This article first appeared in The Edge Malaysia Weekly on June 27, 2022 - July 3, 2022
AUTOMOTIVE companies heaved a sigh of relief after the government decided last week to allow those who place their bookings before June 30, 2022 to still enjoy the sales and services tax (SST) holiday as long as their cars are registered by March 31, 2023.
Automotive executives are largely happy with this development — with the clarity provided by the decision, most of the estimated 80,000 backlog orders will now probably not be cancelled.
“To the auto industry players, it is a win-win situation when potential buyers would still get their passengers cars at the SST tax holiday rate provided [the] booking [is] received by June 30 and registered by March 31, 2023.
“At least there will be no cancellation of orders and customers can be pacified. We hope the world shortage in the supply of microchips would be resolved by then,” says president of the Malaysian Automotive Association (MAA) Datuk Aishah Ahmad.
The SST exemption, first announced on June 5, 2020 as part of the Penjana stimulus package, has been a lifeline for automotive companies over the last two years. This can be seen from the sale of passenger cars between June 2020 and May 2022. However, even with the SST exemption, total industry volume (TIV) between 2020 and 2021 declined year on year, due to the various Movement Control Orders to curb the spread of Covid-19 last year.
In 2021, the Malaysian automotive market chalked up a TIV of 508,911 units, a 3.9% drop from 2020. From January to May this year, TIV stood at 265,656 units, a more than 7% increase from the 247,250 units registered in the same period in 2021.
This shows that the SST exemption has helped the automotive market withstand a myriad of challenges. As such, it is no surprise that the industry was lobbying hard for the government to extend the SST exemption beyond June 30.
However, the fact that more car buyers could enjoy the SST exemption, leading to a surge in sales, does not mean the sector will see a revival. This is because chip supply is still an issue, although some industry players say the shortage is easing.
Moreover, the possibility of the government implementing new ways of calculating the open market value (OMV) of cars starting next year still hangs over the automotive players.
Recall that the revised method to calculate OMV, on which the excise duty on cars is imposed, had been gazetted by the Pakatan Harapan government in late 2019. However, due to the Covid-19 pandemic over the last two years, the revised regulation has not been implemented.
Under the revised method, the OMV of a car will include sales costs, such as advertisement and promotion, marketing, warranty and commissions, in addition to just manufacturing cost. This will increase the OMV of a locally-assembled car, as previously, the value is just the ex-factory price.
In a report dated March 28, MIDF Research’s analyst Hafriz Hezry noted that the revised OMV calculation is a potential risk to auto sector duty costs, and ultimately sales volume, if the increase in duty costs is passed on.
In the report, he said the government should consider a rebate mechanism for the incremental OMV base coming from sales-related costs, which are mostly locally incurred and ultimately provide value-add to the domestic economy, similar to the current excise duty system that rewards the local content of a vehicle.
“In any case, any changes should only be done gradually in order to allow industry players and the market to adapt to the changes, in our opinion,” Hafriz said in the report.
According to estimates by MAA, the revised way of calculating OMV will result in increases of between 8% and 20% in the prices of locally-assembled cars.
If this new way of calculation is implemented in 2023, and with no exemptions on SST, prices of locally-assembled cars could increase drastically.
As it stands, MAA has sent a letter to the Ministry of Finance (MOF) to appeal against the implementation of the revised way of calculating OMV and asked the government to inform the industry first if it plans to go ahead with the implementation in 2023. “We have still not received MOF’s final approval letter (on the appeal to delay the implementation of the new OMV calculation),” says Aishah in a text message in response to The Edge’s queries. However, she says the MOF is “looking positively” at MAA’s appeal.
If the new OMV calculation is implemented, it will impact most automotive companies, including those that have been doing well recently.
Bermaz Auto Bhd (Bermaz) is also concerned about the implementation of the new OMV calculation. This is because 70% of Bermaz’s domestic sales comes from completely-knocked down (CKD) models, including the Mazda CX5 and CX8 crossovers, and the Peugeot 2008, 3008 and 5008.
In the financial year ended April 30, 2022 (FY2022), Bermaz recorded a net profit of RM155.72 million, an increase of 16.35% y-o-y. It was the second consecutive year that Bermaz recorded an increase in its profitability.
The shortage of chips and parts that most of the automotive industry is suffering from did not seem to have affected Bermaz in FY2021 and FY2022. However, the group is still worried about the double-whammy impact of the revision of the OMV as well as a weakening ringgit and rising costs.
“Well, at least our bookings will last until end-March 2023. So, the impact (of the revision of the OMV), if any, will only be felt from April 1 onwards next year. [But] with rising raw material costs, it could be a double whammy for cost increase,” says Bermaz CEO Datuk Francis Lee Kok Chuan when contacted.
“We will be affected as well. The saving grace is that everyone will be affected at the same time,” he adds.
Automotive companies with large CKD operations will be impacted if the revised OMV calculation is implemented.
UMW Holdings Bhd through its subsidiary UMW Toyota Motor Sdn Bhd assembles Toyota models at its plants in Bukit Raja, Klang, while DRB-Hicom Bhd assembles Mercedes-Benz and Volkswagen models in Pekan, Pahang. The latter also owns a stake in Honda Malaysia Sdn Bhd, which has an assembly plant in Pegoh, Melaka.
Tan Chong Motor Holdings Bhd assembles models from Japanese marques Subaru, Nissan and Mitsubishi at its plants in Segambut and Serendah, Selangor.
Meanwhile, foreign automotive groups that have assembly plants in Malaysia include Volvo Car Corporation with a plant in Shah Alam, and Stellantis NV with a plant in Gurun, Kedah, assembling Peugeot and Citroën models.
Besides the possibility of the implementation of the new OMV calculation, the automotive industry could also be hurt by the depreciation of the ringgit against the US dollar, which caused an increase in the cost of some raw materials and automotive parts.
If the ringgit continues to depreciate against the US dollar — year-to-date, the local currency has fallen 5.75% against the greenback — the cost of living will rise and therefore erode the purchasing power of the people. Automotive sales — an indication of consumer confidence in the country’s economy — will be among the first to be affected by a rising cost of living.
The US Federal Reserve plans to continue raising the Federal funds rate to combat runaway inflation in the US. The Fed’s benchmark rate is projected to end the year at 3.4%, from the current 1.5% to 1.75%, and 3.8% in 2023.
This could lead to central banks in emerging economies including Bank Negara Malaysia reacting to the Fed’s hawkish stance to ensure that the ringgit remains stable against the greenback. Bank Negara surprised the market with a 25 basis point hike in the overnight policy rate to 2% in May, in response to inflationary pressures resulting from the reopening of the economy and improved labour market conditions.
This could translate into pricier loans for large-ticket items including cars, eventually dampening demand.
A weaker ringgit against the greenback means that raw materials that are traded in US dollars, such as polymers and other petrochemicals used in the production of automotive parts, will be more expensive for local assemblers.
On top of the weaker ringgit, the prices of these raw materials themselves have increased due to the global supply chain shocks.
Looking at the movement of the ringgit against the currencies of major trading partners, the local currency is still stronger compared with the Japanese yen. This means assemblers of Japanese marques that source their CKD kits from the country could still withstand the economic headwinds.
Year-to-date, the ringgit has appreciated 11.29% against the Japanese yen as at last Thursday, closing at 3.2517 per ¥100. Meanwhile, the ringgit is still quite stable against the euro so far this year. Year-to-date, the local currency is up 1.88% against the euro at 4.6388 as at last Thursday.
Hafriz of MIDF Research says in a June 21 report that industry players are indicating the possibility of passing on these costs via price hikes, though at this juncture, price increases are still selective.
“We anticipate the non-nationals to be in a better position to pass on incremental cost relative to national cars given that the latter typically entails a price-sensitive customer profile,” states Hafriz in the report.
Amid all these factors, the extension in the SST exemption to March 31, 2023 is really just a breather to the automotive sector. It looks like industry players still have their work cut out for them.
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