When the National Automotive Policy (NAP) was unveiled earlier this year, the biggest shake-up was that the tax exemption for energy efficient vehicles (EEVs) and electric vehicles (EVs) would be taken away if they were not locally assembled.
Not surprisingly, some hybrid car players were unhappy. Out of the seven EEV or hybrid players in Malaysia, only one player benefits from the new policy and that is DRB-Hicom Bhd.
DRB-Hicom owns 34 per cent stake in Honda Malaysia and is the only auto player which locally assembles its hybrid – the Honda Jazz to be specific.
Hybrid players that will be hit the most include Toyota, Nissan, Audi (the franchise in Malaysia is owned by DRB-Hicom) and Lexus. On a smaller scale, there is also the BMW and Porsche marques.
All these car manufacturers are currently bringing in completely build up units (CBU) of hybrids.
Under the NAP, the excise duty exemption will only be given to locally assembled or completely-knocked-down (CKD) hybrid and electric cars.
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Sales of hybrids in Malaysia are on the rise, although, only making up 2.85 per cent of total vehicle sales in Malaysia
This means prices of CBU units will revert to their original prices before the exemption for hybrid and electric vehicles was first announced in Budget 2011.
Under the old regime, hybrids and EVs were exempted from import duties and get a 50 per cent exemption from excise duties. While the excise duty ranges from 80 per cent to 105 per cent, import duties are at around 30 per cent.
Without the tax exemption, the hybrids and EVs will now have an effective tax rate of 272 per cent.
This significant change in its price will severely alter the hybrid landscape in Malaysia.
According to UMW Toyota Motor Sdn Bhd’s website, the on-the-road (OTR) price for a Toyota Prius (with the exemption) is RM139,915.30. This only applies to its 2013 stock, the website mentions.
Prior to Budget 2011, the Toyota Prius hybrid had cost around RM175,000. UMW Toyota Motor president Datuk Ismet Suki has confirmed that prices of its new stock will increase.
UMW Toyota says it has no plans to assemble the Prius locally. However, it is committed to assembling the Camry hybrid locally, with operations expected to commence by year-end.
Perhaps the most affected player will be Audi, which saw its 2013 sales driven predominantly by the Audi A6 hybrid.
Audi sold a total of 3,102 cars in 2013, and out of this, 1,907 or 61 per cent of the cars were hybrid cars.
A big appeal of the Audi A6 was its price of RM280,000. Without the tax exemption, the price will leap closer to RM350,000, a level which is considered very steep even for the upper middle class.
“It is hard to move a car at the RM350,000 price level. The hybrid players will have to seriously rethink their long-term strategies with the NAP,” said one auto executive.
CIMB Research in a recent research report agrees that Honda Malaysia, in which DRB-Hicom owns an associate stake, will be the biggest beneficiary of NAP 2014 as it is “ahead of the curve,” with its initial investment of RM382mil (and up to RM1bil) for the second line at its Pegoh plant in Malacca.
“The line started production in November 2013 and will have a capacity of 50,000 units per annum (hybrid and small cars). Thus, we think that Honda will obtain the first EEV manufacturing licence and will be allowed to sell its CKD units exempt of all duties and taxes.
“The new line will enable Honda to meet its sales target of 76,000 units in 2014 (a growth of 40 per cent year-on-year) and 100,000 units by 2016, and allow it to capture Toyota’s top spot in the non-national segment.”
Presently, sales of hybrids in Malaysia are on the rise, although, only making up 2.85 per cent of total vehicle sales in Malaysia.
In 2013, 18,967 units of hybrids were sold, which was a 23.5 per cent increase from the 15,355 units sold in 2012, according to data by the Malaysian Automotive Association (MAA). The bulk of the sales was from Honda and Toyota, which sold 8,550 units and 5,789 units, respectively, last year.
The case for tax exemptions
An observer added that he understood the government’s push for wanting to make Malaysia a green hub for vehicles. However he felt that due to that very purpose, the tax exemption on EEVs and EVs should have been prolonged until the market reached a more matured stage.
“The tax exemption has only been for 2 years. That is too short a time for the market to reach any form of maturity. Effectively, the new policy has killed the EEV and EV market,” said an executive automobile maker who declined to be named.
MAA president Datuk Aishah Ahmad concedes that over the short term, sales of EEV cars will drop. However over the longer term, it will pick up once again when more manufacturing licences are given out.
“The main reason for the revoking of the tax exemption was because the Finance Ministry felt that car manufacturers were not doing any localisation for these cars. So if an EEV distributor wants to enjoy tax exemption to set up an assembly plant, it can just go and talk to the Government. The rules are now less stringent,” she says.
The head of a car manufacturer feels that the tax exemption should be continued especially if it was the Government’s vision to make Malaysia an energy efficient auto hub.
“This goes against the principle of making Malaysia a green hub. The bigger picture is that the tax exemptions are part of a long-term strategy towards reducing gas emissions and improving public health and air quality,” he says.
He says the public will benefit as the adoption of EEVs and EVs accrues.
“Thus I feel that the tax exemptions should continue until the adaption rate for these vehicles reaches a higher level,” he adds.
On the issue brought up that the tax exemption is only benefiting the rich, he says this has been made to a political issue.
“That is absolutely bad economies. In the early stages of any new industry, it is always the wealthier-than-average and tech-savvy consumers who will ‘fund’ its growth. As the industry grows and more lower-end cars are produced, then mass consumers will be able to purchase and the public benefits accrue,” he explains.
The issue of getting a licence
In early February, International Trade and Industry Minister Datuk Seri Mustapa Mohamed said the Government would announce the decision to award manufacturing licences for the production of EEVs to a foreign company in the next two months.
Mustapa said there had been some interest from a major automotive player who would be looking to use the Malaysian auto platform for the export market.
There are currently some 18 assembly plants in Malaysia which consist of Proton Tanjung Malim Sdn Bhd, Perusahaan Otomobil Nasional Bhd, Hicom Automotive Manufacturers, Tan Chong Motor Assemblies Sdn Bhd, Naza Automotive Manufacturing Sdn Bhd, Oriental Assemblers Sdn Bhd, Isuzu Hicom Sdn Bhd, Inokom Corp Sdn Bhd and Honda (M) Sdn Bhd among others.
Observers said that capital expenditure aside, obtaining an assembly licence was extremely difficult.
“In theory it sounds doable. But the reality is that it is difficult to obtain the licence. It is not just about cost. Furthermore, there are no economies of scale to set up a plant just to produce one line of EEV cars when sales figures are still small. Setting up a plant means it’s a volume game,” says the auto head.
“Setting up a manufacturing plant would require capital expenditure of approximately RM100mil. You will need some 40 to 50 acres and you will need to convert the site for the plant. Any franchise holder in his right mind will need to be 100 per cent sure he has the sales volume before spending all that money to set up a plant,” he says.
Another auto manufacturer adds: “Would it also make economic sense to set up a plant here, when we already have a manufacturing plant in Thailand?”
Thailand is the automotive hub of Asia, and ranks within the top 20 in terms of global production. It is home to more than 14 car companies and many global car parts supplier.
