This article first appeared in The Edge Malaysia Weekly, on February 15 - 21, 2016.

Following a lacklustre year of sales, the automotive industry is in for a rough ride in 2016 with total industry volume (TIV) forecast to contract 2.5% y-o-y. In fact, passenger vehicle sales in January got off to a rough start, dropping 14.8% y-o-y.

Despite the headwinds, Malaysia’s largest carmaker by volume, Perusahaan Otomobil Kedua Sdn Bhd (Perodua), aims to top its record sales of 213,307 units in 2015 by about 1.26% to 216,000 units.

“We have been blessed in the sense that the segment that we are in and the products and services that we offer are affordable. Compared with other makes, the impact [on Perodua] hasn’t been so bad,” says Perodua president and CEO Datuk Aminar Rashid Salleh.

“Even in times of economic difficulty, people need to replace their vehicles. In our terminology, we call it buying down. Originally, they would buy an RM80,000 car. But in this situation, where there is still a need to purchase, they will come down to where we are. Our prices are affordable but that’s not all. So is the fuel consumption and maintenance,” Aminar tells The Edge.

Still, despite the record sales last year, rising cost pressure and lower margins have translated into weaker bottom lines for the group overall. According to filings with the Companies Commission of Malaysia, Perodua made a profit after tax of RM509.94 million on revenue of RM8.67 billion in FY2014.

It is worth noting that MBM Resources Bhd has a 20% stake in Perodua and UMW Holdings Bhd, 38%.

“One of the factors is forex (foreign exchange). Some of our components are procured in US dollars and some of them in yen. Unfortunately, the dollar has been very strong,” remarks Aminar.

He estimates that cost rose about 25% last year, trimming Perodua’s bottom line by a similar quantum.

“Another factor is that even among our models, people are buying the lower variants, where the margins are thinner for us. This has impacted our bottom line. We are lucky that we still have volume. It keeps our plant, our workshops and our sales going.”

Aminar estimates that up to 80% of customers who bought the Axia — Perodua’s most affordable model — opted for lower specifications. For costlier models like the MyVi and Alza, more customers opted for higher specs.

In terms of volume, however, the carmaker should have little to complain about. While passenger vehicle sales contracted 14.8% in January, Perodua managed to eke out a 3% y-o-y growth to 13,120 units, giving it a market share of 42.5% (see “Falling sales shaking up automotive industry” on Page 18).

That said, Perodua is not immune to competition from the other carmakers, which were very aggressive last year in order to clear their inventory. Extended warranties, cash rebates and lucrative repayment schemes with zero-interest instalments were rampant towards the end of 2015.

“We had to carry over [into 2016] a slightly higher inventory than in the previous years. This is a reflection of the market. People were giving away a lot of things in November and December, so we had to as well,” says Aminar.

That said, Perodua will retain its edge in terms of affordability this year. Other carmakers, in the face of rising costs, have either indicated a price hike or have already raised prices, as Honda did on Jan 1.

Barring any unforeseen circumstances, Perodua’s prices should remain unchanged this year. So far, only the G-Spec Axia has seen a price increase but only because of the anti-lock braking system (ABS) that was added to the variant.

“At this point, we are trying to maintain our prices. I know some other makes have announced hikes. But we feel there could be a turnaround in the second half of the year or the fourth quarter at the latest,” says Aminar.

“We are in a difficult position. If you increase prices now, when things suddenly get better six months down the line, what can you do? We would rather hang on for now. But if things get worse, then there is a possibility we may need to review our prices.”

Aminar points out that since Perodua began its transformation in 2011, the group has been working actively on cutting costs and reducing inefficiencies. Over the past few years, he estimates that costs have been reduced by about 30%.

“We hope what we are doing — increasing efficiency, eliminating wastage, renegotiating rates — will provide us with a cushion until we see light at the end of the tunnel.”

In the meantime, Perodua will be taking other initiatives to increase its revenue from alternative sources. For example, Aminar hopes to launch a retail centre for Perodua pre-owned vehicles (POVs).

Last year, the carmaker received trade-ins for around 5,000 vehicles, all of which were sold wholesale to a panel of second-hand car dealers.

“This year, we will start with our first retail outlet for POVs in the Klang Valley. It could be in Petaling Jaya or Kuala Lumpur. It will be only for Perodua cars. We can service and repair the cars and, God willing, provide warranties for the cars,” says Aminar.

Another area where Perodua is hoping to improve revenue is its after-sales service where Aminar hopes to reduce leakages — when a Perodua owner services and maintains the vehicle at a third-party workshop.

That said, Aminar’s main challenge this year is to keep sales volume high. The group recently completed a RM1.3 billion investment that includes a new production plant, with which comes increased capacity that needs to be utilised.

“On two shifts, our new plant can do 200,000 units. We are already doing more than 100,000 units there; this is easily 60% to 70% utilisation. At our existing plant, utilisation is only 50% to 60%, so there is some concern there,” says Aminar.

Looking ahead, the group has to deal with short-term speed bumps, like the recent proposal to increase the foreign worker levy (although this is on hold until a decision is made after Chinese New Year). While the bulk of Perodua’s 10,500-strong workforce comprises mostly locals, Aminar notes that the company’s vendors employ a large number of foreign workers.

“So far, they [the vendors] haven’t said anything. But I believe there will be an impact. They will come to us to renegotiate rates, to pass on the cost to us.”

He shares the view of many industrial players — the levy hike is too steep and too quick and there was no consultation with the industry.

Looking further ahead, Perodua’s challenge would be dealing with liberalisation. With the Trans-Pacific Partnership (TPP) agreement signed earlier this month, that reality is fast approaching.

“We are trying to digest and understand the TPP. But TPP or not, the government, under the National Automotive Policy, has already informed the players that the market will be liberalised,” says Aminar.

He points out that Malaysia already has free trade agreements with most of the other signatories to the TPP, excluding the US.

“If we have to improve further, we will. At the end of the day, Perodua needs to survive. It needs to be relevant. We have invested so much. Dealers and vendors rely on us. It is a huge ecosystem that cannot be allowed to fail.”

In fact, liberalisation has already started, argues Aminar, pointing to the growing dominance of non-national marques over the past decade.

“As long as we are able to protect our market share, we are okay. That is what we are looking at.”

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