A Report on the outlook for the Malaysian Automotive Industry in 2009
1997, which some of us may have forgotten, for the rest of us still remains very much fresh in our minds. 1997, that’s just 12 years after the introduction of Malaysia’s first national car, the Proton Saga and almost 3 years after the first Perodua Kancil rolled into the showrooms. The Malaysian Ringgit was “attacked” by speculators in July 1997 and by the end of the year had lost fifty percent (50%) of its value falling from above 2.50 to under 3.80 to the US Dollar. In 1998 Malaysia plunged into recession with the national GDP falling 6.2% and many industries shrinking. Car sales fell by 64 per cent in the first half of 1998 over the corresponding the previous year according to the then Malaysian Motor Traders Association (MMTA) who said that four out of nine assembly plants run by its members had shut down temporarily and some 3,700 staff, or 38 per cent of their workforce, laid off. Total Industry Volume (TIV – Passenger Vehicles + Commercial Vehicles + 4×4 Vehicles) took a nosedive from 404,837 in 1997 to 163,851 units. While it took years, eventually things began to right themselves. By the end of 2002 there were signs that the Malaysian automotive industry was on the mend and growing. In 2007 production of motor vehicles grew by 19.4% to 428,701 units (1997 total production was 458,291 units). 2001 Motor vehicle sales grew 15.5% over 2000 to 396,381 units.
Fraught with uncertainties, the only thing that everyone can agree on is that Malaysia, like the rest of the world, is in for an extremely challenging year. The global financial crisis continues to be felt across the globe. Closer to home Asian economies, still struggling to recover from the effects of high consumer prices in the early part of 2008, now find themselves faced with declining external demand made all the more worse by continuing weak domestic demand. Towards the end of 2008 we see retrenchments on the rise and job vacancies on the decline. According to the International Labour Organisation (ILO) up to 51 million jobs worldwide could disappear by the end of 2009 as the worldwide economic crisis transforms itself into a worldwide employment crisis. The ILO added that if the recession deepens in 2009, this global jobs crisis will worsen sharply. In Malaysia, more than 10,000 Malaysians have lost their jobs since Jan 1, 2009. Malaysian Employers Federation (MEF) executive director Shamsuddin Bardan said more were expected to lose their jobs this year with companies struggling to stay afloat, particularly those in the manufacturing sector.
Together with this, is the very real concern that a decline in the economy will impact safety and security – there is an expectation that the rate of crime will increase in line with loss of jobs. In October recently, dragged down by a slump in exports and a weak property market, Singapore’s Trade and Industry Minister Lim Hng Kiang confirmed that the country had slipped into a technical recession. Recession in advanced economies will affect smaller economies across the globe including Malaysia’s. To help address this the government has introduced fiscal pump priming and monetary easing measures but we will have to wait and see if they work. Sectors and industries are being affected indiscriminately. In the automotive industry for example we are already seeing signs of belt tightening against threats to the bottom line.
FUTURE INDEFINITE
In Japan, according to the Asahi Shimbun newspaper Toyota Motor Corporation will slash production between February and April to about 9,000 vehicles a day, making just half the number of vehicles it produced the previous year, and may need to reduce its full-time work force as a result. Honda Motor Co. said it was cutting 3,100 temporary workers and lowering output by 56,000 vehicles in Japan and 17,000 vehicles in Europe for the fiscal year through March. Associated Press reports that Nissan Motor Company would be cutting domestic production by another 64,000 vehicles in February and March and is planning in 2010 to shift some production of its top-selling compacts, the March and Micra, to India, Thailand and other lower-cost countries from Britain and Japan.
The International Herald Tribune recently reported that South Korean sport utility vehicle maker, Ssangyong Motor, has halted production at both of its plants and was asking a court for bankruptcy protection. The same paper also reported that Kia Motors said it would cut output by a fourth in the January to March period, on the back of an announcement by market leader Hyundai Motor to cut domestic production by 25 percent to 30 percent as demand falls.
The two most promising economies in Asia have not been spared. China’s growth in car sales slowed to a single-digit percentage last year for the first time in at least 10 years following a drop in consumer confidence as its economy continues to slow. According to Reuters China, the world’s fastest growing major auto market, had posted three years in a row of car sales growth above 20% until slowing economic growth began to erode demand last year. India hailed as the tenth largest automotive industry in the world has an annual production of approximately 2 million units and was expected to become one of the major global automotive industries in the coming years. Recently, however, BNP Paribas said it expects overall profitability of the automobile industry to contract by 39.8% and net sales, in terms of value to decline by 14.7% over the same quarter last year. Tighter credit, a weak job market and a slowing economy pulled growth in India’s passenger car sales down to two percent or 1.2 million units in 2008. The Wall Street Journal reports that Analysts expect profits at the country’s largest auto firm by revenues, Tata Motors Ltd, to fall by 88% in the third quarter compared with the year-ago quarter.
MARC, the Malaysian Rating Corporation Bhd sees an uncertain outlook for the global macro economy coupled with a moderating of consumer demand that is expected to dampen domestic economic growth prospects. In line with this MARC recently revised downwards its gross domestic product (GDP) growth forecast for Malaysia this year by 1 percent penciling in a 2.5 percent GDP growth from its October’s projection of 3.5 percent while anticipating a 0.5% expansion in their worst-case scenario.
Leading Asian brokerage and investment banking house, CLSA says regional auto players are already experiencing declining numbers and automotive sales in Malaysia could fall as much as 20% in 2009 as demand for big ticket items is affected by the slowing domestic economy exacerbated by the tightening of lending by financial institutions for hire purchase. Frost & Sullivan expects total industry volume (TIV) this year to fall 8.1% to 501,500 units from an expected 545,440 units in 2008 according to their head of automotive and transportation practice for Asia-Pacific Kavan Mukhtyar and OSK Research projects auto sales to decline between 13% and 14% in 2009. All in all, not encouraging for the domestic motor trade. Affin Investment Bank has forecast a 20 per cent sales drop, while a senior executive of a non-national car distributor expects a 25 per cent slide. The KL International Motor Show 2009 (KLIMS ’09), originally slated to be held from May 29 to June 7, has been postponed to a date not yet determined due to the current situation. The decision was arrived at after deliberations, discussions and consultations with automotive principals, confirmed exhibitors as well as other key stakeholders according to the president of the Malaysian Automotive Association (MAA) Datuk Aishah Ahmad. The MAA is forecasting TIV to drop 12.4% to 480,000 but would update this forecast on a quarterly basis owing to what they see as uncertainties in the local and global economy.
This contrasts sharply with the 12.5% positive growth it registered in 2008. TIV for 2008 stood at 548,118, 530,810 of which came from new vehicle production, an increase in production of 20.2% over the previous year. Passenger vehicles made up 497,459 units or 91% of 2008s TIV. Of total passenger cars, ordinary saloon or passenger cars made up 85.6% of that number, multi-purpose vehicles (MPV) at 11.1%, 4X4 sport utility vehicles at 2.4% and window vans made up 0.9%. The MAA saw the growth being driven by positive consumer sentiments in the first nine months of 2008, the introduction of new vehicle models, competitive prices and aggressive sales promotion campaigns. 2008 can be seen as a bumper year for all with growth showing up across all segments of the category.
THE SALES PUZZLE
Mercedes-Benz Malaysia Sdn Bhd sales of passenger cars and commercial vehicles grew 16% to 6,151 units (4,160 passenger cars and 457 commercial vehicles), surpassing its target for 2008, the biggest spurt since the marque was introduced here 58 years ago. Its market share in its competitive segment grew to 46.7% helped by a 14% increase in its luxury segment. In January this year Mercedes-Benz chief executive officer and president Peter Honegg was quoted in a local daily as saying that the company, through close partnership with their distributors to enhance service facilities and through greater emphasis on the Mercedes-Benz hallmark attributes of safety, comfort and class, aims to extend this performance in 2009. At a year end media briefing in December 2008 Honegg said the company expected sales to fall by as much as 10% to 20% in 2009, a return to 2007 volume levels. At that time he had said that the Mercedes-Benz group had started cost-cutting measures which included reducing the work week by one day to four days. In November 2008 Vice-president for passenger cars, sales and marketing Florian Mueller was reported as saying that the company thought effects of the global financial crisis will be felt in the second quarter and that the next course of action would be decided after the first quarter, after discussions with their headquarters in Germany.
Another carmaker is looking at sales performance in individual states as an indication of things to come, particularly the Johore and Penang markets. For this carmaker the slowdown in growth for the Johore market is symptomatic of the uncertainty in Singapore. The drop in sales in the Penang market, they say, is related to the reduction in electronics components exports to the US and the resulting shutting down of factories and laying off of staff. Speaking on condition of anonymity this carmarker wondered out aloud about whether MIER figures were reliable or suspect. He also expressed concern over the potential rise in violence and theft. It was reported in a national daily that 200 companies had 100 foreign work permits each per month and that we were staring at a potential security issue once mass retrenchments began.
MAA president Datuk Aishah Ahmad was looking at marginal improvements over the next two years – 490,000 units in 2010 and 505,000 in 2011. According to the current forecast, if we are to achieve 2008 volumes, it will not be till 2013. Against all of this, and ongoing soft consumer spending, encouraging domestic demand becomes all the more important in helping to strengthen the Malaysian economy. Crisis in the making, or opportunity? Just how is all of this is affecting key players and will their strategies be to stay competitive, relevant, build relationships with and address sales to and growth among replacement and entry-level car buyers?
Datuk Dr Abdul Halim Harun, UMW Holdings Bhd managing director and chief executive officer, was recently quoted as saying the company had no plans to increase the price of its cars for the time being. Taking a look at the times, it looks almost certain that no one will be increasing prices in an attempt to be competitive. “It is a balancing act between price and demand. In the current challenging environment, demand may come down if we increase prices,” Halim said. Edaran Tan Chong Motors Executive director Datuk Dr Ang Bon Beng concurred when he said, “Everyone wants to make a profit but for long-term survival, we may have to make do with lower margins. In these challenging times, it is unwise and impractical to increase our selling prices.” While Honda Malaysia Sdn Bhd’s costs have risen 5% to 10% Managing director and chief executive officer Atsushi Fujimoto said that there will be no increase in car prices for now.
According to one industry source it is expected that all traditions will break and new grounds will emerge. “The business landscape will change and must change,” he said, and “as was observed in all previous economic disturbances, new challenges and opportunities also arise.” He saw that segmental boundaries will be redefined, “Many years back we only had the 3-box saloons and vans categories, but then the market took a change with a “cross” between a saloon and van and what we have today? MPVs, SUVs and what not.”
He also expects CRM programmes to be “intensified to retain as much as possible the current customers,” but acknowledges that this “could be a costly affair and very time consuming with slow returns.” Taking the longer term view though, he is convinced that this action will hold its ground and reflect a higher percentage of customer affinity and retention. “All planned product development will still be pursued as it’s the essence of the industry to have new technology and innovations to stay ahead of the competition and all these are long term strategies with sunk cost.” On the global front he believes that “compact and fuel efficient cars will take on the main stage; electric cars and other energy saving form of fuel cars will be more focused and hybrid (cars) will still continue to be lobbied to world Governments to accept this new automotive concept.
“Price will still be the challenge of most markets,” he says and adds that balancing cost efficiency and volume will be the main focus of companies in order to stay healthy. He cautions that “margins will be small” saying that other alternative sources of profits, for example, synergistic industries, will be the main focal point to contribute to total profitability. “Traditional margins from selling cars are no longer lucrative and managers will have to be creative to source alternatives.” One way, he says, is to reduce cost down, through (a re-examination of) purchasing, production and overheads. “Companies will have to be very prudent in this sector.” “Operational expansion programs will ease or completely stop due to the uncertain economic environment now which is very volatile and unpredictable. The acquiring of new properties will be an opportunity for some to plan for the future growth but who the the likely candidates are is anybodies guess.” In this environment, keeping stocks down to a minimum is vital; no amount of brand building will sell an extra car, consumers will take this opportunity to secure the best deal of the day. “Retail, tactical actions will be most sensible as, in such an environment the key concerns to look at are cost management – to be efficient, keeping the cost of funds and production down, and stock management – keeping stock to a minimum. Funds management is crucial.”
Peter Das, a veteran of the automotive industry and head of the Malaysian Advertisers Association (MAA) and the Malaysian Audit Bureau of Circulations (ABC) remembers 1997 all too well. “The difference is,” he says, “this time we need not be unprepared, this time we can see the wave of the tsunami coming.” By now everyone in the trade has already had discussions about what’s coming and what to do to turn things around – car-makers need to offer better value propositions in order to maintain sales – but they are also watching and waiting to see what (US President Barrak) Obama will do he said. Peter disagrees that this period could prove particularly advantageous for second-hand car dealers. “During the last downturn there was a need to keep on selling cars. Stripping down the unessential options to provide a no-frills car helped to rebuild volume. People will be looking at how to introduce lower cost cars.” Recently China’s Changan Automotive Co. launched a mini-car and a seven-seater multi-purpose-vehicle here both cars, priced from RM36,000. In India TATA introduced the TATA Nano retailing there for about 100,000 rupees (RM7,300). “Who wants to buy a second-hand car with no guarantee and higher interest rates on hire purchase when they can get a new car, guaranteed and at a lower rate of interest?” Peter asked. “While selling is important, the quality of back-up service is essential to retaining customers,” he added. Companies need to explore creative ways to build-rapport so that customers keep coming back. “Cheaper cars are all very well and good,” he said, “but it is the little things that count as well.” To illustrate the points that consumer understanding is key and that God is in the details he told us of an instance when a foreign car was introduced here. The car-maker switched the steering wheel around but neglected to consider the changes that needed to be made to the stick shift, the boot release lever and the petrol cap lever so that the gear positions were not changed and the driver had to go round to the front passenger side to make use of the boot and petrol cap release levers. “As a driver, I can tell you that forgetting things like those do not endear you to your customer,” Peter admonished. “That was an example of a car that was clearly not consumer-friendly born out of a lack of understanding of the local market, and a lack of caring about the needs of the driver,” he said. To contrast with this is an idea to be launched soon where advertisers take care of car loan repayments in exchange for the placement of advertising on the car, effectively turning cars into an advertising medium and helping consumers lower their financial commitment, something that should find appeal during these times, he said. Expanding and investing during these times is the right thing to do but it is also a bold move. “Everyone talks about it. We talked about this the last time round. It’s a bold move and a calculated risk. If you have the finances and you do it, you come out stronger when the economy turns around. The question is, who’s going to be the first to try?” With all this gloomy talk we ask Peter if there is any hope for us here in Malaysia. “I don’t think it will be that bad if we put our hearts and hands together as a nation,” Peter said. “Don’t stop buying but don’t overbuy either. Malaysian consumers need to know what’s the real picture so we can know how to balance ourselves.” He urges that we be kept informed and finishes with “I for one, am positive about things.”
By Jeff Seow