Germany: It would be a mistake for Malaysia to raise prices of locally produced cars

Hans/Jan 31, 2020 03:01 PM

The German government has expressed concerns that a revision in the pricing structure of locally-assembled cars will affect not just the investments made by German car companies operating here in Malaysia, but also Malaysia’s competitiveness against its neighbours.

A locally-assembled Mercedes-Benz C-Class

Speaking at an interview with BFM radio yesterday, the German Ambassador to Malaysia His Excellency Nikolaus Graf Lambsdorff told BFM:

“German car companies have invested in Malaysia to assemble cars here in view of the Malaysian market but also in view of the ASEAN market, selling cars in neighbouring countries.

“Malaysia has no interest in damaging this idea or to make it more complicated. It doesn’t only affect German car makers, but also several much bigger Japanese and Korean car makers.”

Volkswagen Polo in Pekan

When asked about the impact of the revised Open Market Value calculation that will increase the prices of locally-assembled cars, His Excellency said, “If the government would raise prices for domestic production of automobiles in Malaysia, I think it would be a mistake and of course it would make life for car makers a lot harder. They would lose their competitiveness here in Malaysia, but possibly also in neighbouring markets.”

However the ambassador added that the German embassy is not directly involved in any discussions on the matter with the Malaysian government.

“Typically German car makers would try talk to the government directly. That’s what German companies are used to, to fix their problems themselves.

“Luckily for me they only come to the embassy when they really have a problem and need political help, which hardly ever happens here in Malaysia but I know from talking to them, they have been in serious discussions, certainly with MIDA and MITI in the past three weeks.

“The idea has now been postponed, there will be more studies and the government has decided to take some time.”

BMW Group Malaysia's engine plant in Kulim also exports to the Philippines

Although the revised price structure affects only cars sold in Malaysia (obviously), it will have a knock-on effect on a plant's investments because as we have explained in a separate post - a manufacturing plant needs to operate above a certain minimum volume to make it viable and Malaysia's car market is just too small, especially once you consider that nearly 60 percent of our 600,000 cars per year market is dominated by Perodua and Proton.

An increase in prices will certainly dampen demand and the export market is unlikely to absorb the surplus, thus throwing a spanner into the business projections. 

Earlier on 15-January, first broke the news that car prices would go up by 15 to 25 percent after Chinese New Year, following a hastily done decision by the Ministry of Finance to revise the way Open Market Value (OMV) – the base value on which a car’s excise duty is levied upon - of locally-assembled cars are calculated.

The new calculation method will include not just the cost to produce the car, but also other previously not included items like - distributor’s margins, employee salary and royalty payments (for intellectual property).

Minister of Finance Lim Guan Eng kept mum about the matter for a week, until 21-January when he denied that car prices are going up, saying that the matter is still not finalized.

Less than 24 hours later, on the morning of 22-January, the Ministry of Finance confirmed to the Malaysia Automotive Association that the new OMV calculation has been decided but its introduction will be postponed to 1-January 2021.

“Any increase in OTR prices would be fully absorbed or exempted by the MoF for this year and the difference in duties for past years will also be exempted,” said MAA President Datuk Aishah Ahmad, who added that prices will increase gradually starting 2021.

There are currently three German car companies assembling cars in Malaysia – Volkswagen, Mercedes-Benz, and BMW, with the last two also doing exports.

Volkswagen has an assembly facility in Pekan, located within the DRB-Hicom automotive complex, assembling the Polo, Vento, Tiguan and Passat. All cars produced are only for domestic sales.

Mercedes-Benz Malaysia’s facility is located nearby, also within the DRB-Hicom land. It assembles the C-Class sedan (including AMG C43), GLC (including AMG GLC 43), GLC Coupe, E-Class, and S-Class (including S560e plug-in hybrid). It also assembles the left-hand drive C180 sedan for export to the Philippines.

Assembled in Pekan, exported to Philippines - a left-hand drive C180

BMW Group Malaysia has two facilities in Kulim, both located within the Berjaya-Sime Darby Motors jointly owned Inokom plant. The first is an engine assembly plant while the other is a vehicle assembly plant.

Assembled in Kulim, exported to Philippines

The vehicle assembly plant makes the 3 Series, 5 Series (including 530e plug-in hybrid), 6 Series Gran Turismo, 7-Series (including 740Le plug-in hybrid), X1, X3, and X4, as well as the MINI Countryman (including SE plug-in hybrid). It also makes the left-hand drive 520i for export to the Philippines.

BMW Group Malaysia's engine plant in Kulim

Meanwhile, the engine assembly plant makes three engines - the B48 2.0-litre four-cylinder turbocharged for BMW 20i and 30i cars, plus MINI Cooper S cars, the B38 1.5-litre three-cylinder turbocharged petrol for the Countryman plug-in hybrid, and the B47 2.0-litre four-cylinder turbodiesel for export to the Philippines.