ELECTION promises of cheaper cars have hit the used-car market hard.

Used-car dealers who spoke to The Edge say cash flow has tightened because stock turnover has slowed substantially in the past three months prior to July 15, no thanks to potential buyers holding back, in anticipation of cheaper cars.

The double whammy is that banks were also becoming stricter in providing floor stocking (a short-term credit facility that banks offer dealers to finance the purchase of motor vehicle stock) at that point of time, forcing the dealers to come up with more cash to replenish their stock.

On top of this, the dealers had been finding themselves increasingly at the mercy of franchise holders that have been slashing prices, and adversely affecting the used-car market.

As new car prices fell at a faster pace and the central bank tightens rules on personal loans, used-car dealers were scrambling to move their stock ahead of the coming Raya festive season at that time. They could not risk missing this last season of the year, because the end of the year is typically a quiet period for the car market.

"Raya is our last chance for this year. With prices falling quickly, we can't keep stock for more than three months. Otherwise, we will lose money," said Jacky Ng, a used-car dealer in Old Town, Petaling Jaya.

Three months is how much time the dealers have to settle floor stocking, even if the cars are not sold. They have to pay fully in cash, or partly, via a new facility with a lower financing margin.

However, from a banker's point of view, the three-month window is narrowing. "Based on our data, used-car dealers lose money on any car held for more than 50 days," said a senior banker who handles floor stocking. He cites the rapid fall in used-car prices for banks, tightening the facility.

In this scenario, small players that are not well-capitalised and are unable to turn over their inventory fast, risk going out of business. This will happen if car prices drop faster than expected, or if potential buyers hold back longer than expected, or both, industry players warn.

Since most new car purchases are financed by trade-ins, they say a crisis in the used-car market could have repercussions for the new car market.

Ng said, he accepted a trade-in — a 2011 model of the Proton Inspira — at RM58,000, a few days after the general election in May this year. But the banks were only willing to lend him RM50,000 to finance the trade-in, and that too, only if he could contra or sell another car, because his borrowing limit was up.

"As we hang on to old stock, we have no choice but to keep taking new trade-ins, to lower the average market cost of our inventory. But now, the banks are pretty strict about the limit and margin for floor stocking, which means we have to top up with cash."

According to him, the government's announcement that car prices will be lowered is really hurting the industry.

"The government says prices will drop 20% to 30% over five years, but the public does not understand; they think it will happen next year. And the way new car prices are dropping because of aggressive discounts, we are going to be hit badly."

In June, Proton introduced the new variant of the Saga — the Saga SV. Its price starts at RM33,438, which is about RM5,000 cheaper than that of its predecessor, the FLX variant.

At the same time, UMW Toyota had been throwing in substantial discounts to clear the stock of its old models, before launching new ones. This had also been driving down second-hand car prices.

"Typically, the price of a second-hand Vios that is about five years old, falls about 5% every year. However, with the new Vios coming out this year and the aggressive pricing and discounts offered by the dealers, the price of the five-year-old Vios has dropped more than 10%," says the senior banker who handles auto financing.

According to Dave Lim, vice-president of the Kuala Lumpur and Selangor Car Dealers and Credit Companies Association, UMW Toyota was slashing as much as RM10,000 off the Camry earlier this year, and is now offering discounts of over RM8,000 on the popular Vios subcompact.

"Some years ago, we only had to adjust our prices once or twice a year. Then, if we had a really good car, we could hold out for a good buyer. These days, prices are constantly changing, so we sell our stock as fast as we can," says Lim, who also runs a used-car dealership in SS2, Petaling Jaya, but does not rely on floor stocking.

He says the average margin for used-car dealers has thinned to about 2% to 3%, which means they are under increasing pressure to turn over their stock fast. But this has become really hard because of slowing sales. As a result, dealers have to be very selective in the stock they acquire, says Lim.

"Instead of slashing prices, which has a negative impact across the board, principals [franchise holders] should consider throwing in more accessories and goodies, to entice buyers," he opines.

Perodua, for one, seems to have taken this route. The carmaker had announced that it has no intention to follow Proton's lead by cutting prices aggressively. Instead, it will focus on reducing the cost of ownership of its cars, by throwing in longer warranties and free service packages.

The second national carmaker has also set up a pre-owned vehicle centre in Subang Jaya — and plans to open more branches — to support the resale value of Perodua cars.

Sales slowdown

Car sales on both the primary and secondary markets have been slow this year, say industry players like Datuk Tony Khor, who is the president of the Federation of Motor and Credit Companies Association of Malaysia, which represents a large number of used-car dealers.

"We don't compile numbers from our 3,000 members and another 5,000 dealers nationwide. However, we estimate that overall in the past three months (prior to July 15), sales have dropped 15% to 20%," he remarked.

Sales slowed as expected before the election, with both Barisan Nasional and Pakatan Rakyat pledging cheaper cars. Since the election, however, the wait-and-see attitude had not changed. Even the industry's traditional pre-Raya peak sale season had been lacklustre, according to Ng, Lim and Khor.

As at May 2013, the total industry volume (TIV) of new car sales recorded by the Malaysian Automotive Association (MAA) stood at 259,857 vehicles — 6% higher than in 2012. The improvement, say players, is due to the low base effect in the first half of 2012.

Looking ahead, many players are increasingly sceptical about the car market outdoing last year's TIV, despite MAA's bullish forecast of 640,000 this year.

The senior banker points out that while MAA's data is positive, it does not reflect the number of new cars that make it to the road, because the TIV includes sales by the principals to their dealers, that may not necessarily have sold their stock.

From a banking perspective, 2013 has been challenging thus far for hire-purchase loans, and this is not likely to improve much, despite the number of new models lined up, said the senior banker.

"With Raya around the corner, this month (July) should be a little better, but probably not as good as in previous years. Normally, we see a lot of new car sales one to two months before Raya, as folks like newer and bigger cars to 'balik kampung'."

Also contributing to the slowdown in sales were the stricter lending guidelines by Bank Negara Malaysia to curb household debt, which had risen to 83% of GDP. In the past year or so, loan application rejections had increased from about 40% to almost 50%, said the senior banker.

"The rejections were mainly in the low-end market, especially in the used-car market, where buyers tend to have very high borrowings to begin with."

Bank Negara's latest measure —limiting personal loans to 15 years instead of 25 — will also chip away at the motor vehicle industry, as buyers have been known to take personal loans to make the down payment, notes the senior banker.

Nonetheless, he highlighted that non-performing loans in the hire-purchase segment were low at only 1.9% — much lower than the 2% to 3% from over 20 years ago.

"There needs to be more prudent lending, given the high household debt, but for now, competitiveness comes before prudence. If you tighten, you'll lose business. Banks are going to be more focused on character, rather than collateral, which means we are more interested in the quality of the borrower than the valuation of the car," says the senior banker.

While low-end buyers grapple with tighter lending rules, mid to high-end buyers who can afford to be discretionary about their purchase, appear to be holding back on expectations of cheaper cars, going forward.

"The mid to high-end buyers tend to be a little more forward-looking. Many of them are simply upgrading, so they can afford to wait and see if prices fall," comments Lim.

Khor expects car sales to rebound as the wait-and-see attitude changes after the government made it clear that it will not cut the excise duty. It will instead rely on increased competitiveness among automotive players, to drive down prices.

"The prices of vehicles will decline gradually over the next five years. The change has not been as drastic as many expected, because the key driver of falling prices is the liberalisation of the automotive industry," says Abdul Karim Md Lassim, who heads auto finance at CIMB Bank.

But for small used-car dealers like Ng, five years are too long a horizon. His immediate worry is whether he can move his current stock — the value of which has been hit by falling new car prices, before Raya.

"I used to move 30 cars a month in the good old times, but last month (in June), I only sold six. I would be very happy if I could make an average of RM2,000 to RM3,000 per car nowadays," he comments.

This story first appeared in The Edge weekly edition of July 15-21, 2013.