Creating Affordability - Car Pricing Strategy

For many OEMs, positioning their products at the lowest price may be an added advantage. But the challenges in bringing down the price are much too many. But of course, to customers, , they wished for the cheapest BUT with no less superior in-terms of quality, features and specifications.

On the Road (OTR) price of the car is determined by various factors. Development costs, material costs, royalty (if any), taxes, marketing and distribution costs as well as the profit margin. Reduction in one factor alone is not sufficient to reduce the OTR price if other factors are increasing at the same time.

When talk about the impact of GST, yes, simply calculated, there is a reduction by 4 percent in tax as compared to the previous Sales Tax of 10 percent versus GST of only 6 percent. Unfortunately, things were not as simple as that and a direct reduction was not the case due to different basis in deriving both taxes.

Rather unfortunate too that when GST was first introduced, OEMs were also slapped with weaker Ringgit Malaysia (RM) against US Dollar (USD). Import became very costly. Thus, not many OEMs were able to translate the savings on GST onto a lower OTR price despite the request made by the government for price revision. Many OEMs were unable to reduce the price under tremendous pressure of higher USD as many are depending on imports.

OTR price down should not be looked solely from a lower OTR price. In Malaysians market, we have seen brands maintaining their price despite higher USD. We have also seen many brands maintained their price positioning but offering much higher specifications and better features. This is what terms as “Creating Affordability”. It is not price reduction, but instead, a value up for the same price.

But of course, again, it is very subjective and arguable depending on how we view the subject matter. The options are, lower OTR price with lower specifications and less features or keeping the same price with higher specifications and better features.

Perodua, being a national car, has tried its very best to adhere to the request made by the government. Thanks to previous efforts on cost reduction, including by its vendors, Perodua was able to directly reduce marginally the OTR price of selected models such as an Alza and the previous Myvi but not on its other models. Even though Perodua’s localisation level is much higher than other OEMS in the market, there are still some exposures on forex pressure.

Instead, Perodua put its focus on creating affordability by introducing one after another, a higher specifications and better features model as well as to continue to improve its quality. In 2018, Perodua’s customers are still paying almost the same price as before but for much higher value products, amid the increase in material costs due to unfavourable forex conditions and a hike in inflation over the last many years.

Perodua’s transformation initiatives has resulted to the introduction of higher safety features, better comfort, better fuel efficiency and newer engine at either no increase or just a small hike in price. This is what creating affordability is all about. No OTR reduction but providing the opportunity for Malaysians to own a much better product not possible before, at an affordable price.

The current Perodua Axia launched in 2014 is the indirect replacement of the previous Perodua Viva (2007). The latter was the replacement for the first Perodua model, the Kancil (1994). Axia has came a long way with its newer EEV compliance 1.0 L engine and 4 stars ASEAN NCAP rating compared to the 660 c.c. Kancil. Despite a span of over 21 years and changes in operational costs and inflationary rates, the Axia is still selling at almost the same OTR price as the Kancil in 1994 at just slightly over RM24,000.

Similarly, the 1^st generation Myvi 1.3 L Premium with 2 airbags was priced at RM50,800 in 2005. The price was reduced to RM49,900 in 2011 when the 2^nd generation was launched in 2011. When GST was introduced, the selling price was further reduced to RM47,200 despite of the introduction of some new features and rated 4 star ASEAN NCAP. The 3^rd Generation Myvi which was recently launched with 4 airbags and loaded with other safety features and comfort, newer EEV compliance engine, better fuel consumption and 5 star ASEAN NCAP rating, the OTR price is still the same as the one once sold in 2011. Mind you of the severe fluctuation of the USD and Yen, mind you of the shift in the inflation rate over those period.

That is how the call for lower car prices should be defined and understood as Malaysians buyers should not be treated as 3^rd World buyers, by offering an inferior product just for the sake of reducing the selling price.

For me, pricing is a business decision and part of the company’s marketing strategies, thus should not be dictated one way or another by the authority. However, pricing must also be a result of the business environments influenced by government’s decisions and policies.