Weak Ringgit to push up new car prices in Malaysia, regardless if it’s CKD or CBU

In the last 10 years, the Malaysian Ringgit has lost more than 30 percent of its value. In October 2011, the Ringgit was trading at around RM 3.12 against 1 US Dollar. Today, that figure is RM 4.12.

It’s a similar conclusion when the Ringgit is measured against the Euro, losing around 20 percent. Even when measured the Thai Baht, the Ringgit has lost a similar 20 percent in the last 10 years.

The only upside is that the Ringgit has performed well against the Japanese Yen, rising by around 5 percent in the 10 years.

Economists expect the Ringgit to remain weak against most major trading and regional currencies, trading at around RM 4.10 to RM 4.15 to the US Dollar for 2022.

The effect of the weakening Ringgit has become more pronounced in recent years. Malaysian buyers would’ve noticed that car prices have gone up more than usual with every new generation model launched.

But car manufacturers are not banks so they rarely change car prices based on prevailing foreign exchange. Profits from favourable foreign exchange will be kept but losses will also be absorbed.

Also, like any trading company, car companies do their own hedging and wholesale prices are agreed years in advance.

However, when it’s time to introduce a new model, wholesale prices will have to be renegotiated and this is when buyers will notice a big jump in prices over the previous generation model.

Naturally, the effect of this is more obvious on imported (CBU) cars than locally-assembled (CKD ones, but even CKD cars have a fairly high number of imported parts, so it too is not immune to forex fluctuations.

When the previous generation W176 Mercedes-Benz A-Class was launched in Malaysia in 2013, it was priced at just RM 198,888 for the A200 and RM 238,888 for the A250. Both models are imported from either the Rastatt plant in Germany or Kecskemet in Hungary.

Come 2018, prices of the second generation W177 A-Class ballooned to RM227,888 for the A200 and RM 263,888 for the A250.

Of course, with better features, it’s natural for an all-new model to command a higher asking price from its predecessor but the average increase in price between a new generation model and its predecessor is typically only around 3 percent.

In fact, the W177 generation A250 saw a slight reduction in its starting price in Europe, from 36,860 Euros to 36,460 Euros, but this is also due to adjustments in standard / optional features packages, which can be very wide in Europe. But the point remains, there was very minimal increase in prices, if any.

So why then did prices go up by RM 30k in Malaysia? Forex is one reason, although it’s not the only one. Adjustments in priorities between sales volume and model profitability is another - a point which current Daimler CEO Ola Källenius has reiterated, that chasing for market share at the expense of profitability is bad for the long-term success of a luxury brand.

Also read: Mercedes and BMW: Selling more cars to poorer buyers is bad for business

Mercedes-Benz Malaysia has responded to the weakening Ringgit by investing into local assembly in Pekan. But local assembly implies the need to optimize plant utilization, which also means keeping the number of model variants low so parts commonality are at its highest.

In a toss between the A-Class Hatchback and A-Class Sedan, the latter is chosen, because past experience with the CBU models show that Malaysian customers overwhelmingly prefer the Sedan.

As a result, the CBU A-Class Hatchback is now discontinued (but you can still buy one via a special order request, at higher prices and longer waiting period).

Also read: Goodbye A-Class Hatchback, dealers to focus on CKD Mercedes-Benz A-Class Sedan

The other compact Mercedes-Benz model added to local assembly is the GLA. Together with the CKD A-Class Sedan, these two lower priced entry models will compensate for the reduction in volume versus the previous generation Mercedes-Benz compact cars range.

Michael Jopp, Vice-President of Mercedes-Benz Malaysia (MBM) acknowledged that the Ringgit has weakened but in the near-term, the situation is still manageable for MBM as the current value of the Ringgit versus the Euro, which MBM trades in, is still within its own hedging.

“Our forward hedging of the Ringgit is in line with the current development. So for the time being we are not planning for any price increases (apart from those due to the eventual resumption of SST),” said Jopp.

Local assembly has slashed prices of the A-Class Sedan and GLA by around RM 10k to RM 20k, depending on variant. Not as much as you thought? That’s because a locally-assembled car actually costs more to produce than an imported car, but our local taxes skew this.

Confused? Imagine that there are two factories, one massive mega plant that cost RM 100 million to build and makes 1 million cars every year, or a small plant that costs RM 10 million to build just makes just 10,000 cars a year.

Using this as a very simple example, the former has a unit cost of just RM 100 per car, while the latter costs RM 1,000 per car. This is what it means by economies of scale.

The best real-world example of this is a comparison between that imported from Thailand Toyota Camry and locally-assembled (Pegoh, Melaka) Honda Accord.

Without tax, the imported Camry costs just RM 123,152 in Langkawi, while the locally-assembled Accord with similar equipment levels (with Sensing), still costs RM 159,800 in the same tax-free Langkawi area.

The weaker Ringgit is also why prices of many D-segment sedans and pick-up trucks have increased sharply.

On one hand, it is true that the production cost of these cars have gone up. Today’s Toyota Camry and Honda Accord are more comfortable than a Mercedes-Benz C-Class, offering top notch comfort and refinement, with far more space and safety features too.

It’s the same with pick-up trucks. Today’s Isuzu D-Max is comfortable enough to match a family SUV, but with far greater off-road driving capabilities.

In Thailand, prices of such models have gone up by around 5 to 7 percent but in Malaysia, we are seeing over 10 to 12 percent increase in prices.

In the case of the imported Toyota Camry, it now sells for RM 196,888 (with SST). The locally-assembled Honda Accord is not that much cheaper, at RM 195,900 (with SST) for the similarly equipped 1.5 TC-P variant (recall the earlier point economies of scale). Previously, the Accord topped out at just RM 168,998 for the 2.4 VTi-L with Sensing.

The next model at risk of seeing a big increase in price is the upcoming all-new 2022 Honda HR-V. Prices in Japan have gone up by between 6 to 8 percent, largely because the latest HR-V is a significantly more premium product, which the Japanese media says has the refinement levels just a notch below a Toyota Harrier.

Our local taxes will also amplify the increase in cost.

Also read: All-new 2021 Honda HR-V gets more expensive in Japan; Malaysia to follow

The upcoming Toyota Camry facelift will also face a similar fate. Based on trends in other markets which had previously used the same ageing 2.5-litre 2AR-FE Dual VVT-i engine as us - Taiwan, Australia, Dubai, and Russia, all have since switched to the latest 2.5-litre Dynamic Force engine when they introduced the new facelift model – Malaysia should be adopting the new engine too.

But don’t be too happy yet. Expect prices to balloon even further as the newer engine certainly costs more. Our local taxes and weaker Ringgit will amplify what is otherwise a minimal price increase in other countries.

Also read: Malaysia to launch 2022 Toyota Camry facelift soon, Dynamic Force engine confirmed?