Answering Mukhriz Mahathir: Car Prices 101

I am glad that Datuk Mukhriz Mahathir has finally decided to respond to our campaign #turunkanhargakereta especially when he is primarily tasked with the national automotive policies.

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.

9 thoughts on “Answering Mukhriz Mahathir: Car Prices 101”

  1. Assalamualaikum to Mr. Rafizi. Based on your calculation, if the cars prices go down as they should be, can i know how much these cars below for the actual prices if I buy them from local dealer?
    1) Lamborghini Aventador LP700-4
    2) Lamborghini Gallardo LP560-4
    3) Ferrari 458 Italia
    4) Mercedes SLK 250 AMG

    It would better if Sir Rafizi can show me how to calculate the actual prices of car..Thank you

  2. Rafizi Ramli is the Strategic Director of PKR. He used to audit car companies. He used to drive a cheap car with no air-cond too. hahaha

  3. I had to explain this to a doubting friend recently, and I found out that using tables (and pictures) makes it easier for laymen to understand it. Perhaps the rakyat needs to see something similar from you guys to appreciate the policy more?

  4. Hi Rafizi,

    First of all, I’m totally behind you on the need to put an end to ‘opaque’ AP procedures. With cars being almost a necessity to the rakyat, greed and corruption driving AP prices up will most definitely put a burden onto the individual Malaysian. It also goes without saying that on a macro scale, inefficiencies and illicit outflows from this and many other ‘opaque’ practices does not serve in the public interest of the public.

    I am no economist, so what I say next may sound flawed. And for that I apologise.

    I think while having an open auction for APs may be in the step in the right direction, it may not necessarily lower the prices of cars. In fact, it may do the opposite. Case in point: Singapore’s openly-bidded Certificate of Entitlement (COE), which is a major hot button issue. Because like APs, there’s a set quota to COEs, the rakyat will attempt to outbid each other, driving car prices up. Currently, Singapore’s car prices are considered amongst the highest in the world.

    Do we then increase the supply of APs? The economic, infrastructural and even environmental side-effects of raising the amount of APs indiscriminately would be too long to go into in my comment.

    Taxes, as you mentioned rightly, are a major contributor to rising car prices. At a glance, lowering or scrapping said duties would reduce our federal government’s revenues, which means less investment into the people. (Of course, it also means less money to be wasted on cronies and mega projects, but that’s another thing altogether).

    All in all, taxes and APs, in its original intent, are meant to protect the national car industry. Now we all know that our national car industry leaves a lot to be desired, let’s assume a clean, accountable and transparent government takes over Putrajaya and gets the national carmakers back on the right track. Wouldn’t an oversupply of APs, plus lower import duties, be at the detriment of our national carmakers? Or would you suggest phasing out our national car industry (which, admittedly, is another can of worms altogether).

    All in all, what I’m saying is that in my humble opinion, I think it may not be as simple as “lower AP = lower car prices”. It would take proper management of the bidding process by the government of the day. A free-for-all bidding process might end up like Singapore’s COE. So I suppose the question for both PKR and BN is: how would you manage the AP process to be transparent, yet at the same time, ensuring it doesn’t escalate to a price war that would be at the detriment of the people?

    Rafizi, please accept my apologies if my comment is out of line. Like I mentioned, I am no economist. I may be getting this stupidly wrong.

    And in the end of the day, the fact that unlike certain parties, you choose to focus on hot-button issues that matter to the rakyat instead of making personal attacks to your opponents, shows that not only you, but that PKR is committed to putting the rakyat first, instead of serving your own interests.

  5. Hi Rafizi,
    Our nation is under the threat of mutants with great greed and feeding on the people. This mutation has been for over 50 years. If not stopped, the infestation will collapse the nation, which could otherwise be one of the superpower of ASIA.
    What I can foresee is the Avengers of PKR, DAP and PAS will lead humans to victory! And then another 50 years to redo the past 50 years.
    So, I salute you for your effort. Great nations needs great people. Keep on fighting…Avengers will have my VOTE….

  6. To be fair to Mukhriz, I don’t quite understand this explanation. Although I am skimming through this pretty fast. Maybe a graph or table would help better explain this?

    Adam

  7. I completely understand your explanation. You qualify your explanation with “when excise and import duties have been completely phased out”. But you said previously that it will be done progressively. Perhaps you will reduce the excise and import duties by 20% for the first year. Will the price of imported cars still be lower in the first year of implementation? Well, you’d probably say “Bid for the Ap at a lower price range. Instead of RM40K bid at RM10K” That may work. 🙂

  8. I think the government should just take out the exercise tax and subsidies for petrol. And in my opinion, it is fair we pay for what use…

  9. i think we need to look at a versatile structured formula when it comes automotive transportation tax. it plays a key role in our economics and standard of living especially among the poor. we also can not take a blind eye to scrutineer other countries method of application. on automobile and motorcycle, the method of taxing we experience i find very crude, merely placing a number, not even a number based on another number. the only versatility is having two break it into two, local SEA and import. the method on road tax is even more impressive.

    a versatile method for taxing can make life a lot better without too much impact on the gross amount of tax being collected with a positive impact on the industry in total since malaysia produces cheap cars. it will definitely draw confidence to how the government is being competitive with our standard of living. versatile tax, taxing cars based on the engine size,efficiency and maybe even technology with the absolute spirit of variable tax rate lifting the burden on the poor boosting economy by a significant margin by manoeuvring them, more privately and comfortably. so really low tax on cars below 1.0, and gradually increase on 1.3, 1.6 2.0 and upwards.

    maybe lowest tax on two seated cars below 1.0 but the gradient is steeper as it increases on the engine size scale as larger engined two seater cars are move towards performance recreational type. 7 seater and or SUV’s should go up as they are not efficient and are more dangerous to smaller cars.

    expanding the scale of taxing vehicles but finding its center of gravity can draw a fine balance between the payers and collectors.

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