AUTOMOTIVE INDUSTRY CHALLENGES 2009
1. The automotive industry is expected to suffer with lower sales for the year 2009 due to the recession. Without sufficient support from the government to sustain the automotive sales and growth, automotive manufacturer, vendors and dealers will be badly affected.
2. The impact of the recession can be reduced if the automotive sales volume can be sustained. With encouraging sales, dealers, vendors and other stakeholder will not suffer much loss.
3. Automotive industry is unique as it is neither the seller’s market nor the buyer’s market but instead it is the BANK that controls the car sales via the vehicle financing. A car with the best technology, design or pricing is still not sellable unless the dealers were able to secure the bank financing for the customer hire-purchase loan.
4. Banking facilities and hire-purchase loan are the MAIN factor that will determine the sustainability of the automotive industry.
5. More than 90% of car dealers and vendors operate with banking facilities and more than 90% of car buyer, purchases vehicle via bank hire-purchase loan.
6. During the 1998 recession, all banking facilities and loans were frozen to the public as well as the dealers.
7. Any negative changes in the banking facilities (to dealers or vendors) and hire-purchase loan to the customer will gravely affect the automotive sector.
8. Pre-1998 recession, there were more financial institutions and banks that offers various financing packages to dealers and the car buyer. With more competition between financial institutions and banks, dealers and customers were immediately attended to with almost an immediate loan approval or a maximum approval period of 24 hours (approval SOP- AM/PM or morning HP-loan submission will get approval by evening.)
9. Post 1998 recession, the government had successfully initiated and completed the mergers of Banks and financial institutions. After the bank merger, options for bank financing and hire-purchase became limited within only a few big banks and without any financial institutions. Banks became choosy with the type of customers they deemed profitable. Hire-Purchase loan are no longer approved via direct interview with bank officers but through a computer programmed that is instilled with customers and vehicle risk profile. From the conventional am/pm pr 24 hours approval, hire purchase loan is now approved within a week.
10. The Risk profile for Proton car buyers differ from other model make. There have been various instances that the hire-purchase loan for proton car buyer were either reduced or rejected but the same customer were able to secure a higher hire-purchase loan to buy other non-proton model.
11. With a high inflation rate and essential items price increase, the risk profiles were adjusted and HP-loan approval became more stringent, understandably because of a lesser disposable income. Car dealers in Singapore and Thailand have informed that only 10% car loan submissions were approved due to the economic downturn. In other word, out of 10 applications for car loan, only 1 loan is approved.
12. The percentage of approval rate for HP-loan application in Malaysia is at 40%. This year 2009, it is possible for the approval percentage to be as bad as Singapore or Thailand. The percentage of approval is true base on direct feedback from dealers although official statistic from the Bank may state otherwise. The dealers know the true picture better.
13. Factors such as lower disposable income that is affected by high inflation, as well as possibility of retrenchment will also influence the HP-loan approval. Inflation and increase in the prices of essential item affected the public’s affordability to regularly service their existing HP-loan repayment and may result in an increase in Bank’s NPL. This in turn, will affect the risk profiling again and loan approval will be worse for future Proton buyers.
14. However, the global economic downturn is inevitable given Malaysia high international trade volume. However, the impact can be cushioned with government intervention.
HP LOAN APPROVAL AND BANK FACILITIES
15. To cushion the downfall in automotive sales, an easier approval will ensure sustainability instead of the conventional stringent & careful approach adopted by Banks during trying time. There are various factors that determines the customers and vehicle risk profile that was generated from historical data (especially customer’s historical credit pattern, past NPL and fraud cases). These risk profile can be adjusted to be more friendly and practical given the current economic downturn.
16. The terms and conditions of Bank facilities enjoyed by dealers, vendors or other stakeholders should be friendlier or flexible rather than any unfavourable variation to ensure the survivability of all stakeholders in the network. Customers and public will be better served with a healthy network.
THE PERCENTAGE MARGIN OF FINANCE & LOAN PERIOD
17. Currently, the maximum loan amount allowed for car financing is 90% of the On-the-Road car price for a maximum of 7 years (and perhaps 9 years for some model). A drastic change increasing the margin of finance from 90% to full 100% will enable the public to afford the purchase of a new car. When the loan repayment is spread over 12 years instead of the current 7 -9 years, the public can afford to service their HP-loan repayment given a lower disposable income due to recession. This will also avoid the possibility of high NPL.
OFFICIAL VALUATION OF REGISTERED USED CARS OR SECOND HAND CARS
18. There is no centre or independent body or organisation in Malaysia that is accredited to value the price of registered vehicles or second hand vehicles. The valuation of registered vehicles, are fixed by the Bank via the quantum the bank is willing to finance the registered cars. As an example, if the bank is willing to finance a Wira year 2000 for RM20,000, then the used car dealers will buy the car either at the same price or below the approved loan amount. This car is in turn sold for a few thousand profits only.
19. Without a proper valuation or regulated pricing of the second hand car prices, customers who bought a car under HP-loan financing will not be able to sell the car when the car value is lower than the balance loan amount.
20. Existing car buyers too will be blacklisted when they cannot afford to service the loan repayment during this downturn and thus increasing the NPL rate. Customer is then made a bankrupt when the car is repossessed and auction for an amount lower than the balance loan amount.
21. The public should be allowed to withdraw their EPF to repay any outstanding HP-loan that will avoid NPL and financial blacklisting. The EPF withdrawal as a downpayment to purchase a new car will also spur and promote the automotive sales.
BANK HANDLING FEE
22. Dealer’s income was drastically affected with the ceiling imposed by the Central Bank (Bank Negara) on the Handling fees paid by the Bank.
23. In an independent study conducted by Ernst & Young benchmarking internationally 5 developed and neighbouring countries, Malaysia is the ONLY country that imposed a ceiling to the quantum paid. Singapore, Thailand, United Kingdom, Japan and Australia allow the market to dictate the quantum to be paid.
24. The Ernst & Young report also state that car Dealers in Malaysia have greater responsibilities, liability, exposure and work in coordinating Hire-purchase loan submission and approval as compared to the 5 developed and neighbouring countries.
25. General insurance or specifically Motor Insurance accounted to approximately 20% of the dealer’s income. Our income is affected when the Bank embarked in the sales of motor insurance by-passing the car dealers (who are all an authorised agent) via indirectly-forcing the customer to renew the motor insurance (and road tax) with them by prohibiting the collection of the vehicle registration card kept by the bank.
26. Banks discriminate dealers by categorising and prioritising dealers who subscribed to their Bank facilities with unfavourable terms. The unfavourable terms includes restricting non-insurance related banking-facilities only to dealers who are agent to the Bank’s insurance. The Bank’s insurance are inferior in services and packages offered (compare to other provider) to dealers and any insurance commission for insurance renewal are forfeited by the bank.
27. Various other unnecessary charges were also imposed to dealers that further reduced the dealer’s already deteriorating income due to higher cost of operation.
28. Banks have also embarked in selling car to the Bank’s existing customer. The sales are channelled to a ‘special’ dealer’s network created by the Bank. The Bank customers enjoy special privileges such as special interest rates but with a lower income to dealers.
29. The Merger of Banks and Financial Institutions had led to the introduction of various unfavourable terms and activities in adverse to the dealers and the public. Unfavourable terms that burdens the dealers as well as the public should be supervised especially during expected worsen economic downturn.