NAP 2014: Talk of Cheap Cars Again

Read these first:-

the-impact-of-the-electric-car_5033a828f37ca

(The hard cold facts of EEVs – have we considered the pros and cons of using EEVs? After all, the buzz word of NAP 2014 is EEV which is not a bad thing if you ask me and holds many benefits, both for the industry, consumer and the environment. But the thing is, will we put the right effort on implementing what we have planned and deliver cheaper car in the end? Image source: http://visual.ly)

If you can recall before the elections, reducing price of the car was something that both side of the fence promised to entice the voters. Err, sorry that was not case really – what actually happened was this, it was something that Pakatan had initiated (it was a good proposal too) and when people had warmed to the idea, BN found themselves pushed to a corner and promised the same thing (some how, strangely earlier they were against cheaper cars). They said they were wiser and promised price reduction for many other things – toll being one of it. But in the end, all those items that should have cost cheaper, ended up costing more (although the toll increase seems to be on hold at the moment but it may not be for long). They were indeed wiser and the voters who voted for them were made to look like fools.

Then recently in 2014, we got this:-

The National Automotive Policy (NAP) announced today that it is committed to a gradual reduction of prices ranging between 20% and 30% over the next five years. However, Inter¬national Trade and Industry Minister Datuk Seri Mustapa Mohamed, who announced it, stopped short of giving details on how the reduction would come about.

“We are constantly reviewing our fiscal position. Our deficit level is now 4%. In the event our revenue improves, we may review the excise duty. “We will reduce excise duty gradually over a period of time,” he told reporters after announcing NAP 2014 here today.

NAP 2014’s key objective is to make Malaysia a regional automotive hub for energy-efficient vehicles (EEVs), to be achieved by issuing manufacturing licences (ML) to all car companies without any engine capacity restrictions. This will be followed with customised incentives for each investor coming into the country, which will eventually contribute towards a lowering of EEV car prices in the country.

On Approved Permits (APs), Mustapa said the government will conduct an in-depth study on the issue to assess the impact of the termination on bumiputera participation in the automotive industry. “We are not backtracking. We will be doing a thorough study which will start after Chinese New Year,” he said, adding that NAP 2009 had specified the termination of open APs by Dec 31, 2015 and Franchise APs by Dec 31, 2020.

(Source)

Now where did we saw that very similar looking promise to reduce the price of cars? So what does this really means to all of us?

One, it looks like price of cars will NOT be coming down anytime soon (soon means in the coming months instead of the coming years) BUT they have promise to bring it down in the next 5 years, interestingly just before the next general elections. Don’t you feel a sense of déjà vu? So, you guys want to trust them again with the so-called promise of gradual reduction in the next 5 years? What stopping them from postponing this plan to reduce the price after the elections?

One thing that NAP 2014 seemed to have missed in making vehicles more affordable is the structure of car financing in this country (if it is there and I have missed it, please let me know). The current method of installment computation using flat rest (upfront interest) should be abolished. They should instead apply the same monthly rest method used for housing loans (month end interest computation). If a car cost RM100,000 (let’s assume 100% financing) with an interest rate of 5% and the financing period of 5 years, the monthly installment from the 2 methods would be as follows:-

Upfront interest method – ((RM100,000 x 5% x 5) + RM100,000)/60 = RM2,084
Month end interest computation – using the PMT formula = RM1,887

There is a difference of almost RM200 per month. Yes, the banks earns less every month but this also means the consumer is paying less. In total (for that 5 years), the financing cost is lower by almost RM12,000 and that is a lot of money, if you ask me. Money can be offset against higher petrol, toll and maintenance cost. There is no need for a very long financing period too if the monthly installment is lower. Some of us are forced to take 7 – 9 years of hire purchase just to own a decent safe car. And for those may opt to pay higher installment, the settlement of the loan would be faster. Further by using upfront interest method, the consumer loses more if he settles earlier towards the end of the loan cycle. Those who is familiar with the Rule 78 will understand this and in 2001, a Bill was even introduced in US that would eliminate the use of the Rule of 78s formula in credit transactions, for obvious reason:-

But your payout amount won’t be what you deserve. The reason? Using the “Rule of 78s” method, your lender applies more of your previous payments toward interest and less of your previous payments toward principal.

Since less is applied toward principal, the amount you owe will be higher than expected. The earlier you try to pay off one of these loans the more you’ll have to pay. The higher the interest rate, the more that payoff amount is going to hurt.

“If it had overcharged the lender and undercharged the consumer, it would have disappeared decades ago,” says Jean Ann Fox, director of consumer protection for Consumer Federation of America. “It’s a dirty little secret.”

(Source)

In Malaysia, we are still stuck to the upfront interest computation and the use of Rule 78 and so far, the Government have not introduced any restrictions on this. At the end, the consumer do pay more to own a car. Add this with the overpriced car (no thanks to AP and excise duties), the cost of owning a car is very expensive indeed in Malaysia. This somehow is missing from NAP 2014 although this has a direct implications on the industry.

Two, there is no clear decision on abolishing the APs although the Minister did mention “something” will happen on Open APs in December 2015 (that’s about 2 years from now). So let’s see if something do happens next year or as usual, it gets swept under the carpet. After all, if the Minister comes back and say “We need to do this study. We have to take the views of automotive industry stakeholders including bumiputera participants and the impact of the AP termination”, you probably want to hold back your celebrations. We all know who the stakeholders are and there is only a handful of them (we even had AP Queen once) but somehow this takes precedent over the many Malaysians who owns a car (with a ratio of 200 cars for every one thousand people, Malaysia ranks among countries with high car ownership ratio in the region. We have more than 22 million vehicles)

Back in 2005, Paul Tan wrote about this and nothing much have changed since then:-

Let’s use Honda cars for example. In Malaysia, Hondas are marketed and distributed by Honda Malaysia Sdn Bhd, a joint venture company between Honda Motor Co., Ltd. of Japan, DRB HICOM Berhad and Oriental Holdings Berhad. I do not see Honda Malaysia Sdn. Bhd. in the AP recipients list.

But I do see an AP king trio of Syed Azman, Mohd Haniff and Azzuddin holding the most APs. And one of their companies is Weststar Motorsport, which is said to be the franchise AP holder for Honda cars in Malaysia. Weststar Motorsport received 7603 APs in 2005 so far. It’s only half a year now. With a market rate of RM30,000 per AP, that’s a nice amount of roughly RM228 million ringgit worth of APs. However, I do not see Weststar Motorsport having any distributor chain of Honda cars anywhere.

Perhaps a distribution chain is not needed. Maybe all they need is a small office to process AP purchase orders. Could it be Honda Malaysia has to buy APs from Weststar Motorsport in order to import their own vehicles into Malaysia? In Honda’s case, Weststar Motorsport brings the cars in and hands over the car and responsibilities of how the car is going to reach the consumer’s hands to Honda Malaysia. And I reckon they only import as much as what’s requested.

(Source)

Speaking of APs, NAP 2014 also states that the government is open to possibilities to reduce excise duties gradually BUT ha ha, when the fiscal situation permits. And you know by the way the Government spends like they are high on drugs, the fiscal situation is not going to improve anytime soon. So forget about all these talk of reducing the excise duties gradually.

Three, EEV (energy-efficient vehicles) seems to be the “in” thing for the latest NAP. Considering that the price of petrol have been going up in the last few years, this is indeed good news. It is also good news for the environment too. But are we prepared for it in terms of infrastructure and cheaper EEV? Forget about getting a cheaper Prius – even after you have take into consideration the high cost of the battery, it still cost almost RM140,000 right now (in US, it cost only RM80,000 so we must paying an extra RM60,000 for taxes and AP). It may be cheaper in the future but that is not certain. And if we also include electric cars, do we have plans to set up the infrastructures needed to compliment a greater use of EEVs?

Electric cars often have less maximum range on one charge than cars powered by fossil fuels, and they can take considerable time to recharge. This is a reason that many automakers marketed EVs as “daily drivers” suitable for city trips and other short hauls.

Nevertheless, people can be concerned that they would run out of energy from their battery before reaching their destination, a worry known as range anxiety. As of December 2013, Estonia is the first and only country that had deployed an EV charging network with nationwide coverage, with fast chargers available along highways at a minimum distance of between 40 to 60 km (25 to 37 mi), and a higher density in urban areas

(Source)

Four, there is something called “voluntary annual vehicle check” which seems to be more of a mystery. How effective is this voluntary annual vehicle check when there is also scheduled car service in place for all cars? For example if I am taking my car to the authorized car service center every 5,000 km for a change of oil and car inspection, will I volunteer for another vehicle check in another center who may or may not be familiar with the workings of the car?

And what happens if during the voluntary annual vehicle check, the car is found to be unsafe for one reason or another? Will be the owner be advised to go back to their authorized service centers to get it rectified or their car is impounded right there? Don’t the authorized service centers suppose to do this in the first place? One just hopes that this will not be part of the earlier proposed end-of-life vehicle policy wrapped in new clothes. It may be voluntary checking now but once the inspection issues ironed out, what’s stopping them from making it mandatory (where consumer ends up paying more for the same thing) and thereafter impose the 12 years end-of-life vehicle policy?

To be fair, NAP 2014 has just been announced – it may be tweaked in the coming months but one would hope that the execution of the key features of the NAP 2014 is effectively done. No point talking about reducing the price of the car or give higher incentives for EEVs if at the end of the day, we don’t actually see overall reduction of the price for better equipped in terms of performance and safety cars and other related factors like car financing is not taken into consideration.

As I have said, don’t you feel a sense of déjà vu?

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