Thursday 28 Mar 2024
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According to International Trade and Industry Minister Datuk Seri Mustapa Mohamed, the health of the automotive industry is a barometer of a nation’s economic health.

His statement at the opening of Perodua’s new RM36 million flagship centre — Perodua Sentral, PJ — last Friday, may seem positive. After all, Perodua’s sales increased 11.6% to over 143,000 units for the eight months ended Aug 31.

But amid the fanfare at the launch of the new state-of-the-art one-stop centre for Perodua customers, it is difficult to overlook the fact that the carmaker’s strong sales performance this year is the exception rather than the norm in a beleaguered automotive industry.

Last week also saw the first round of lay-offs by an automotive player, with the Naza group retrenching some 300 workers at its plant in Gurun, Kedah, where Peugeot and Kia cars are assembled.

Like many other importer-assemblers, Naza is facing the double whammy of a weak ringgit and slowing demand.

“Our priority is to focus on continuous improvement in productivity, maximising resources and regaining market share to ensure we remain competitive and resilient amid a sharp decline in auto sales, both in domestic and overseas markets that we are engaged in,” says S M Nasarudin 

S M Nasimuddin, the CEO of Naza Corp Holdings Sdn Bhd, when asked about the retrenchment exercise.

Mustapa, however, brushes aside concerns of more lay-offs, saying, “Retrenchment is not a big issue in Malaysia, not like the 1997/98 [Asian financial] crisis where about 100,000 people were retrenched.

“Naza conducted interviews on behalf of its employees, and my understanding is that many of them have already been hired by other automotive companies or other companies in Gurun.”

Automotive industry players, though, are less convinced, and the numbers do not look encouraging.

For the eight months ended Aug 31, total industry volume (TIV) or total automotive sales fell  an estimated 2.3% year on year to around 434,000 units. If there is no rebound, this could be the first annual decline in TIV after three consecutive years of growth.

“Confidence is very bad. People simply aren’t spending. A car is a purchase that you can delay. Unless things turn around, sales will continue to be weak,” says one industry executive.

Mustapa’s view however, is that “it (TIV) is going to be stable. The total for this year is going to be about what it was last year”.

That said, the TIV numbers alone may not paint a complete picture. A 2.3% decline may seem small, but that does not reflect the sales value.

The main reason TIV came up to 434,000 units for the first eight months was due to Perodua, specifically, strong sales for the Axia, which has achieved over 140,000 bookings to date.

The problem is that the Axia has a very low selling price. Starting at RM24,437.16, it is the most affordable car in the market at the moment.

In the meantime, the sales of cars in the middle segment have taken a serious beating.

In a nutshell, TIV may have fallen 2.3% but sales revenue for the automotive industry could have dropped much more.

Apart from Perodua, industry sources say only Mercedes-Benz and Mazda posted a year-on-year increase in sales for passenger cars (excluding commercial vehicles) for the eight months ended Aug 31. 

Both would have easily posted double-digit sales growth due to the low base effect.

What’s really worrying is the decline in sales of Proton and Toyota. Industry players estimate that Proton’s sales fell 15% y-o-y to around 70,000 units for the eight months, despite the launch of the compact Iriz last year. Meanwhile, Toyota’s sales are estimated to have fallen by about 19% y-o-y to 54,000 units for the eight months.

It’s particularly worrying because of the two marques’ high sales base. Between Toyota and Proton, sales numbers would have dropped by some 25,000 units from 2014.

To make matters worse, the depreciation of the ringgit is driving up costs for importer-assemblers, and weak demand is not allowing them to pass the costs on to consumers.

Over the past 12 months, the ringgit has declined 34.1% to 4.26 against the US dollar, 24.18% to 6.495 against the sterling pound and 13.58% to 4.746 against the euro.

“We are caught in a very difficult situation. On one hand, our costs are going up because of the weaker ringgit, but we can’t pass it on to consumers because nobody is buying. Confidence is very weak right now, so people are delaying their purchases of cars,” explains one industry executive.

Even players like Perodua, which has over 90% localisation for its cars, is feeling the pinch from the weaker ringgit.

“Our degree of localisation is much higher than others, but still we are impacted,” explains Perodua CEO Datuk Aminar Rashid at the launch of Perodua Sentral.

Perodua still has to import some components, while some vendors would be exposed to raw materials priced in foreign currencies, he says.

“About two to three months ago, the falling ringgit had an impact of  2% to 3% on our bottom line. But with the ringgit depreciating further, it is currently about 5%. We are trying very much to hold our prices and hopefully, things will get better,” says Aminar.

If a company with almost 90% localisation is feeling a 5% squeeze to its bottom line, foreign marques must be having a much tougher time.

Says Mustapa, “It is too early to venture any guesses on this subject (price hikes for cars). We are monitoring the situation. We will be alerted by car companies, but so far we have not been alerted by them on this subject.

“The depreciation of the ringgit will have an impact on everyone producing something in Malaysia. But the automotive industry is very competitive. Unless it is absolutely necessary, I think carmakers will not want to raise their prices.”

The problem is, many of the assemblers and importers have already committed to a large amount of stock that may not have any buyers.

“As an importer, we have a lead time of almost six months, between the time we order a car and when it arrives at the showroom. Not only has our cost increased due to the exchange rate, but if we can’t sell the cars quickly, our cash is stuck,” explains one industry executive.

Hence, to stem the bleeding, importers and assemblers are looking for avenues to re-export their vehicles, he says.

“In this industry, if you hold your inventory for more than three months, you’ll be losing money. The storage, maintenance and financing costs will kill you,” he adds.

Looking ahead, using the automotive industry as a barometer for the country’s economic health paints a worrying picture for Malaysian businesses. The weak ringgit and poor consumer confidence may finally be taking a bite out of the real economy.

If things do not improve, more automotive players may have to trim their headcount.

 

This article first appeared in digitaledge Weekly, on September 7 - 13, 2015.

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