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Saturday, September 15, 2012

Rafizi explains how auctioning APs can lower car prices

Mukhriz Mahathir has come out with guns blazing trying to blast at Rafizi’s plan to reduce car prices by putting up the AP (Approved Permit) required to import a car into Malaysia, up for auction. Mukhriz is scratching his head on how auctioning APs can lower prices.

Rafizi’s explanation is simple as explained in the article below, Answering Mukhriz Mahathir: Car prices 101:

Answering Mukhriz Mahathir: Car prices 101

  • Rafizi Ramli
  • 11:23AM Sep 15, 2012

COMMENT I am glad that 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 like.
Among the many daily economic woes experienced by the younger population, exorbitantly high car prices easily occupy the top three concerns of this group.
NONEMukhriz (right) asked me a simple question: how can auctioning approval permits (permits to import cars) lower 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 had proposed, or part of his brilliant strategy to catch us.
Eventually as he kept repeating the same question at press conferences and in his tweets, I began to realise that he truly could not understand ( in commercial 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.
Nitty gritty of car prices
To understand what needs to be done in order to trim car prices, we need to know the main cost components that make up the final selling price for customers.
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.
toyota car manufacturer loss of sales report 221208 03As it is, the taxes/duties constitute at least 50 percent of the final car price - meaning if you buy a car with a retail price of RM50,000, the government takes RM25,000 in taxes/duties.
The same cost structure is also applicable to imported cars , with the addition of 2 more cost components. Each imported car attracts additional 30 percent import duty and a much higher hidden cost due to the AP that you need to obtain to import.
Previously, the AP was given to only selected companies/individuals with close connections to the ruling elite.
As the pressure mounted in the last few years, the BN government began to charge a flat rate of RM10,000 for each AP.
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, 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 for the actual cost of the car plus the shipping cost. The balance RM55,000 comprised excise duty at 85 percent, sales tax at 10 percent and import tax at 30 percent.
NONEPua (right) was lucky to pay only RM100,000 for the car because if he were to buy from a local car dealer, he would have had to shell out RM160,000.
Trapped in intricate web
The difference of RM60,000 between buying from an importer and importing on your own (because you have an AP) is the actual impact of the opaque AP system, responsible for pushing car prices to exorbitantly high levels.
Nevertheless, the real culprit behind skyrocketing car prices that enslave many a Malaysian in perpetual indebtedness are the taxes imposed on cars.
Furthermore, only 10 percent of the cars sold each year are brought in with APs; 90 percent of the rest (the bulk of the population) are not affected by any changes to the AP system.
Therefore, the only way to correct the distortion and economic misery inflicted on 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 understand this better, we should go back to Pua's Nissan Juke. If he imports the car when excise and import duties have been completely phased out, he will need to pay only RM50,000 for the cost of the car, shipping and a 10 percent sales tax.

Magic wand for cheaper cars

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 start 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).
Pua then can kick in a bid, factoring in the total price that he is willing to pay. He may aim to pay a maximum of RM90,000 for the car, so he will bid RM40,000 for the AP since the total cost of the car is only RM50,000 without the exorbitant duties phased out by PR.
This is the part which Mukhriz clearly does not understand and as a result of that, frighteningly demonstrates his incompetence before the whole country.
While government will boost 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.
NONEWhen excise and import duties are removed, this automatically lowers prices by at least 50 percent even when the AP price is decided through bidding, because under the current corrupt system the AP already fetches between RM40,000 to RM60,000 each in price 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 Mukhriz to digest because it is of highest imperative that he understands this basic knowledge in the car industry before he decides other complicated matters.


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

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