Rich man’s EVs are tax free, but common man’s hybrids are not – here’s why

The recently announced Budget 2022 proposes a complete waiver of import and excise tax, as well as road tax exemption for all electric vehicles. Locally-assembled (CKD) BEV models – of which there are none at the moment – will enjoy additional exemption from sales tax.

Specifically, these exemptions apply only to battery electric vehicles (BEVs). Regular hybrid electric vehicles (HEVs) and plug-in hybrid vehicles (PHEVs) don’t get to enjoy the benefit.

So for the upcoming Toyota Corolla Cross Hybrid and Honda City RS e:HEV, or even the BMW 330e, 530e, and 740 Le xDrive, it’s business as usual.

The regular man on the street wants to know why. Even with full tax exemption, most BEV models will remain a rich man’s toy, a technological wonder to join their already extensive collection of cars owned.

The Nissan Leaf, currently the cheapest BEV on sale in Malaysia costs RM 181,263. Prior to Budget 2022’s announcement, it already benefits from a reduced excise duty rate of just 10 percent, while the 30 percent import duty has been waived under the Japan-Malaysia Free Trade Agreement.

Minus the remaining sales tax and excise tax, the estimated price of a Nissan Leaf is around RM 160,000, which is more or less what buyers in Europe pay, about 35,000 Euros, quite affordable for a typical Euro wage earner.

Over here, the RM 160k tax-free Leaf is still too expensive for Makcik Kiah and her family. You can blame the weak Ringgit for that.

Sure, China has plenty of cheap BEVs that rival a Myvi’s price, but none of it are cars you will want to drive.

The Wuling Hong Guang Mini EV sells for about RM 20k in China (but costs about RM 49k in Thailand) but tops out at 100 km/h. It’s a city-only, first-mile / last-mile commuter car to be driven to the nearest subway station and back. It complements Chinese megacities’ extremely efficient and well-planned public transport.

The next closest BEV that is good enough to replace a combustion engine car is Geely’s Geometry A, an upper C-segment, 410 km driving range electric sedan slightly bigger than a Toyota Corolla.

Prices start at RM 97,000 in China but that’s with government subsidies. Without subsidies, it costs over RM 136,000.

In Thailand, the cheapest BEV is the MG ZS EV, but it’s still priced about the same as a Toyota Corolla Cross Hybrid there 1,190,000 baht (about RM 148k).

Of course, prices of BEVs will come down further but as of 2021, BEVs are not cars for the B40 or M40 income group – and that’s 80 percent of the population.

But let’s answer the question posed - why are hybrids not tax-free?

Hybrids already enjoyed one round of tax exemption, and that's enough

That’s because the government has already extended such an offer from 2011 to 2013. At least back then, there were immediate benefits to the masses.

Sales of the Honda Insight, Honda CR-Z, Toyota Prius, Toyota Prius c, and the Audi A6 Hybrid boomed for a while, totalling 25,665 units in that 3 years. Of the 4 models, two were priced less than RM 100k, the Insight and Prius c. It benefitted the common man.

However as good as the plan was, the government had little results to show once the exemption period was over.

After 2013, the tax exemption applied only to locally-assembled models and only Honda dedicated itself to deliver affordable CKD hybrids to the masses – Jazz Hybrid, City Hybrid, and HR-V Hybrid. It also made Malaysia the only country outside of Japan to sell these affordable hybrid models but few appreciated the gesture.

In an environment where RON 95 petrol costs just RM 2.05 per litre (as point of publishing), trying to push high initial cost but long-term fuel-saving technology to the masses is a dead-end. Manufacturers have to spend money to create demand for hybrids but that’s not how you do business.

Buyers in the lower income group are also more concerned about money matters like battery replacement cost and low resale value, and that’s not going to change with BEVs.

Elsewhere where drivers pay around RM 4 per litre of petrol, a RM 6k battery replacement cost (RM 4k for refurbished ones, depending on model) after 10 years is a non-issue but over here, buyers can’t overlook that.

Between hybrids and BEVs, the latter is further ahead in the technology curve and is the one that needs a little bit more push. Hybrids have been around for more than 20 years and is a mature tech. The problem is Malaysia is a little bit far behind, due to the reasons mentioned above.

In many countries, governments no longer extend tax breaks to hybrids because CO2 emissions-based tax, which is already the norm in many countries, gives a huge advantage to hybrids. But again, Malaysia is still further behind with our engine capacity-based tax structure.

Also read: Indonesia to abandon engine capacity-based tax for cars, CO2-based tax by Oct 2021

CKD hybrids already pay minimal tax

The existing Energy Efficient Vehicles (EEV) incentive programme already offers substantial cuts in excise duty for locally-assembled (CKD) hybrids.

Take the Honda City RS e:HEV for example, which sells for RM 105,610. Tax-free price in Langkawi isn’t that much cheaper, at RM 96,300.

The BMW 330e M Sport is another example. It already enjoys RM 67,662 worth of tax rebates. Without EEV, the plug-in hybrid 3 Series would’ve been priced at RM 322,573.

The 330e now starts from RM 249,848, which is equal to about 52,000 Euros, quite close to the 54,150 Euros that German buyers pay for no-options added 330e.

Add M Sport package to match our local specs, the price increases to 58,150 Euros, meaning that Malaysian buyers are actually paying less than the Germans!

So why then are CKD hybrids still so expensive?

The issue here is the weak Ringgit, which has lost 30 percent of its value in the last 10 years, and stagnating wages but those are another topic altogether.

As you can see from the example with a BMW 330e, Malaysian hybrid buyers are not paying any more than buyers in Germany.

Another reason is local assembly, which is necessary to escape high taxes, actually increases the cost of the car but Malaysia’s tax structure turns this disparity upside down.

At around 600,000 cars a year, more than 60 percent of it controlled by Proton and Perodua, there is just not enough economies of scale for local assembly plants to spread out their fixed cost to be competitive against cars made in high volume factories in Thailand, Indonesia, or even Japan.

This is why the Honda City RS e:HEV still costs over RM 100k.

Here’s another example that CKD costs a lot more than CBUs without tax. In tax-free Langkawi, the imported-from-Thailand Toyota Camry costs just RM 123,152 while the locally-assembled Honda Accord with similar equipment levels (with Sensing) costs RM 159,800.

Also, hybrid components cannot be sourced locally. Imported parts for CKD cars will still have to pay a 10 percent import duty.

Unlikely for CKD BEVs to go below RM 100k, at least not until 2030

Assuming that our past experience with CKD hybrids is a reliable indicator, the prospect of affordable CKD BEVs for the masses is not going to happen within this decade.

The important question here is, what is the government's end goal with these proposed tax exemption measures for BEVs?

Over 70 percent of cars sold in Malaysia are priced below RM 100k so tax-exempted BEVs from Porsches and BMWs will have very little the multiplier effect in boosting demand for public charging infrastructure.

In the UK, government subsidies for BEVs (up to 2,500 Pounds, about RM 14k) are limited only to models that are priced below 35,000 Pounds (about RM 200,000). The UK government doesn’t give tax breaks for Pandora Papers-class Brits to buy new toys.

There is a missing link between Budget 2022's proposed BEV promotion measures and scaling it up so Malaysia can keep its commitment to the Paris Agreement to cut CO2 emissions by 45 percent by 2030. This won’t happen if BEV activities are concentrated around Pandora Papers-class Malaysians.

After all, CKD plug-in hybrids by Mercedes-Benzes and Volvos haven’t done much in boosting our local industries as their volumes were too low for any meaningful localization. Why should we expect CKD premium BEVs to be any different?

Having said that, CKD BMW plug-in hybrids use locally-sourced wire harness - commendable but in the grand scheme of things, is still too minor.

However, sales of higher volume, lower-priced Toyota and Honda hybrids have shown better results. Honda Malaysia's battery assembly plant in Pegoh for example, is the first of its kind in the country.

The multiplier effect extends to the after-market sector too. Mili Auto & Hybrid Service, a small workshop in Kajang for example, has upskilled itself to repair all electrified vehicles, BEVs included, and now offer training classes for hybrid repairs. They achieved all these by gaining experience with Toyota and Honda hybrids, because there are so many of them on the road.

Green public transport, not electric cars make low carbon cities

China didn’t cut emissions and move their people into BEVs with privately-owned electric cars, but electric motorcycles, shared e-bikes, and electric buses. When it's time for Chinese consumers to buy their first car, the habit of plugging in to charge is already part of their lifestyle. For them, transport equals electric power.

Which will lead us into another topic. The path to low carbon cities lies not in BEV private passenger cars, but accessible green public transport.

Malaysia sells about 600,000 motor vehicles (excluding bikes) per year but has over 15 million four-wheeled or more vehicles on the road. You can switch every new car sold into an EV and it will still barely nudge the needle for CO2 emissions.

Put it another way, even if 100 percent of new cars sold in Malaysia annually is electric, it still will take 25 years to make all cars on our roads zero emission.

Incentivizing electric cars is necessary but it cannot be the main focus. It works too slow to bring meaningful results.

The true solution is accessible, green public transport. Electric minibuses plying neighbourhoods, small single-seater commuter BEVs serving as last-mile transport between your home and the MRT station, that’s how low carbon cities should look like.

The standard for urban public transport is no more than 500 metres of walking, OKU friendly, and no more than 10 mins waiting period in peak hours.

Once you give regular Malaysians reasons to stop driving their own cars, CO2 emissions will be curbed at its source. The debate on whether fossil fuel-burning power plants charging BEVs are cleaner than hybrids or not becomes irrelevant.

Reduced reliance on private cars also frees up parking spaces, which can be turned into green lungs. Buildings can also be made smaller, using less materials, thus reducing urban heat islands.

With equal access to efficient and green public transport, the multiplier effect for electric vehicle ecosystem promotion is a lot more because everyone benefits from it. Right now, Malaysia's priorities in cutting CO2 emissions appears to be arranged in reverse.

Also read: Toyota is quietly showing how everyone is missing the point about carbon neutrality