The good, the bad and the ugly

Low percentage: People riding the LRT in Kuala Lumpur. Owning a car in Malaysia has become a necessity due to the poor public transport system.

First, the good news. Malaysia’s automotive industry saw total industry volume (TIV) surge to an all-time high of 799,731 units in 2023, up 10.9% year-on-year (y-o-y) from 721,177 units in 2022.

According to the Malaysian Automotive Association (MAA), the increase in sales was mainly driven by the passenger-cars sub-segment, which grew 12% y-o-y to 719,160 units, making up almost 90% of total TIV.

Other factors include tax-free incentives as well as new electrified vehicles (xEVs) launches, which gave buyers the freedom to choose from a wide variety of offerings. xEV includes hybrid vehicles as well as electric vehicles (EVs).

In total, some 38,055 xEVs were sold in 2023, up 68.2% y-o-y, and making up some 4.8% of TIV. Within the xEV segment, hybrid vehicles saw a 40.4% y-o-y increase to 28,055 units while pure EVs jumped almost four-fold to 10,159 units from a mere 2,631 units in 2022.

The good

Some of the key market players in the automotive sector experienced a significant increase in revenue and profits due to the strong market demand.

For example, in Sime Darby Bhd’s case, the cumulative nine-month financial results ended September 2023 saw revenue from the Malaysian automotive division surge 46.9% to RM5.78bil while profit before interest and tax jumped 76.5% to RM429mil from RM243mil a year ago.

Bermaz Auto Bhd too saw a big jump in revenue for its Malaysian automotive outfit as its reported quarterly results for the nine months between February and October 2023 improved 30.5% y-o-y to RM2.91bil from RM2.23bil a year ago, while segment profit jumped 33.6% y-o-y to RM325.7mil from RM243.7mil.

UMW Holdings Bhd is the other big winner as revenue and profit before tax for its automotive division for the nine months ended September 2023 surged by 15.1% and 16.1% y-o-y to RM11.07bil and RM687.5mil respectively.

However, both MBM Resources Bhd (minus the share of profits from its 20% stake in Perodua) and Tan Chong Motors Bhd did not fare as well, as profit before tax (for MBM Resources), and earnings before interest, tax, and depreciation (for Tan Chong Motors) declined by 17.3% and 46.3% y-o-y to RM36.9mil and RM41.2mil, respectively.

In the case of Tan Chong, the topline growth too was disappointing as revenue from the automotive division dropped 20.7% y-o-y to RM1.79bil from RM2.25bil a year ago.

Overall, the five listed companies saw revenue for the 2023’s nine-month window increase by 18.4% to RM23.03bil while reported profit jumped 26.7% y-o-y to RM1.52bil.

The bad

Well, as we are well aware, passenger vehicles are largely bought using financing and in most cases, these are hire-purchase loans.

Based on Bank Negara’s latest statistics as at the end of December 2023, hire-purchase receivables for the purchase of passenger cars stood at RM198.3bil or 9.3% of total loans outstanding.

With almost 720,000 passenger vehicles sold last year and assuming that 90% of them are financed using hire-purchase loans based on an average value per car of RM70,000 per unit and with 80% financing rate, the passenger car receivables generated in 2023 alone is estimated at RM36bil or some 18% of total outstanding hire purchase receivables.

The balance of RM162bil is from loans outstanding from prior years and based on the data, we can roughly assume that Malaysians obtain car loans that are probably on average for a period of seven years, although there are cases of shorter tenure of four years and up to the maximum of nine years.

Depreciating asset

Although owning a car has become a necessity mainly due to the poor public transport system, one cannot deny that owning a car is one the dumbest things to do when investing in an asset due to the depreciating nature of the asset.

Worse, when one obtains a traditional hire-purchase loan, whereby interest is calculated upfront and on a flat rate throughout the tenure.

Hence, in the earlier example, for a RM70,000 car with 80% financing at a rate of 3.4% per annum for a maximum tenure of nine years, the loan interest alone is RM17,136 or approximately 30.6% of the RM56,000 principal amount.

The borrower will pay RM677.19 per month for the next 108 months before the loan is fully paid.

However, at the end of the nine years, the RM70,000 new car will only be worth approximately RM30,000 and the car buyer loses RM57,136 in total investment based on the initial outlay plus interest cost, which translates to RM6,348 per year or RM529 per month.

This excludes the cost of maintenance (fuel, road tax, insurance, parking, toll charges, servicing) which can run easily another RM400-RM500 per month.

Hence, all in, we spend or experience an outlay of approximately RM1,000 per month on car ownership alone without even realising it.

As vehicles have a finite life and there is a greater tendency for vehicle owners to change cars of equivalent value or upgrade to a higher value car after several years, or when the loan is fully paid up, we tend to repeat this cycle over and over again throughout our driving lives.

All in all, we will change cars at least six to eight times in our lifetimes, and on every occasion, when we repeat the cycle of buying a depreciating asset, the losses or outlays are repeated over and over again.

Of course, for a cheaper valued car, or a fully paid-off car, the running cost is much cheaper, while for a more expensive passenger car, the cost will just escalate in terms of depreciation as well as running cost per month, especially in terms of insurance and servicing.

The ugly

Down south, Singapore has presently a car population of just over 650,000, which is just over 90% of Malaysia’s total passenger car sales last year!

Yes, cars are expensive and hardly affordable but one must also realise that car is not a necessity in Singapore mostly due to an efficient public transport system.

Public transport is so affordable that one does not spend an arm and a leg going places and transport costs can be as little as just S$128 per month based on the monthly pass, which allows commuters to travel on buses and the Mass Rapid Transit (MRT) lines.

We too have that in Malaysia but for one reason or another, our MRT ridership is nowhere near what Singapore MRT carries daily while our bus ridership, number of buses, reliability, and connectivity are left much to be desired.

With passenger cars choking our roads, we continue to pollute the air and stuck in massive traffic jams daily.

This causes more stress to motorists and loss of productivity. Malaysia’s car-centric nature needs to be addressed urgently and the answer is not building more highways or interchanges or widening our roads but making our public transport system more efficient to enable consumers to save on travel time as well as the cost of owning a passenger car.

Spending on large infrastructure like the MRT3, which is expected to cost some RM50bil, is better utilised by improving public transport connectivity, and frequency, which will translate to higher ridership, via an efficient bus network.

In summary, while TIV sales are good for automakers and perhaps to a large extent shareholders of the company, there is a bigger price to pay in terms of cost to the environment, losses suffered by consumers due to the financing cost of owning a depreciating asset as while as society as a whole as more infrastructure is build to cater for rising vehicle population.

Worst, existing public transport is underutilised, mainly due to the lack of an adequate, acceptable, reliable, and dependable bus network, leaving the government spending more money on fuel subsidies as more cars are on the road.

Pankaj C. Kumar is a long-time investment analyst. The views expressed here are the writer’s own.