As all Malaysians know, taxes weigh very heavily in pushing car prices up in our country. The government relies on the car industry to fill up over RM 10 billion worth of taxes annually.

Free-trade agreements aside, the only way to go around this is to assemble the cars locally, but this only allows a manufacturer to skip the 30 percent import duty. The elephant in the room is excise duty, which ranges between 75 percent to 105 percent depending on engine capacity and body type.

Excise duty applies irrespective of whether a car is imported (CBU) or locally-assembled (CKD).

However, few CKD models pay the full excise duty rate. Most CKD manufacturers benefit from rebates/discounts on excise duty depending on the value of local content sourced and development work done here – the latter is rather vague and is the main reason why Proton and Perodua models will always be priced cheaper than locally-assembled models by other makes, even if it’s a rebadged Indonesian Daihatsu Terios (Perodua Aruz), or a Chinese Geely Boyue (Proton X70).

How does the government quantify the value of design and development (not research and development, just design and development) work done on the Proton X70’s grille, or the front bumper of a Perodua Aruz, a model which was developed by Daihatsu in Indonesia.

Our Malaysian car market, worth about 600,000 cars a year, is too small to sustain any large scale manufacturing activities. There is just not enough volume to bring the cost down far enough to be competitive against larger scale plants in Thailand and Indonesia.

Some manufacturers will employ some clever accounting or lobby for special exemptions to allow them to import foreign-made parts, which are cheaper and higher quality than locally-sourced equivalents, but it’s a tricky path to follow.

If you do it right, you can bring down the price of the car. If there’s a change in government and the new people at the Ministry of Finance don’t agree with the manufacturer’s justification, they could be in trouble. Mind you, these are perfectly legal methods, but there’s always a risk of some over-zealous auditor challenging the validity of previous justifications, which could lead to some very time consuming back-forth debates.

There was one European manufacturer that figured out a loophole that allows them to park most of a car’s features as an optional accessory, which are not taxed, and submit their pricing application documents by basing it on an entry-level, ‘taxi’ specs steel wheels, manual transmission variant.

When their Japanese rivals learned of that trick, they were impressed by their accounting ingenuity, but figured that it’s too risky for them.

Anyway, Customs have since wised up and the loophole has since been closed.

When the Proton X50 was announced with prices ranging from RM 79,200 to RM 103,300, it got their more established Japanese rivals scratching their heads on how can the car be so cheap, even when judged by the standards of a national car.

To give you some context, a tax-free Honda HR-V sells in Langkawi from RM 90,700 to RM 103,900 (for Peninsular Malaysia, it is RM 104,000 to RM 118,581). We don’t need to remind you the huge difference in specifications and features between a Honda HR-V and a Proton X50.

Proton has yet to announce tax-free Langkawi prices for the Proton X50, but since Proton hardly pays any excise duty, prices won’t differ by much, estimated to be somewhere between RM4k to RM8k cheaper.

How Proton is able to keep its prices so low is a closely-guarded secret and it’s easier for us to dig out ‘secrets’ like future models planned, than details of a model’s cost structure.

For any manufacturer, the bill of materials and profit contribution of each model are more sensitive information than their future product plans and even amongst employees, few are given privilege access to such information, not even the product planners and development engineers have access to it.

What we do know however, is that the new Geely management that’s leading Proton now have a reputation for bringing cost cutting and efficiency improvement to a level that’s not seen, or done before by any manufacturer here.

Yes, we all know how competitive Chinese manufacturers can be but the tales trickling out of the grapevine from Proton will raise eyebrows of Japanese and Korean manufacturers – and we meant it in a good way.

About 50 years ago, the Japanese employed Lean Manufacturing to leap frog over American and European manufacturers. Western manufacturers just couldn’t keep up and political tensions over trade imbalance flared up. Ironically, Lean Manufacturing originated from American engineer and statistician William Edwards Deming, but General Motors was too proud to listen to him.

When Toyota was pushing into BMW’s territory with Lexus, and leaped to the No.1 position in the all-important US luxury car sales market in a ridiculously short time of just two years, the then chairman of BMW Eberhard von Kuenheim lashed out at Toyota, and accused them of dumping cars to the market by selling it below market price to gain market share.

BMW just couldn’t believe how it is possible to put together a luxury car at that price.

His No.2 at BMW, Wolfgang Reitzle said “I don’t think the Japanese intention is to live with us. I feel they want to destroy us.”

Well today, BMW has recovered its position and it's still ahead of the Lexus, even in the US.

See, that’s the thing about life and competition, and the wonders of human ingenuity. BMW re-organized, took a hard look on itself, and they pushed themselves to match Lexus’ cost and manufacturing efficiency - something they never thought was possible.

In the early 2000s, the Korean began building cars that are of higher quality than a Toyota, selling them at even lower prices.

The Japanese thought they were the masters of quality and manufacturing efficiency, but Hyundai’s latest range of Genesis branded cars represent Korea’s middle finger to Lexus. Short of a Rolls-Royce, the Genesis G90 is the world’s best luxury sedan you never heard of.

How Korea is able to beat the Japanese in cost and manufacturing efficiency is another topic, but it’s as much about politics as it is about business, plus a dose of culture. Hyundai has an unusual advantage in that it’s a conglomerate that has full control over a car’s development and production cost in ways that Japanese manufacturers don’t have.

All Hyundai plants are built by Hyundai Engineering & Construction. The Hyundai cars are made of steel provided by Hyundai Steel, welded together using robots made by Hyundai Robotics. The car’s electronics are made by Mobis, which is also owned by Hyundai. The finished car leaves the plant to a port next to it.

The Ulsan plant is the only car plant in the world that’s integrated into a shipping port, built by Hyundai’s construction division of course. The cars are then shipped to other countries on ships built by Hyundai Heavy Industries, which also built the port. The logistics are managed by Hyundai Glovis.

Now, the Chinese appears to be one-upping the Koreans. It’s not that apparent in automotive yet, as even the best Chinese cars have yet to make significant inroads in international markets, but that day will come soon.

The rate at which Chinese brands are displacing the likes of Samsung and LG in the consumer electronics sector is enough to give us a preview of what’s coming. We are not talking about Haier TVs or Huawei phones anymore, but Xiaomi’s Mijia range of smart and connected devices, from WiFi connected LED lights to AI-enabled motorised suitcases.

How the Chinese is able keep cost low is still little understood, beyond the overly simplistic view that their large domestic market gives them significant advantage. Counterpoint: India has a comparably large domestic market, but progress is still lacking.

What we do know however, is that Proton is churning through quite a number of senior management staff who were not able to meet Geely’s cost reduction targets. Many have been asked to leave. It’s not pretty but the super competitive automotive industry is a ruthless one.

Never mind a tax-free Honda HR-V. Even the Japanese from Daihatsu who are stationed at their Malaysian outpost in Perodua, say that Proton’s cost reduction targets are unrealistic and unsustainable, and the combative stance is counterproductive in maintaining positive working relationships with parts suppliers.

We know that Perodua has bought and taken apart a Geely Boyue (Proton X70) for their own study to understand better on how the Chinese at Geely build their cars. Daihatsu is Japan’s zen master in building low cost cars, so they know what they are talking, but well so did BMW in the late ‘80s when they refused to acknowledge Lexus’ competency.

Whether the relentless pursuit of ever lower cost by Geely/Proton is sustainable or not is something that we will only know 10 years later. 

Of course, the flip side of the story is that many local parts suppliers are simply not competitive enough by international standards. Some will need to be withered away.

Geely is a disruptor in the local automotive industry, even by the standards of a national car company – a term which doesn’t mean anything anymore anyway, but you get the point.

A disruptor is always seen with suspicious lenses. On its part, Geely has done many initiatives to link up Malaysian parts suppliers with Chinese ones, transferring best practices from China to allow local suppliers to make better parts at lower prices, and to be able to respond to changes in market requirements even faster.

Delloyd and HICOM Teck See Manufacturing (HICOM Teck See) are two Malaysian companies that have benefitted from Geely’s supplier matchmaking programme.

The knowledge exchange now allows Delloyd to make fuel pump modules, making them a pioneer in the local auto parts market. HICOM Teck See also became the first Malaysian company to manufacture anti-slosh modules for the fuel gauge.

On a global level, the auto industry’s transition towards electrification and driverless cars and shared/subscription ownership model is a once in a 100 years revolution. On the local front however, the disruption brought about by Geely is a once in 50 years revolution.

Not since cheap Datsuns and Toyotas flooded the market and drove out British Austins/Minis and German Opels/Vauxhalls/VWs in the ‘70s have we seen such upheaval.