This article first appeared in The Edge Malaysia Weekly on January 27, 2025 - February 2, 2025

THE automotive industry has managed to secure another extension on the proposed revision of excise duty for locally assembled (completely knocked down [CKD]) cars, until Dec 31 this year, according to industry sources.

Despite the current respite, however, it is likely that there will be no further extensions from 2026, which means car prices are likely to increase significantly from 2026.

A source explains that there are unlikely to be anymore extensions, as this allowance is not the first. “This marks the third extension granted to the auto industry since the revision was first introduced in early 2020.”

A letter dated Dec 19, 2024 — and sighted by The Edge — from the Ministry of Finance (MoF) to the Malaysian Automotive Association (MAA) stated that this year-long extension “constitutes as the last [such extension], and no additional extensions will be provided”.

The MoF under then finance minister Lim Guan Eng, introduced the new excise tax regulation — P.U.(A) 402/2019 — Excise Regulations (Determination of the Value of Locally Manufactured Goods for the Purpose of Imposing Excise Duty) 2019 — which was targeted for implementation on Jan 1, 2020.

The regulation is slated to expand the scope of automotive excise duties for locally assembled, or CKD, vehicles to include non-manufacturing items, including sales costs, marketing and administration expenses and profits, which is known as open market value (OMV).

In a nutshell, the excise duties are imposed based on the OMV, and currently only manufacturing-related items are taxed.

Nevertheless, the regulation was then deferred to end-2021, owing to the adverse impact on the auto industry brought about by the Covid-19 pandemic.

MAA received the second extension for two years until Dec 31, 2024. This third extension is until Dec 31, 2025.

The impact of the price increase on vehicles is likely to be substantial.

Last week, MAA president Mohd Shamsor Mohd Zain said the implementation of the revised excise duty could see an average price increase of between 10% and 30% for locally assembled cars.

“If that [OMV revision] happens, there will be a spiral-down effect in the future years, in terms of lower sales, lower volume, especially for CKDs. It will also have an impact on our local (automotive) industry, especially our suppliers. There are a lot of after-effects that we’re concerned about,” Mohd Shamsor was quoted as saying at the MAA briefing on the industry’s 2024 performance.

“We will continue to engage and, hopefully, we’ll be able to get some kind of understanding and also an alternative way to overcome this.”

To put things in perspective, this price increase, when implemented, could see a basic Perodua Myvi car, which is priced at RM50,900, see a price hike of between RM5,000 and RM15,000 to between RM55,900 and RM65,900.

A market observer reckons that, if implemented, the revised excise duties could have an adverse impact on car sales and overall negative impact on the industry supply chain.

“If car sales drop 10%, that is about 80,000 units, based on total car sales of 816,747 units in 2024. This kind of drop in sales could see a significant impact on the industry … We should also consider the investments that have already been made to set up the assembly plan,” he tells The Edge.

He suggests that the government provide a longer runway of five to 10 years for the industry to be ready for such a drastic increase.

“Car makers usually take a five- to 10-year horizon when making investment decisions. An abrupt implementation could affect the investments that have already been sunk into assembly plants … This tax hike could also dampen new investments because of the uncertainty surrounding its implementation,” he says.

Analysts are already expecting lower car sales this year in view of the fuel subsidy rationalisation.

“We foresee a gradual easing of TIV (total industry volume) in 2025 after years of elevated backlog, with our projections at 792,000 units (-3% year on year) … We maintain our ‘neutral’ call on the sector, owing to the anticipated downcycle,” MIDF Research said in a Jan 25 report.

In 2024, sales of new motor vehicles rose 2.1% y-o-y to a record 816,747 units, surpassing the previous record of 799,821 units achieved in 2023. Note that fully imported (completely built up [CBU]) vehicles use a different system — prices of these cars are based on cost, insurance and freight (CIF), on which import and excise duties are imposed. CBU cars are subject to higher taxes and excise duties than CKD cars, which makes them more expensive.

Nevertheless, if the price of locally assembled cars rises as much as 30% because of the implementation of the revised excise duty, will the price gap between CKD and CBU vehicles narrow to the point that foreign automotive players might prefer importing fully assembled (CBU) cars rather than investing in local manufacturing plants for CKD production?

A market observer says: “Companies typically need to plan three to five years in advance, depending on the life cycle of the vehicle model. If the timing of the implementation remains unclear, it may not be feasible or practical to continue with CKD operations, making long-term planning challenging.”

For instance, in 2015, the CKD Mazda 3, which was locally assembled in Kulim, Kedah, was priced between RM106,105 and RM121,105, while the CBU model cost about RM139,000, a price difference of RM18,000 to RM33,000. 

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's App Store and Android's Google Play.