Why Proton should not raise prices

By Sherilyn Goh

A little late to the party, national carmaker Proton Holdings Bhd said on Monday that it is mulling increasing its car prices effective January 2016, citing the weak ringgit which has inflated prices of its imported raw materials. Tiger lays out the case for why Proton should not raise car prices.

Proton’s announcement that it will increase prices follows in the wake of foreign car brands including Honda, Toyota, Lexus and Mitsubishi, all of which had earlier confirmed that a price hike is on the books beginning 2016. Meanwhile, BMW, Nissan and Perodua have each said that they would consider doing the same should the situation deteriorate.

But it annoys Tiger that Proton is now jumping on the price hike bandwagon citing a weak ringgit. Proton is the national carmaker. How could even the national carmaker be affected by the currency play, when it is expected to manufacture most if not all of its components locally?

Abdul Harith Abdullah

In justifying the proposal for the price hike, its chief executive officer Abdul Harith Abdullah said the price increases were seen as an industry-wide problem as hikes would be necessary to compensate for the effect of the lower ringgit.

While the ringgit depreciated by about 25% year to date against the greenback, its impact varies depending on the proportion of components that are imported, which is estimated to be about 30%.

So the question boils down to the proportion of components which are foreign made. With more than 70% of its car components being manufactured locally, Tiger wonders whether there is a real need for an increase in car prices.

So being the curious feline, Tiger worked out some simple calculations: Take the ringgit which has weakened about 25% against the US dollar, for example, every 1% weakness in the ringgit against the US dollar should only result in a 0.075% increase in cost, given that about 30% of Proton’s components are imported.

With the ringgit weakening against the US dollar by about 25%, the increase in cost therefore amounts to about 1.88%.

While the quantum of price increase has yet to be ascertained as varies across different models, it is important to note that going by an increase of more than this percentage means that the price hike accounts for more than just the ringgit’s depreciation.

In addition, why would Proton choose to increase prices when consumers have been paying indirect taxes for choosing not to buy a national car? In 2013, for instance, Malaysian car buyers paid RM9 billion to government coffers in the form of excise duties for choosing foreign brands over national cars.

So, really, what would you make of a 1.88% increase in cost due to foreign-exchange losses to all those years of protectionist policies against foreign competition?

Tiger has said previously that it is unfair for Perodua to raise prices at the expense of its captive market and the same applies Proton, which has similarly enjoyed lopsided advantages since its inception in 1985. In fact, Proton has enjoyed them for a much longer time.

It also baffles Tiger that Proton, while touting itself as the first national carmaker, actually imports its components to the extent that the depreciation of the ringgit is able to substantially “affect its production ecosystem”, to put it in Abdul Harith’s own words. So how national is Proton after all?

Given Proton’s dismal sales performances in recent years, raising prices also goes against the logic of what it should do, which is to boost its sales volume and achieve economies of scale.

It takes no genius to tell you that the reason Proton’s bottom line is under pressure is not due to foreign-exchange losses, but the fact that it has not been operating at its full capacity while increasingly losing market share to Perodua and other non-national brands.

The carmaker’s two main manufacturing plants in Tanjung Malim and Shah Alam have a combined installed production capacity of 300,000 units, of which approximately 50% is utilised at current production levels. Proton officials in 2013 said that domestic sales of above 350,000 per annum would be a challenge given the fast-saturating domestic market.

And by raising prices does it mean that prices will fall as the ringgit strengthens? Most unlikely, according to the economic principle of price stickiness. So why punish Malaysians when their purses are already bleeding, and after all these years of denying them access to cheaper alternatives?

It would make more sense for Proton to absorb the 2% increase in costs, rather than raise prices and turn consumers away as they might choose to hold back on their purchases in the current economic climate.

Aishah Ahmad

Malaysian Automotive Association president Aisha Ahmad puts it well. “Increasing prices is not going to boost sales. On the contrary, it will worsen the situation as consumers are already tightening their belts due to inflationary pressures,” she was quoted as saying in a news report.

Raising prices at at this point will only force consumers to further hold back on their planned purchases and aggravate the slowdown in car sales. Instead of looking at a price hike as an immediate solution, perhaps Proton and other carmakers alike should come up with avenues to make their products more competitive in terms of pricing and quality.

So here’s Tiger two cents: it’s better for Proton to keep prices as it is, and to take advantage of the situation by offering consumers better value for their ringgit while other carmakers increase their prices.

GRRRRR!!!