Friday, September 14, 2012

Answering Mukhriz Mahathir by Rafizi Ramli, The Strategic Director of PKR


ANSWERING MUKHRIZ MAHATHIR: CAR PRICES 101

I am glad that Datuk Mukhriz Mahathir has finally decided to respond to our campaign # turunkan harga kereta especially when he is primarily tasked with the national automotive policies.
Rafizi Ramli turunkan harga kereta
  Isu Politik M'sia di sini. Kisah persundalan Umno BN di sini.
He is also expected to win the next Umno Youth head contest easily, so his views on issues affecting the younger population are a glimpse of what life under another 5-year term of BN rule will be. Among the many daily economic woes experienced by the younger population, exorbitantly high car prices easily occupy the top three concerns of this group.

Datuk Mukhriz asked me a simple question: how does auctioning approver permit (permit to import cars) can lower down car prices?

The question was so simple that initially I was not sure whether he really did not understand the mechanics of the policies we proposed, or it was a part of his brilliant strategy to catch us. Eventually as he keeps repeating the same question in press conferences and his tweets, I began to realise that he truly could not understand (commercially or in economic terms) how auctioning AP in a transparent process can lower car prices.

Let me attempt to explain the mechanics to the Deputy Minister in charge of automotive policies in the country.
 

To understand what needs to be done in order to reduce car prices, we need to know the main cost components that make up the final selling price that customers pay.

For cars manufactured by national automotive companies or assembled here, there are two components: the cost of the car itself (which already includes the profit margin for the manufacturer) and the taxes/duties levied by the government. As it is, the taxes/duties constitutes at least 50% of the final car prices sold to customer – meaning if you buy a car with a retail price of RM50,000, you pay RM25,000 in taxes/duties to the government.

The same cost structure is also applicable to cars imported from abroad, with the addition of 2 more cost components. Each imported car attracts additional 30% import duty and a much higher hidden cost due to the AP that you need to obtain to import.

Previously, AP was given to only select companies/individuals with close connections to the ruling elite. As the pressure mounts in the last few years, BN government began to charge a flat rate of RM10,000 for each AP issued.

But the cost of AP translates into a much more expensive portion of the cost component that makes up the final retail price. To understand how much an AP pushes up the retail price, YB Tony Pua shared his experience in importing a Nissan Juke using his AP entitlement as a member of parliament.

To cut the story short, he paid about RM100,000 to import the car. RM45,000 is to pay for the actual cost of the car and the shipping cost. The balance RM55,000 was payments to the government due to the excise duty at 85%, sales tax at 10% and import tax at 30%.

YB Tony Pua was lucky to pay only RM100,000 for the car because if he were to buy from a local car dealer, the retail price is RM160,000.

The difference of RM60,000 between buying from an importer and importing yourself (because you have an AP) is the actual impact of the opaque AP system which has pushed car prices exorbitantly high.

Nevertheless, the real culprit that pushes car prices skyrocketing and enslaves many Malaysians in perpetual indebtedness is the taxes imposed on cars. Furthermore, only 10% of the cars sold each year are brought in with APs; the rest 90% (which form the bulk of the population) is not affected by any changes to the AP system.

Therefore, the only way to correct the distortion and economic misery to the rakyat is to phase out the high excise duty on cars and bring back car prices to comparable parity with other economies around the world. Since excise duty is levied on all cars, the phasing out of excise duty will affect both locally manufactured/assembled cars and imported cars.

To further understand this, we should go back to YB Tony Pua’s Nissan Juke. If he had imported the car when excise and import duties have been completely phased out, he only needs to pay RM50,000 for the cost of the car, shipping and a 10% sales tax.

He can then estimate how much he wants to bid for the AP to bring the car in. Since Nissan Juke is a small car and comes with better fuel efficiency, the proposed reserve price for the AP of such classes of car starts at RM10,000 only (as opposed to if you are bringing in a Lamborghini with high fuel consumption, whose reserve price may start at RM30,000).

YB Tony Pua would have put a bid factoring in the total price that he was willing to pay. He may aim to pay maximum of RM90,000 for the car, so he would bid RM40,000 for the AP since the total cost of the car is only RM50,000 without the exorbitant duties that have been phased out by PR.

This is the part which Datuk Mukhriz clearly does not understand and as a result of that, frighteningly demonstrates his incompetence to the whole country.

While government will increase its revenue from higher AP payment it receives due to the open bidding system, the same revenue is then used to fund the policy to phase out excise and import duties that currently form the biggest bulk of the cost component of a car’s retail price.

When excise and import duties are removed, this automatically reduces car prices by at least 50% even when AP price is decided through bidding, because the AP under the current corrupt system already fetches prices in between RM40,000 to RM60,000 each (which is similar to the prices expected under open bidding system). The difference is the money currently goes to the private pockets of closely linked cronies. This deprives the public of the necessary fund to phase out excise and import duties.

In short, the elimination of excise and import duties on cars across the board will automatically take away the most expensive cost component of a car’s retail price.

I hope this explanation is simple enough for Datuk Mukhriz to digest because it is of highest imperative that he understands this basic knowledge in the car industry before he decides on other complicated matters.

Rafizi Ramli is the Strategic Director of PKR. He used to audit car companies. 

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