Perodua supports government's effort to boost automotive industry

By Surin Murugiah- theedgemarkets.com, June 10, 2020 11:38 am

KUALA LUMPUR (June 10): Perusahaan Otomobil Kedua Sdn Bhd (Perodua) expressed its support on the government's recent effort to boost the automotive industry. In a statement, Perodua president and chief executive officer Datuk Zainal Abidin Ahmad said that the exemption of sales tax which will be effective June 15 is a welcomed step taken to rejuvenate the economy in general and the local car sector in particular.

In the Economic Recovery Plan address last Friday, Prime Minister Tan Sri Muhyiddin Yassin announced various measures and incentives to stimulate the economy amidst the ongoing Covid-19 crisis that has gripped the nation.

Among the incentives to assist the automotive industry are a 100% sales tax exemption on new completely knocked-down (CKD) vehicles and a 50% exemption for completely built-up vehicles until the end of the year.

"Perodua is in full support of the government's move to fully exempt sales tax for the purchase of CKD cars until the end of the year to shore up the domestic economy," said Zainal.

Perodua's current model range comprises the Myvi, Axia, Bezza, Aruz and Alza.

Zainal said the Malaysian public is spending more cautiously due to Covid-19 and the Movement Control Order, although personal vehicles are still very much needed.

"This move to fully exempt CKD cars from sales tax is a confidence boost for the automotive industry not just for car buyers but the entire ecosystem of manufacturers, suppliers and dealers.

"Along with low financing rates at this difficult time, we are cautiously optimistic that this will spur new car sales," he said.

Zainal said Perodua had sold 52,920 vehicles as of the first five months of 2020, giving it a 41% market share against an estimated year-to-date total industry volume of 129,401 units.

He said all current Perodua models have over 90% local content, and last year the carmaker purchased RM5.4 billion worth of components from Malaysian suppliers.

"As Malaysia's biggest carmaker by volume, we reiterate our commitment to the government to contribute wherever and whenever we can to ensure the industry can get through this difficult time," said Zainal.

In the light of the above news report,

i. Assuming that the price of cars is determined by market forces, what are the impacts of the exemption of sales tax on the equilibrium price and quantity for Perodua cars? Provide an appropriate diagram to illustrate your answer.

ii. Despite the Covid-19 crisis, why do you think Datuk Zaina Abidin Ahmad is confident that demand for Perodua cars would increase in the near future?

iii. Suppose that the demand for Perodua cars actually increases, what would be its impacts on equilibrium price and quantity for Perodua cars taking into account your answer in part (i) above? Use appropriate diagram(s) in your answer.