GST weighing on automotive industry

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MANY car buyers are holding back from making a decision, awaiting cheaper prices after the implementation of the Goods and Services Tax (GST) on April 1. Consumers are expecting car prices to fall after the 10% sales and service tax is replaced by GST, which is lower at 6%.

However, automotive industry players are uncertain how the new tax scheme will affect their pricing policy going forward, although GST is just around the corner.

“As for car prices coming down post-GST, the government has not taken into account the fact that unsold stock held by the dealers and stock purchased from non-licensed manufacturers — CBU (completely built-up) and CKD (completely knocked-down) vehicles — will incur double taxation,” says Malaysian Automotive Association (MAA) president Datuk Aishah Ahmad.

“As we have indicated, in terms of unsold stock where sales tax has been paid, consumers will have to pay 10% sales tax plus 6% GST on April 1, especially for CBU stock held by dealers.”

However, it is understood that automotive players are still in discussion with the government on the implementation of GST since it could increase costs for them.

“Right now, when wholesalers get the cars from the manufacturers, they have to pay a 10% sales and service tax. When GST is implemented, these wholesalers will have to add 6% to their selling price on top of the 10% sales tax. At this point, the government has only offered to refund a portion of the sales tax, not all of it,” says one industry player.

Double taxation will also occur when the cars are imported. Thus, foreign marques are the most exposed to the negative impact of GST, at least until the dealers clear their old stock. It takes about three to four months to import a car or to manufacture a CKD model, so industry players are trying to get an equivalent grace period for existing stock to mitigate the situation.

The wait-and-see stance adopted by car buyers is particularly harmful to the more expensive marques because as little as a 4% discount on their prices could be substantial.

“Sales in January were extremely slow, no thanks to the year-end offers made by most car companies in December to achieve their 2014 market share and targets. The announcement by the government that car prices will be lower post-GST could also have contributed to the lower sales,” says Aishah. “For now, we are still not changing the total industry volume (TIV) for 2015. We are still forcasting 670,000.”

Until there is a way out of the situation, consumers playing the waiting game will only exacerbate matters since inventory will build up. Still, the lower mass-market end of the industry remains relatively robust, albeit for only half the carmakers in the segment.

Total vehicle sales may have risen a modest 1% in January to 50,660 units registered with the Road Transport Department (JPJ) in the month, but it masked a sharp fall in the sales of Proton and Toyota vehicles, which came in second and third in terms of volume.

In short, 2015 looks to be a challenging year for the automotive industry.

Telling of the tough times ahead are the aggressive discounts — of up to RM7,988 — that Proton is offering on the Iriz that was only launched in September last year

But some marques bucked the trend with exceptionally strong sales. Perusahaan Otomobil Kedua Bhd (Perodua), for example, saw sales rise 32% year on year to 16,067 units, boosted by the Axia, which registered sales of  7,700 units in January.

This made the Axia the top-selling car in the country with over 92,500 bookings and 41,000 units registered as at January since the B-segment mass-market car was launched in August last year.

In contrast, Proton’s total sales for the month fell 8.5% y-o-y despite the launch of the Iriz. In fact, sales of the Iriz were the highest-ever in January with 1,980 units registered, bolstered by aggressive promotional discounts in conjunction with Chinese New Year.

According to Proton’s website, the company is offering discounts of RM988 to as high as RM7,988 for models manufactured last year.

“Consumers prefer to own cars that were manufactured in the most recent year, so a discount is not unusual. However, to give such aggressive discounts for a model that was launched only a few months ago is unusual, especially if Proton has over 10,000 bookings as it claims,” says an industry veteran.

In total, there have only been about 5,400 Iriz registered since the car was launched, missing the 3,000 to 4,000 a month sales that the company was hoping for based on the production capacity requested of Proton’s vendors.

Ultimately, the tepid take-up of the new car could not offset the falling sales of its other models. Proton’s top-selling model, the Saga, saw a 27% y-o-y drop in sales with only 3,910 units registered in January. Sales of the Persona and the Preve too fell 24% and 18.6% respectively to 1,125 and 785 units registered.

January also saw sales of the Exora drop 68.9% y-o-y to 470 units registered. For February, the company offered discounts of RM7,000 for the 2014 Exora Bold model and RM4,000 for this year’s model.

Proton’s parent company DRB-Hicom Bhd last week posted a sharp 94% y-o-y fall in profit in its fourth quarter ended Dec 31, 2014, to RM9.47 million. Despite the launch of the new car, Proton’s sales were the weakest in 4Q2014 with 25,034 units registered. In contrast, the quarter saw the highest number of new vehicles registered across the whole industry.

At the mid level of the market, Toyota relinquished its position as the country’s largest non-national automaker, falling to fifth place in terms of sales in January, behind fellow Japanese marques Honda and Nissan.

Sales of Toyota’s Vios fell 58% from the previous year to 1,365 units during the month, resulting in a 38% drop in overall sales to 4,065 units registered. With Toyota launching the 2015 variant of the Vios in January, registrations may pick up in the coming months, but since it is a cosmetic makeover with slight improvements in the specs,  industry players are not particularly bullish on sales going forward.

The poor performance of the Vios can be blamed on a sharp increase in competition in the segment, particularly from Honda’s City, which saw an 83% increase in sales to 3,180 units registered in January.

 

This article first appeared in The Edge Malaysia Weekly, on March 2 - 8, 2015.