‘Tax holiday’ boosted new vehicle sales in 2018 – and that’s not good for 2019

2018, like previous years, was a challenging year for the local auto industry and when the year started, the car companies were fairly certain that the Total Industry Volume would not go much and might even drop. The first few months seemed to suggest that the market was stagnant and perhaps many people were holding back purchases because an election was due in May. Although it seemed likely that the ruling party would win and continue, a fierce contest was expected so perhaps it was better to wait and see how the outcome would be.

Those who chose to defer their purchases for such a reason would have patted themselves on the back for doing so because the unexpected happened – the ruling party did not win for the first time in 61 years and a new government took over. And one of the first things this new government did was to almost immediately suspend the Goods & Services Tax (GST) for 3 months – from June through August – pending the switch to a new Sales & Services Tax (SST). This meant that there would be a ‘tax holiday’ during those 3 months, during which time not having to pay GST reduced the cost of purchases of all goods and services.

For the car companies, it was very welcome news after months of weak sales. In the final two weeks of May when the new government had announced the move, sales had slowed since the opportunity to save money meant that waiting a little bit longer was worth it. This did have an effect on sales and to avoid a total standstill, some companies decided to offer their vehicles at GST-free prices. It was a cost to them but for Perodua, it was crucial to keep sales going for the sake of the dealers and suppliers.

During the 3 months, sales boomed like never before and stocks ran out. The development had caught everyone by surprise so additional stocks were not ordered and as it was only 3 months long, it was pointless to order more because the tax holiday would end by the time the additional stocks arrived and then there would be a problem because it was anticipated that after the tax holiday, sales would fall and they did quite significantly in September.

While the man on the street may imagine that the boost in sales should have seen 2018 being a record year, it was not really the case. In fact, for its mid-year review, the Malaysian Automotive Association (MAA) even revised its forecast downwards rather than upwards. Yes, the boom saw sales rocket to some of the highest in history but this spike did not actually boost the year’s TIV. As mentioned earlier, it wasn’t practical to order more stocks in spite of the high demand because the lead time for the plants to produce vehicles is 3 to 4 months. And with so many people buying in the third quarter, it was likely that the fourth quarter would see a drop which is what happened.

Nevertheless, when the year ended and the last invoices were issued, the industry registered a 3.8% increase in TIV new vehicles registered. The 598,714 units delivered were 22,089 units more than in 2017 and the first time after two years that the TIV went upwards instead of downwards. And at least 2018 also saw the MAA forecast being exceeded; in fact, it was even higher than the initial forecast of 590,000 units that had been announced at the beginning of the year and then revised to 585,000 units in June.

The year started off with weak monthly sales and then, with the ‘tax holiday’ during the months of June, July and August, sales shot up to the extent that the 68,465 units delivered in July were the second highest monthly volume in the history of the local market. However, the boom was followed by a massive drop in September which was the lowest volume in a long time. (Data sources: Monthly reports of the MAA)

Does the upward trend mean better times ahead then? The MAA doesn’t think so and for its 2019 forecast, it expects a growth of just 0.21% to 600,000 vehicles. The last time less than 1% growth was forecast was probably in the late 1990s during the Asian financial crisis when the market contracted very severely. Asked why the forecast is for almost no growth, Datuk Aishah Ahmad, MAA’s President, said that it is the view of the members that there will be decreased demand after the ‘boom time’ in 2018. “What happened was that during the tax holiday, many people ‘bought forward’ because of the chance to save money. They may not have wanted to buy a new car or change so soon but it was a rare opportunity so they went ahead. This means that there will be a large portion of buyers who may have done their purchase in 2019 not doing so and that is why the market is likely to be ‘flat’,” she explained.

Things are expected to pick up again in 2020 as the MAA forecasts a 2% growth to 612,000 units. This would follow the cyclical nature of motor vehicle sales where there are periodic downturns and then a climb back to good times. But as many analysts have often noted, the Malaysian market is fairly saturated and increments in the TIV won’t be big in years to come. And with no political will to implement the End-of-Life policy to scrap older vehicles, there won’t be a boost in demand either.

SUV sales continued to grow in 2018 mainly at the expense of MPV sales. With Perodua and Proton adding new SUV choices to the market, this segment should grow further this year.

Touching on other issues which are affecting the industry, Datuk Aishah said that many companies are facing problems setting the prices of their new models because there is a very long delay in the processing of applications for the incentives offered under the National Automotive Policy. These incentives have a direct impact on the retail prices as they help to offset the production costs. The savings that the companies can achieve must be fully passed on to consumers and not kept as extra profits and the government audit department checks to see that the condition is complied with.

According to a senior executive in one of the companies, the incentives have been given for a number of years and in the past, the process from application to approval was not long. “Now, we submit an application and we don’t even know what the status is. We have already taken bookings for thousands of cars and the customers are getting angry having to wait so long but we cannot release those cars since we cannot set the prices,” he said.

Datuk Aishah said that there are pending applications that go as far back as May 2018 which frustrates the companies who have to hold the stocks. The only good thing is that because there is no confirmed price and customs duties cannot be paid, the cars will not be considered as 2018 models from that standpoint and will be considered as ‘2019 models’. Still, it cannot be good that so many new cars are sitting in stockyards and if it gets too long, the companies will have to spend money to do them up before delivery. This happened during the market downturns of 1986 and 1998.

H-P loan approvals are still a problem due to strict Bank Negara directives but affect mostly the lower-priced models. Customers who buy the high-priced premium luxury brands have better ability to show they can repay loans.

The other thing that has been an issue for the companies has been the strict policies of approval by Bank Negara regarding hire-purchase loans. The MAA President said that there is no indication of a change in the policy as Bank Negara does not want non-performing loans (by people who do not repay) to become a serious problem that can affect the economy. She said that the difficulty in getting approvals affects mainly models in the lower prices ranges where the customers have lower incomes. “Our members who sell the expensive premium and luxury models don’t face such issues as their customers who can afford such cars would be able to prove their ability to repay loans,” she said.

On the MAA’s expectations for changes in the next National Automotive Policy, Datuk Aishah said that basically, they just want the existing incentives to be maintained, if not improved.

As mentioned earlier, the incentives are a significant factor in keeping prices down. The government won’t change the tax structure since it needs the revenue but it can at least help to offset the production costs of those companies which are contributing to the economy by investing and assembling locally and paying corporate taxes. Removal of incentives or decreasing them will certainly have a great impact as prices will then go up and sales will drop for a while until the market gets used to the higher price levels.

[Chips Yap]