and 15% by Oriental Holdings Bhd, raked in RM135.7 million in after-tax

profit from almost RM4.7 billion in revenue for its financial year ended March 2014. Honda Malaysia paid out RM81.2 million in dividends for the year in review.

Honda Malaysia had current assets of almost RM1.1 billion, non-current assets of

RM721.8 million, short-term debt commitments of RM898.6 million and long-term borrowings of RM108.4 million as at end-March 2014. The company also had reserves of RM634.1 million.

Thus, it is no wonder that despite the dip in sales, several companies are said to be looking at expanding. Sources say Sime Darby Bhd is looking at opening more showrooms for its Range Rover and Jaguar marques in Johor Baru and Penang. Volvo, meanwhile, is said to be making preparations to have a bigger presence in Asean, with Malaysia as its hub.

Other big players such as Toyota have already invested in infrastructure in Asean, and are now looking at further strengthening their footholds in the region.

Local market leader Perodua registered an after-tax profit of RM509.9 million on revenue of RM8.7 billion for its financial year ended December 2014. As at end-December last year, the company had reserves of almost

RM3.2 billion. Perodua is 38% controlled by UMW Holdings, 20% by MBM Resources Bhd, 20% by Daihatsu Motor Co Ltd, 10% by PNB Equity Resource Corp Sdn Bhd, 5% by Daihatsu (M) Sdn Bhd, 4.2% by Mitsui & Co Ltd and 2.8% by Mitsui & Co (Asia Pacific) Pte Ltd.

Malaysia a mature market

Mahaleel puts it succinctly, “Primarily, the car industry is facing a demand issue, not a supply issue. They (automotive players) have made their sales projections based on an economic assumption of growth. So, the industry is chasing a number.

“Fundamentally, on a global basis since 2008, the world economy has slowed down with the US meltdown due to subprime problems. This, as we all know now,  affected demand, including in Malaysia, and a drop in the prices of goods, especially commodities such as crude oil and palm oil, which Malaysia exports and earns from.

“Coupled with the various measures the government has implemented such as GST and utilities increasing their prices, invariably the end-retail prices for essential goods rose. This has reduced substantially the average disposable income of consumers,” he explains.

Perhaps the writing is on the wall. In end-

July, MAA reduced its forecast TIV sales for the year to 670,000 units from 680,000 previously. At 670,000 units, sales this year would be 0.6% higher than 2014’s TIV of 665,675 units.

But is even this target achievable?

For the year to August, new car sales stood at 434,282 units, 2.3% less than in the first eight months of 2014, and only 62.8% of MAA’s forecast for this year.

TA Securities analyst Angeline Chin does not “see any rerating catalyst for the sector”  and maintains her “underweight” call. Her estimate is that 657,000 vehicles will be sold in Malaysia this year, 1.9% less than MAA’s forecast. BIMB Securities, meanwhile, pegs TIV sales at 650,000 units.

Another point to note is that double-digit growth numbers could be a thing of the past as the market matures.

Mahaleel notes that the ratio of cars to population in Malaysia, at 1:3,  is equivalent to that of highly developed nations.

“Thus, to expect high growth rates at this stage of the cycle is not possible. In fact, if we don’t plan earlier, with new policies, the industry can and will face a decline,” he says.

A clear casualty of the decline in automotive sales is diversified DRB-Hicom, which is also involved in the property, defence and services sector, among others.

For its first quarter of FY2016 ended June, DRB-Hicom suffered a net loss of RM19.7 million from RM2.9 billion in revenue. In contrast to a year ago, it posted a net profit of

RM107.8 million from RM3.7 billion in sales. For the current year’s first quarter, close to 76% of the company’s revenue, or RM2.2 billion, was from the automotive sector.

DRB-Hicom attributed its losses to “lower sales by the automotive companies following the initial impact Goods and Services Tax implementation”.

While DRB-Hicom’s main automotive outfit is national carmaker Proton Holdings, it also has a hand in the assembly and distribution of Mercedes-Benz, Suzuki, Honda, Audi, Mitsubishi and Isuzu, among others.

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