Auto sector hit by low ringgit, foreign marques price expected to rise

Local edge: Buyers checking out a car in a Perodua showroom. The market perceives that players like Proton and Perodua have higher localisation rates.

PETALING JAYA: The perfect storm which has passed over the country’s economy and markets has begun to see an unintended consequence on the automotive industry.

The sector, which was already suffering from a lack of interest from consumers due to the implementation of the goods and services tax earlier this year and lacklustre demand, is now grappling with the increase in input costs due to the ringgit’s weakness.

UMW Holdings Bhd’s joint venture, UMW Toyota Motor Sdn Bhd, is one of the few players that have officially acknowledged this and indicated earlier in the week that prices of the Toyota and Lexus models are slated to rise in 2016.

UMW is not the only player which has relented to the weakened ringgit, but reports indicate that the South Korean car company Hyundai was the first to hike up prices in the local car market on currency factors.

Market sources said a price hike in the highly competitive automotive industry was usually done only as a last resort, more so especially under difficult economic circumstances.

“For the fact that it had been done in spite of the economic growth weakness indicates that these automotive players have had absolutely no choice but to pass on some of these cost increases to the end-user due to the weakened local currency,” said a market observer.

UMW said prices would rise by 4%-16% across all its model ranges, also noting that it had absorbed the additional costs from the currency weakness in the past few months.

Notably, UMW in its statement implied that the sudden pace of the ringgit’s fall was the last straw that broke the camel’s back, as this had greatly affected the company.

UMW said it would have implemented necessary measures to minimise the foreign-exchange losses’ impact and address the fluctuation of the ringgit if it had dropped gradually, but the drastic drop had given it no other choice but to pass on these costs.

Other than UMW, Kenanga Research believes that Tan Chong Motor Holdings Bhd will also be at a disadvantage from the weak ringgit.

“UMW and Tan Chong have high denominated US dollar costs due to the import of completely built-up vehicles, completely knocked-down parts and other components,” Kenanga analyst Desmond Chong said in a report.

The latest circumstances surrounding the industry could be turned into opportunities by players that are able to efficiently and quickly manage their costs.

While not all players would be able to contain these additional costs, analysts said the ones that were efficient would reap the benefits of such a harsh environment in the end.

Thus far, reports indicate that manufacturers such as Proton and even Mercedes-Benz Malaysia Sdn Bhd will not resort to hiking car prices.

Mercedes-Benz announced a price reduction of as much as RM52,000 across its locally-assembled W205 C-Class range.

The reduction was due to the C-Class range qualifying for the Energy Efficient Vehicle duty incentives.

While Mercedes-Benz competes in the higher market segment, which is not that price-sensitive, the reduction of prices could serve to enlarge the market that it wants to cater to and may lead to an increase of economies of scale for it.

Meanwhile, whether or not the currency weakness will result in Proton, which is owned by DRB-Hicom Bhd, claiming market share at the expense of other market players remains to be seen in the longer run.

“If Proton can overcome the brand perception hurdle, then it can gain from this unique currency weakness situation,” an analyst said.

The analyst added that whether or not costs would rise would depend largely on the localisation rate of the cars, and that the market perceived that players such as Proton and Perodua had higher localisation rates.

“Proton’s localisation rate should be higher than Perodua’s. Given that they place more importance on sales, I expect them to sustain their prices. Also, since this is a very price-sensitive segment, Proton (if it does not raise prices) may be able to gain market share from other entry-level players that increase their prices,” analyst Azman Hussin of CIMB Research said.

Moving forward, Chong, who has a “neutral” call on the sector, said that auto sales would gain momentum to make up for his flat total industry volume growth assumption of 667,000 units.

The market is expected to be driven by aggressive advertising and promotional (A&P) activities, festivities and stronger seasonal patterns.

He, however, noted that on the flip side, all these catalysts would be at the expense of margin erosion.

“To make up for the lagging sales caused by weaker consumer sentiment in the first half, we believe auto companies will be more aggressive in A&P activities for the remaining months of 2015,” he said.

“We remain selective in our picks and prefer players which are less vulnerable to the weakening ringgit, with its targeted customer base in the middle-income to high-income brackets that are less sensitive to the rising cost of living,” Chong added.