ARTICLE: NAP yet to draw major investments from abroad

The Star Business, Saturday August 7, 2010
NAP yet to draw major investments from abroad
By EUGENE MAHALINGAM
eugenicz@thestar.com.my

THE revised National Automotive Policy (NAP) has not been a blazing success as initially hoped by the Government, as it has yet to attract any significant foreign investments to Malaysia.

“If the question relates to getting global motor vehicle manufacturers to set up new production bases in Malaysia, then it is true that up to now there has been no announcement by global players on such a move,” says Malaysian Automotive Association president Datuk Aishah Ahmad.

Aishah, however, adds that there are several factors investors need to take into consideration before making any investment decisions.

“Whether to set up a base in Malaysia is a business decision which depends on a host of other factors,” Aishah tells StarBizWeek in an e-mail response.

An industry observer who requested anonymity says it is not difficult to see why the automotive industry has not attracted in-flow of investments.

An analyst says industry liberalisation so far has been more focused on the luxury segment, so Proton and Perodua are still protected.

“Everyone out there is only interested to bring in CBU (completely-built-up) units into Malaysia because we are still an attractive passenger car market,” he says.

“With most foreign automotive companies already setting up bases in Thailand and making it their regional hub, it is hard to imagine why anyone would want to uproot to relocate or worst still, to add fresh capacity via a new plant in Malaysia.”

Under the NAP which was reviewed last year, the country’s automotive industry was further liberalised to see a more effective development of the industry.

Among the measures introduced by the Government was to issue manufacturing licence to foreigners for selected segments without imposing any equity condition beginning this year.

This was offered for the production of luxury passenger vehicles with engine capacity of 1,800cc and above, pick-up trucks and commercial vehicles, hybrid and electric vehicles, as well as motorcycles of 200cc and above.

In early March, it was reported that the Government had received “overwhelming response” from foreign luxury car manufacturers seeking further clarification on the NAP.

“The Government has acknowledged that the local automotive industry needs to improve its capabilities and competitiveness to survive in the long term,” says Aishah.

“Local players are encouraged to look beyond the domestic market and to explore partnerships with foreign automakers in penetrating the global markets,” she adds.

Aishah says Malaysian companies should convince their principals on the attractiveness of this form of partnership.

“For non-national makes, this would depend very much on their principals to make such a move,’’ she says.

Nevertheless, the liberalisation of the local automotive industry seems to have kick-started some initiatives.

UMW Toyota Motor Sdn Bhd has announced it plan to invest RM170mil over the next three years to further develop its assembly plant in Shah Alam.

The company also plans to assemble its Toyota Camry model in Malaysia for the local market, replacing the current Thailand-imported units from 2012.

France’s Peugeot has announced its plan to make Malaysia a production hub for right-hand-drive vehicles.

Under a memorandum of understanding between local distributor Nasim Sdn Bhd and Automobiles Peugeot last month, a C-Segment sedan – about the size of Honda Civic or Toyota Altis – is expected to be launched next year.

The car, to be powered by either a 1.6-litre turbo-charged or 2.0-litre engine, will be assembled at Naza’s plant in Gurun, Kedah.

An analyst with a local bank-backed brokerage says the Malaysian automotive industry will not be “completely liberalised” as long as there are excise duties in place.

“Liberalisation of the industry so far has been more focused on the luxury segment, so Proton and Perodua are still protected. Only if excise duties are reduced, then will the NAP have a positive impact.

“If more foreign automakers come in with lower car prices, then it’s good. But so far, none has set up their lines here.”

END OF ARTICLE...

Source:
http://biz.thestar.com.my/news/story.asp?file=/2010/8/7/business/6813393&sec=business

That's all folks, thanks for having the time and patiece to read this blog entry...

ARTICLE: Analysts say Proton-Perodua merger won’t solve woes

The Star Business: Wednesday July 28, 2010

Analysts say Proton-Perodua merger won’t solve woes

By JAGDEV SINGH SIDHU
jagdev@thestar.com.my

Perodua deemed reluctant to merge

IT may seem strange that the merger between the national car companies was initially proposed by Perusahaan Otomobil Kedua Sdn Bhd (Perodua) but now, it appears as if Proton Holdings Bhd is the main driver of that proposed union.

Initially, the general view was that such a merger would not help lift the fortunes of Proton. Today, most market observers opine that an amalgamation of both companies may not be in Perodua’s best interest.
A proposal to bring together both car companies was first mooted sometime end 1998 as the local car industry was slowly starting to gain some lost ground after being badly hit by the Asian financial crisis.
The suggestion was made public not by Proton, but by then Perodua managing director Tan Sri Abdul Rahman Omar, who floated that idea as Proton was on the verge of being acquired by Petroliam Nasional Bhd (Petronas).

Cash muscle

The reason for that suggestion by Perodua’s management was simply down to financial strength. The idea was that with Petronas’ cash muscle, a merger between both car companies would lower costs, improve research and development on new models and offer economies of scale once the industry and market improves.
When Abdul Rahman made that suggestion, car sales for the year was poor. Total auto sales in 1998 was 163,000 units and with the recovery in the economy and sentiment, sales rebounded in 1999 to 288,000 units.

National car manufacturers commanded 93% of sales, or 222,000 units, in 1999 with Perodua then a distant second in sales compared with Proton.

That scenario, however, reversed and the idea of a merger with Proton fizzled out in the later years as Perodua overtook Proton and maintained its market leadership of passenger cars sales since 2006 thanks to the Myvi and a growing demand for smaller, fuel efficient cars.

Proton was then saddled with mammoth capacity from its plant in Tanjung Malim and Shah Alam after sales did not match projections that led to the creation of all that capacity.

The reversal of fortunes of the national car companies since then has seen the idea of a merger between the two companies emanate from Proton’s side, the latest being this month after Prime Minister Datuk Seri Najib Razak said at Proton’s 25th anniversary celebration that if overcapacity was an obstacle, auto companies should merge to create a stronger, bigger and more able company.

Those comments set into action suggestions from Proton why a merger would be beneficial as there would be economies of scale, costs would be cut and exports could grow following the merger.

Perodua, however, maintained its stance since becoming the market leader by saying there was little synergy between both companies too seek a merger.

Analysts too have played down the overtures from Proton, saying there was little incentive for Perodua to proceed with a merger given the profit its making and the seeming hesitancy from its Japanese partner Daihatsu to share the money its making with another company.

Analysts said immediate gains from the lowering of cost would not be forthcoming as cars from Proton and Perodua operate on different platforms.

Structural issues

Should a merger materialise out of political persuasion as opposed to financial reasoning, it would temporarily mask the deep structural issues that have plagued the national auto companies over the past decades.
Both Proton and Perodua were created during the wave of industrialisation in Malaysia and as a vehicle of import substitution.

The companies jointly have the lion’s share of the domestic car industry, thanks to high taxes, but that market share has slowly eroded over the years as Malaysia adheres to the Asean’s Common Effective Preferential Tariff agreement between the member countries.

The entry of lower taxed cars produced mostly in Thailand, which has grown its automotive industry thanks to the bureaucratic barriers in Malaysia that drove investment up north, has led to sales of non-national cars rising.

Growing affluence of the middle class, along with the fall in taxes for cars from Southeast Asia and the historical low interest rates in recent years, have allowed households in the country to buy a growing number of non-national cars. Analysts said while the merger could stem the decline in national made cars, it may not solve a sore point of the domestic auto industry, which has been weak export numbers.

Proton sold 160,000 cars during its 2010 financial year ended 31 March, out of which 25,000 were exported. Perodua sold 166,000 cars in calendar year 2009 and a news report said just 2% of sales was shipped out of Malaysia.

It does not need to export as the domestic market has been lucrative for the company over the years.
A merger might not boost exports from Perodua’s models as Perodua needs to demonstrate an ability to be competitive to its Japanese shareholders before being given the greenlight to sell cars overseas.
Right now, it is exporting cars to the UK and it has made a case to export the Myvi, badged as a Daihatsu, to Indonesia.

The future challenge to the small car segment, in which Perodua dominates in Malaysia, will come from Thailand once “eco-cars” start rolling out of production lines in the Detroit of the East.
The need to defend domestic market share would override any export ambition, and one analyst expects that to start in 2012 once Tan Chong starts producing the Nissan March in Malaysia two years from now.
About half a dozen companies have secured eco-car licences in Thailand and exports to Malaysia might grow if manufacturers who hold those licences start exporting those small and fuel efficient cars in greater numbers to Malaysia.

Gaining exports would also depend on model mix of cars produced and newer models would need to be made, and in faster frequency, to gain share in markets where global players are already in fierce competition.
As it stands right now, Perodua produces one new model every two years and Proton’s development pipeline has shown a similar albeit faster rollout of a new model.

The financial commitments needed to compete globally might also be prohibitive given the challenges both companies face in their home market.

With total industry sales for 2010 expected to be a new record at 574,000 units, the incentive for Perodua, which now has about 30% of that market, to proceed with a merger is just not there.

Exports are not as high up on its agenda as Proton and the economies of scale a merger would bring would not be justified right now given the difference in platforms and models both companies are operating with.

ARTICLE: Analysts play down Perodua-Proton merger

The Star Business, Tuesday July 27, 2010

Analysts play down Perodua-Proton merger

By JAGDEV SINGH SIDHU
jagdev@thestar.com.my

They say a merger will only benefit Proton at the expense of Perodua

KUALA LUMPUR: Perusahaan Otomobil Kedua Sdn Bhd (Perodua) would likely scupper any attempts to merge with Proton Holdings Bhd as there would be little benefit for the second national carmaker to enter that marriage.

Analysts said a merger between the national car companies would benefit Proton and the vendor system more than Perodua, hence creating little or no incentive for Perodua to proceed with the consolidation of the industry.

“On paper it could look beautiful but executing the merger will be very difficult,” said an analyst.
The suggestion that Proton and Perodua should consider a merger was floated after Prime Minister Datuk Seri Najib Tun Razak said at Proton’s 25th anniversary celebration that if overcapacity was an obstacle, auto companies should merge to create a stronger, bigger and more able company.

Proton has since spoken positively about the benefits of a merger with Perodua, with its group managing director Datuk Syed Zainal Abidin Syed Mohamed Tahir saying a merger would enhance economies of scale, reduce costs and help exports.

But Perodua has been coy about the whole process.

Its managing director Aminar Rashid Salleh reportedly said there was little compatibility between both companies as they made different car models. The argument of lowering cost of components and economies of scale from the merger does not, however, gain a lot of traction from analysts.

“The key difference and impediment is that the cars from both Proton and Perodua operate on different platforms,” said an analyst. “That makes a merger irrelevant.”
A merger also would not address the poor export performance by both companies. Analysts said a merger would not be the ideal solution to deal with Proton’s overcapacity issue. An analyst said such a move would only mean transferring the problem to another company.

“Proton has ample capacity to spare as its Tanjung Malim plant has not been fully utilised since it was built,” said an analyst.

“Perodua’s expansion in adding capacity has been prudent and tracks the rise in sales the car company has been etching over the past years.”

According to Malaysian Automotive Association president Datuk Aishah Ahmad, Proton’s Shah Alam plant is operating at 54% of capacity while its factory in Tanjung Malim is functioning at just 42% of capacity. Aishah said UMW Toyota Motor unit Assembly Services Sdn Bhd was operating at 215% production capacity, Honda Malaysia Sdn Bhd at 202%, Nissan vehicle assembler Tan Chong Motor Sdn Bhd at 143%, and Perodua at 164%.

‘’Most plants are operating at more than 100% capacity. If you are already full there’s no need to consolidate,” Aishah said in a report last week.

Analysts concurred, saying that Perodua by itself was reaping the benefits as one of the most profitable auto companies in the country. The only way Perodua would consent to a merger was if it were forced to do so, or offered a deal it could not refuse, said an analyst.

A Proton-Perodua merger would, however, solve a long-standing issue of a foreign partner for the first national car as Perodua lists among its substantial shareholders, Japanese carmakers Toyota and Daihatsu.

END OF ARTICLE.

Source:
http://biz.thestar.com.my/news/story.asp?file=/2010/7/27/business/6739072&sec=business

ARTICLE: Subsidy cuts without pay rise = tax hike

THE STAR BUSINESS: Thursday July 22, 2010

Subsidy cuts without pay rise = tax hike

Making a Point - By Jagdev Singh Sidhu

IT’S been roughly a week since subsidies were cut marginally in Malaysia and judging by the reaction people have to it, I guess the public has taken it in stride.

After all, the increase in the cost of fuel (increase of 5 cents per litre across the board with RON97 subject to FLOAT Mechanism), which is ultimately the biggest cost element among the other goods that saw prices rise, was small and well within what people can stomach.

The price increases in sugar and cooking gas were small when looking at what an average household would spend monthly to consume and use such goods.

The way subsidies were removed this time around was also properly handled. The message of why that needed to be done was clear.

Conversely, editorials and comments have stressed the point that the increase in government revenue of RM750mil from the subsidy rationalisation, along with how the Government spends taxpayer money, should also be more disciplined to avoid wastage and should be on projects, goods and services that have tangible benefits to the general population.

So far so good but the reality of things is that the subsidy cuts announced represent the first wave of what could be a series of cuts that would bring down the overall subsidy bill of the Government.

It’s quite likely too that future subsidy cuts could see the price of fuel, depending on the price of fuel internationally, and electricity rise. Along with that, sugar, flour, cooking gas, cooking fuel and maybe even other goods, services and utilities could also see a price increase.

And while the general population, especially the middle-class, has been quiet about the first cuts, there could be grumbles if the price increases do not correspond with the pay packet they bring home.
The reason for that is there is a feeling that urban inflation has grown quite a bit in recent years and that wages in Malaysia have not increased in keeping with the rise in the prices of consumables or even assets.

The increase in starting salaries for jobs in many industries today pales in comparison with how, say the price of a house, car or processed food has risen over the past years or even decades.  I know employers will say that salaries would have to reflect the productivity of employees, the growth of which has in recent years been poorer compared with how Malaysians in yesteryears used to attain.

There are also suggestions that the current labour laws, which make it difficult for employers to fire unproductive employees, are also an impediment to employers offering more lucrative salaries for their workers.

Changes to such laws are reportedly being looked at but there is still no guarantee wages would rise after that.
Unless salaries rise as a result of a more efficient marketplace brought about by the removal of subsidies and laws, the price hikes from future subsidy cuts would be viewed as a tax hike. And that could well raise the blood pressure of a lot of people.

·Deputy news editor Jagdev Singh Sidhu is now looking at a substantially smaller pay packet for the next few months, not from the subsidy cuts but the taxman.
 
END OF ARTICLE...

SOURCE:

http://biz.thestar.com.my/news/story.asp?file=/2010/7/22/business/6710844&sec=business


Related Stories:

Penjanabebas: IPPs don’t get financial benefit from gas subsidy

Minimal impact seen from subsidy cuts

Analysts expect subsidy cut in August

That's all folks!  Thanks for having the time and patience to read this blog entry.

ARTICLE: Optimism on auto sector running high

THE STAR BUSINESS: Thursday July 22, 2010

Optimism on auto sector running high

By EUGENE MAHALINGAM
eugenicz@thestar.com.my

Analysts follow MAA in revising upwards car sales figures for 2010

PETALING JAYA: Analysts are upbeat about the outlook of the local automotive industry for 2010, saying “the current state of the auto industry is one of optimism not seen since 2005.”

“We believe the TIV (total industry volume) will exceed our initial forecast of 546,000 units as consumer and business confidence improves,” said Kenanga Research in a report yesterday.

The research house said it was revising upwards its 2010 TIV forecast to 568,000 units from 546,000 units originally due to the commendable sales performance in the first six months of the year.

The Malaysian Automotive Association (MAA) has revised upwards its 2010 TIV forecast to 570,000 units from 550,000 units initially due to the stellar sales performance in the first half of the year.

File photo shows a woman walking past Proton car models on display at a showroom in Shah Alam. — AP

The TIV in the first half grew 19.8% to 301,077 units compared with 251,305 units in the previous corresponding period.

However, Kenanga said that it anticipated TIV in the second half of 2010 to “normalise” as the period was expected to be “seasonally slow.”

RHB Research, in its report, said it was maintaining its 2010 TIV growth forecast of 9.5% to 587,698 units.
“We are keeping our 2010 to 2012 TIV projections. We expect TIV to grow 9.5%, 4% and 3.2% in 2010 - 2012, following a 2% contraction in 2009,” it said.  TIV for 2009 was 536,905 units.

RHB Research said it was positive on the earnings outlook for local automotive companies, namely Proton Holdings Bhd, Tan Chong Motor Holdings Bhd, UMW Holdings Bhd and MBM Resources Bhd.
It noted that UMW was looking to increase localisation of its Toyota models, in particular the Camry by 2012 as part of the company’s RM170mil assembly plant upgrading programme.

“The Camry is currently assembled in Thailand and selling for between RM144,000 and RM174,000 as a CBU (completely built-up) unit. Once locally assembled, we believe this price would be brought down by at least 5% as import duty will no longer be imposed,” it said.  The research house also said UMW was looking at increasing the local content of its Toyota Vios, which had 40% local content.

RHB Research also said it was optimistic about the launch of Proton’s Waja replacement model in the final quarter of 2010.  The vehicle is expected to be similar to the Mitsubishi Lancer and priced RM20,000 to RM40,000 cheaper than the actual Lancer.

It also said Proton could be consolidating its plants in Shah Alam and Tanjung Malim and secure contract manufacturing to optimise plant utilisation which would further improve profitability via better cost control and economies of scale.

Sales of Toyota vehicles rose to 34,943 units in the first half of 2010 versus 30,147 units previously, making it the market leader in the non-national passenger car segment.  Sales of Proton vehicles increased to 80,051 units from 67,770 units during the same period.

RHB Research said it was also positive on the outlook for Tan Chong (which distributes Nissan vehicles) and MBM Resources (which has a 20% stake in Perodua).  Perodua sold 94,936 vehicles in the first half of 2010 compared with 77,045 units previously, making it the market leader in the local passenger market.
Sales of Nissan vehicles increased to 13,406 units from 11,220 previously.

An analyst from a local bank-backed brokerage said the TIV performance in the first half of 2010 was within expectations, adding that he had revised upward his forecast to 573,000 from 561,000 initially due to the good industry performance.  He said he was positive on the outlook of the local auto industry, noting that many car companies were offering low interest rates to boost sales.

END OF ARTICLE.

SOURCE:
http://biz.thestar.com.my/news/story.asp?file=/2010/7/22/business/6709333&sec=business

 

That's all folks!  Thanks for having the time and patience to read this blog entry.

The Star: Dealing with subsidies is serious business...

The Star, Wednesday May 26, 2010

Dealing with subsidies is serious business, it cost RM74bil in 2009

By JAGDEV SINGH SIDHU
jagdev@thestar.com.my

SUBSIDIES in the country, which reached a staggering sum of RM74bil in 2009, will be the thrust of discussion over the next few days as the Cabinet and the public will examine the ambitious plan hatched to minimise and eventually remove the burden to the Government.
The Cabinet is scheduled to meet today to deliberate on the subsidy-removal plan laid out by Pemandu and the public will have their say at the subsidy rationalisation lab open day tomorrow.
The basis of wanting to give subsidies the boot is simple. The cost of maintaining cheap food, energy and services has put a terrible strain on government finances with the fiscal deficit now projected at 5.6% of GDP.

Whatever the case, maybe as one economist puts it that Malaysians may now feel a right of entitlement with subsidies after enjoying the benefits all these years with Malaysia being one of the most heavily-subsidised nations in the world.

 

One of the main subsidies is for petrol. Subsidised fuel has made the price of petrol in Malaysia among the cheapest in the world

As a percentage of GDP, subsidy expenditure is now at about 11% of GDP compared with 3.5% in Switzerland, 1.4% in France, 0.7% in Britain, 2.7% in Indonesia, 1.6% in India or a meagre 0.25 in the Philippines.

One study puts the average subsidy expenditure for OECD countries at 1.5% of nominal GDP.
Much of the subsidy bill, totalling RM42.8bil, is in the form of social services which include health, welfare, education and scholarships.

While such expenditure is important as it involves directly funding education and healthcare and other services which the public is dependent on, there are components within that category where subsidies can be lessened through better effort to check on wastage and abuse.

“I don’t think people will complain much if they are asked to pay RM3 for outpatient care at a government hospital compared with the current charge of RM1,” said an economist with a local brokerage.

While savings from the huge social bill can be obtained, the biggest and fastest source of savings from the reduction in the deficit will come from the reduction and removal of energy subsidies.

Fuel, either in the form of petrol, natural gas, LPG or electricity, cost the Government RM23.5bil in 2009.

Subsidised fuel has made the price of petrol in Malaysia among the cheapest in the world, as Malaysia is ranked 157 out of 175 countries in terms of having the lowest cost of petrol.
Cheap petrol and diesel prices have also led to wastage and frivolous use of such energy. Furthermore, the amount of smuggling, in the form of fuel, sugar and cooking oil, to neighbouring countries is huge.

The subsidy bill for food, which includes cooking oil, sugar, flour and rice fishermen, was RM3.1bil in 2009.

Analysts agree that the subsidies for fuel and food should eventually go but they caution that the immediate consequence of that, depending on how the subsidies are removed, will have an impact on inflation and consumption.

The planned subsidy removal, which will likely be done on a comprehensive but staggered and gradual basis, may see inflation rising by between 4% and 4.5% in 2011 before coming back down the following year.

“If the rise in fuel price is gradual then people would be able to stomach such increases. What they don’t want to see is a sudden steep increase in the price of fuel as that would see inflation and their disposable incomes hurt,” said an economist.

Dealing with the subsidies is a major concern for the Government now as the mountain of subsidies, which it has to borrow money just to fund, has taken a toll on its total debt.
The percentage of total debt to GDP, which was in the 40 percentage plus point range for much of this decade, surged to 54% in 2009 which also took into account the fiscal stimulus cost incurred to aid the economy during the recent recession.

Economists have said that the implementation of subsidies had been faulty for all these years as they were not targeted to the needy.

Instead, government data shows that 97% of subsidies were given regardless of household income levels. As an example, 71% of fuel subsidies go to the mid-income and high-income groups who can pay for higher fuel prices.

If subsidies can be reduced and utilised to targeted groups, then the extra freed-up cash can be used to improve services and productivity that will improve economic growth in the years ahead.

END OF ARTICLE...


SOURCE:
http://biz.thestar.com.my/news/story.asp?file=/2010/5/26/business/6338825&sec=business

That's all folks, thanks for having the time and patience to read this article...

The Star, Thursday February 25, 2010

Fuel subsidy scheme shelved, originally set to be implemented on May 1

By EUGENE MAHALINGAM

eugenicz@thestar.com.my

PETALING JAYA: The Government’s proposed fuel subsidy scheme based on the engine capacity of vehicles has apparently been shelved.

Sources indicate that the plan, which was originally set to be implemented on May 1, will not proceed even though a lot of the preparatory work has entered the final stage.

“We were so close to getting this off the ground,’’ said a source.

The Government had planned to introduce a tiered pricing system for petrol, depending on engine capacity, while foreigners would have to pay the market price.

According to reports, the plan called for the mandatory use of MyKad to differentiate Malaysians from foreigners, requiring the need for MyKad readers at petrol stations.

Subsidised petrol would be capped to a certain amount of litres a month per user for owners of vehicles with engine capacities of below a certain threshold. The reported upper limit eligibility for the petrol subsidy is 2,000cc. Owners of cars with bigger engine capacities would be exempted from the subsidy.

However, many had considered the proposed scheme to be very unfavourable and cumbersome to enforce and some have suggested that the subsidy itself should be removed.
RAM Holdings Bhd chief economist Dr Yeah Kim Leng said scrapping the scheme and moving to a “fully market-driven” system was a better option in the long run.

“The public has to realise the fuel subsidy scheme is not sustainable as it impacts the Government’s finances. Removing the subsidy would reduce over-consumption and promote more efficient use of our country’s resources,” he said when contacted by StarBiz.
Yeah said many countries, including Indonesia and Sri Lanka, were practising a free-float system, where fuel prices were based on global oil prices.

“This is the ideal but Malaysia is accustomed to subsidised prices. From an economic standpoint, it is not sustainable.”

Yeah said removing the fuel subsidy completely would create short-term strain on the lower income group as they would have difficulty coping with the sharp increase (in fuel prices).
“The best thing to do is to gradually reduce the fuel subsidy or it would create inflationary pressure.”

Yeah said the proposed tier system was unfair and vulnerable to abuse.
“It is unfair from the individual perspective because everyone is entitled to equal fuel subsidy levels.”

He also cited the case where some fishermen were purchasing diesel at subsidised prices and were selling it for profit.

“Owners of lower cc engine cars could sell their entitlement to owners of higher cc vehicles. This situation could crop up if the system is not watertight.

“Principally, it (the tiered fuel subsidy scheme) seems desirable but administratively, it is no go,” said Yeah.

An analyst from a local bank-backed brokerage said the tier system would be difficult to monitor and the Government should do away with the fuel subsidy scheme.

“The only way to become a high-income nation is to remove the fuel subsidy. There would be near-term implications but eventually the public will be able to adjust. The removal should however be gradual,” he said.

He also said the Government should improve its public transport infrastructure if it were to reduce or remove fuel subsidies.

“The Government could also do away with excise duties (for imported vehicles) but I don’t think that would happen any time soon.”

Mercedes-Benz Malaysia Sdn Bhd vice-president of sales and marketing for passenger cars Florian Mueller said he could identify with the Government’s decision to introduce a fuel subsidy scheme.

“In the long run, the Government is looking at how to reduce fuel consumption. I think the best thing to look at next is how we can encourage people to purchase vehicles with the latest technology or encourage the manufacturer to build car engines with lower fuel consumption.
“This would also encourage other players to introduce technology that encourages fuel saving. The Government could also make it mandatory for car owners to replace old engines if they are not fulfilling emission standards, just like they do in Europe.”

END OF SOURCE...


My Comment:  THANK GOD!!!  GOD IS GOOD!

That's all folks, thanks for having the time and patience to read this blog entry...

SOURCE:
1) http://biz.thestar.com.my/news/story.asp?file=/2010/2/25/
business/5741670&sec=business

Automotive sector – shifting up a gear

SOURCE: THE STAR, STARBIZWEEK.

Saturday October 31, 2009

Brought to you by:
MAYBANK-IB Watch
Maybank Investment Bank
By "faudziah"

Automotive sector – shifting up a gear

THE fresh National Automotive Policy (NAP) measures are a short-term neutral but long-term positive, and offer a decent roadmap to the domestic automotive industry. The policy is pro-investment and embraces liberalisation without hurting the national car plans.

A timetable to phase out approved permit (APs) and the introduction of a vehicle end-of-life policy is commendable. The pursuit of green car development will turbo-charge the industry, if executed well.

The plan to issue new manufacturing licences for selected segments, including high engine capacity cars, with 100% foreign ownership, suggests that Malaysia is heading in the right direction in liberalising its automotive sector, transforming it from pro-national car into a regional manufacturing hub, akin to Thailand.

Interestingly, the policy is structured so that it does not hurt further development of the national car programme and franchise holders. It encourages new foreign direct investments without competing directly with local players such as Proton, Perodua, Inokom, Naza Kia (MPV model only), Isuzu-HICOM and Modenas (motorcycles), predominantly in the below1,800cc (cars) and below 200cc (motorcycle) categories.

Proton stands to gain most as the majority of its products are below the 1,800cc segment, and it can offer contract assembly, as it is currently running at 40% of its production capacity.

Other beneficiaries are Tan Chong Motor Holdings Bhd, UMW Holdings Bhd and MBM Resources Bhd (via 38% and 20% stakes in Perodua).

The timetable to gradually phase out the AP system by December 2015 (open APs) and December 2020 (franchise APs) is commendable. It allows existing AP holders to diversify and venture into other businesses.

Terminating the AP system will encourage development of an auto assembly hub. Beneficiaries are automakers and franchise holders who already have assembly presence in Malaysia, namely Proton, UMW and MBM (via Perodua), Tan Chong, DRB-HICOM, Inokom, and Naza.

Meanwhile, implementing a 15-year vehicle end-of-life, which is akin to the scrapping policy, will benefit the industry in terms of replacement cycle, and ties in well with the measure to introduce rigorous vehicle testing standards.

Policy implementation could be unpopular with the rural/lower income group if no rebates are tied to it. Nonetheless, implementation of a 15-year life-span is still high compared to Singapore (10 years).

We are however disappointed that the current RM5,000 non-cash rebate for trade-in of old vehicles enjoyed by Proton and Perodua owners has not been extended to the other marques.

The green car programme is globally new but could turn out to be Malaysia’s “product champion”, if executed well. The global market offers a potential of 11 million units. The incentives for hybrid/electric car development are on par with Thailand’s, which could entice prospective manufacturers/assemblers.

Thailand has a headstart over Malaysia in attracting green car investments but Malaysia is still ahead of the rest. Thailand has managed to rope in 6 OEMs (Honda, Mitsubishi, Toyota, Tata, Nissan and Suzuki) in setting up the eco-car project there.

Honda will commence production in 2010 and the other automakers will start in 2011 (full capacity by 2015: 700,000 units p.a.).

Proton’s search for a strategic partner is not new but being incorporated into an official policy further validates our view that a foreign partner is needed for its long-term competitiveness. Volkswagen and Renault are among the heavyweight names touted to partner Proton.

An established foreign partner is vital to Proton’s long-term competitiveness as Proton needs (i) technical expertise (i.e model development), (ii) marketing expertise and cost synergies (i.e. higher utilisation at its Tanjung Malim manufacturing plant; currently at 40%, lower R&D costs), (iii) new sales markets.

These synergies would eventually enhance shareholders’ value.

We are surprised that the revised NAP did not clear up the definition of a national car. For the consumers, with no change to sales, import and excise duties, vehicle prices are set to remain unchanged.

We maintain our earnings forecasts for auto stocks under our coverage, as the industry makeover will be gradual. Overall, Proton is a clear winner. UMW, Tan Chong and MBM do not lose out either.

We lift the sector to Overweight following recent upgrades to Proton and Tan Chong. We continue to recommend Buy on Proton (target price: RM5) and Tan Chong (RM3). Maintain Hold on MBM (RM2.40) and UMW (RM6.35).

END OF SOURCE.

References:
1) http://biz.thestar.com.my/news/story.asp?file=/2009/10/31/business/5014538&sec=business

That's all folks, thanks for having the time and patience to read this WONDERFULLY WRITTEN ARTICLE...

Who' s footing the bill? By IZWAN IDRIS

As promised, Article 3 of 3 as published in today's The Star Business. I published here for your reading pleasure. Another WELL WRITTEN, Interesting, NEUTRAL yet THOUGHT PROVOKING, Article. I wish I can WRITE SUCH GOOD ARTICLE, But honestly, I simply can't. NOT AT THE MOMENT... Hats off to the author, "Izwan Idris".

SOURCE 1: The Star, StarBizWeek.

Saturday October 31, 2009
Who’s footing the bill?
By IZWAN IDRIS

"THE Government dished out a whole lot of fresh manufacturing goodies after it reviewed the National Automotive Policy (NAP), which can be described as an attempt to improve on the flawed original.

But with car prices being kept at prohibitively high levels, consumers cannot be faulted if they feel like they are the ones footing the bill to keep the industry alive.

“It was a positive NAP for market players, but not so for consumers,’’ MIDF Research analysts Zulkifli Hamzah and Wan Azhar Mustapa said in their commentary on the industry.

Malaysia is set to remain among the countries with the highest numbers of new car buyers after the International Trade and Industry Ministry said on Wednesday that it would keep import duty and exercise duty structures for motor vehicle at the current rates.

Any price reduction, the Government said, would have to come from the industry.

As it is, most analysts as well as market players, including Malaysian Automotive Association president Datuk Aishah Ahmad, expect car prices to remain the same, at least for the rest of the year.

Under the Common Effective Preferential Tariff scheme, Malaysia must eliminate import tariff for CBU (completely built up) vehicles produced in the region before Jan 1, 2010, to comply with the Asean Free Trade Area (Afta) agreement.

Currently, there is a 5% import duty imposed for CBU cars and motorcycles under Afta.

International Trade and Industry Minister Datuk Mustapa Mohamed said the Government was committed to honouring all its international obligations.

There is a chance for a slight price reduction for CBU car imports from neighbouring countries, but the final sticker price will depend on the respective car dealers’ marketing and sales strategy. One CBU model imported from Thailand into Malaysia is the Toyota Camry.

The Camry comparison


(SOURCE 2).

So how much does a Toyota Camry cost here and how does it compare to the rest of the region, and everywhere else, for that matter?

The 2.4 litre automatic version carries a sticker price of about RM260,000 in Singapore, which is higher compared to RM176,000 for a similar unit at local showrooms.

A check through the web revealed that the Camry is priced at about RM160,000 in Jakarta and just above RM150,000 in Thailand.

Meanwhile, a survey on households by CLSA published recently showed that the Camry in Malaysia has the second highest showroom price tag in Asia, behind Singapore, of course, but ahead of Hong Kong.

The car was priced between US$30,000 (RM102,000) and US$34,000 (RM115,000) each in China, Japan, the Philippines, Taiwan and Britain.

The Camry is the cheapest in the United States and Australia, where the sticker price is less than half of the one quoted at local (UMW) dealerships.

Of course, it can be argued that the actual cost of owning a car varied from country to country after taking into account other things such as fuel, parking fees, regular maintenance charges, road tax and insurance.

Also the same car may actually be of a slightly different specification and styling to suit local needs and conditions.

The Camry model is targeted at executives in most markets. In Malaysia, the Camry competes with MPVs and SUVs at a price range of between RM150,00 and RM200,000.

In the entry-level segment, the cheapest new cars in Asia can be bought in China and India. Most entry-level cars in markets surveyed by CLSA are priced below RM35,000 per unit. In Singapore and Hong Kong, the cheapest new car available starts from RM60,000 each.

Despite the relatively high local new car price, MAA expects the annual total industry volume (TIV) to remain above half a million units over the next three years.

Taxing burden

Under the revised NAP, the Government aims to boost foreign direct investments (FDIs) in the sector, but is careful not to antagonise supporters of the national car makers.

“There are seven policy thrusts detailed in the NAP, and we believe it has managed to successfully balance continued protection for Proton, whilst encouraging FDIs,’’ RHB Research Institute said.

The improved tax and incentives given to automotive components would benefit existing local exporters, as well as attract new players to set up shop in the country.

The prohibition of imported used parts will also force consumers to switch to using products by original equipment manufacturer (OEMs) and replacement equipment makers (REMs).

Meanwhile, there is a plan to gradually phase out older cars from Malaysian roads and to implement more rigorous safety checks on vehicles. However, no deadlines were given.

The MIDF analysts expect the development of the end-of-life vehicle (ELV) policy to be a slow process, given the “sensitive” nature of the issue.

One thing for sure, OEM and REM parts will cost more compared to used items and Malaysians will have to dig deeper into their pockets to maintain their vehicles.

And the prohibitively high sticker price for new cars out there continue to put better quality cars out of the reach of most Malaysians.

Based on current duty and tax structure, the effective rate for the Toyota Camry 2.4 stood at 185% of the CBU price. Basically, more than half of the sticker price at the local dealerships is attributed to duties and taxes.

Exercise and import duties collected from car sales contributed billions to the Government’s coffers every year, with some estimates putting it in the range of between RM6bil and RM7bil annually.

However, it can be argued that the high prices limit the industry’s growth potential. And it is unfair to car buyers to continue shouldering the financial burden of ensuring that domestic car makes remain competitively priced."

END OF SOURCE.

SOURCES:
1) http://biz.thestar.com.my/news/story.asp?file=/2009/10/31/business/5008187&sec=business
2) http://www.toyota.com.my/index.aspx?cat=models§=camry&subsect=gallery

That's all folks, thanks for having the time and patience to read this WONDERFULLY WRITTEN ARTICLE. Again, I REALLY REALLY WISH I CAN WRITE SUCH GOOD ARTICLE. But Not at the moment...

Coming to grips with APs. By IZWAN IDRIS

As promised, another well written article from Today's The Star Business. Article 2 of 3.

SOURCE: The Star, STARBIZWEEK

Saturday October 31, 2009
Coming to grips with APs
By IZWAN IDRIS

THE Approved Permit (AP) system to import cars into the country is often a contentious issue, one that even the Government seems to be having a hard time getting rid of.

Abolishing the well-entrenched system means taking on a group of wealthy bumiputra businessmen, whose strong ties to the political elite makes them formidable opponents.

On the other hand, the general perception is that the AP system is riddled with abuses. And the suspicion seems to be validated by facts.

Recent audits by the International Trade and Industry Ministry (Miti) have come up with the conclusion that a number of AP recipients continue to “misuse and abuse” their allocations.

Minister Datuk Mustapa Mohamed confirmed that some AP holders sold their car import permits to third parties for quick profits. However, he did not elaborate on this. Meanwhile, a check with several re-conditioned car dealerships in Klang Valley yielded claims that forgery of AP documents still goes on.

According to Mustapa, some companies have had their AP allocations for 2009 slashed based on recent audit findings due to various reasons. He added that while no new AP application would be entertained, future allocations would take performance into consideration.

The ministry, however, gave no details on the number of APs issued so far this year and to whom they were given.

In fact, the last time a full list of AP recipients were made public was in 2005, following a huge debate over the issue. That year, names like the late Tan Sri SM Nasimuddin SM Amin of Naza Group, Datuk Syed Azman Syed Ibrahim of Westar Group and a few others made headlines due to the huge amount of APs given to them.

U-turn

The National Automotive Policy (NAP) was first introduced in 2006 and one of the key aims was to abolish the AP system by 2010. But on Wednesday, when announcing the review of the NAP, the Government pushed the deadline to 2015 for open APs, while the franchise AP system will continue to be in place for another decade.

The move to postpone the abolishment of the much maligned AP system was not totally unexpected.

On Oct 23, in presenting his first budget, Prime Minister Datuk Seri Najib Tun Razak said the Government would start imposing a RM10,000 charge for every open AP awarded from next year onwards.

This may be the AP holders’ only concession in exchange for the extension announced on Wednesday by Miti.

“Finally, closure on this issue, hopefully,’’ said Maybank Investment Research head Andrew Lee in his take on the AP system’s new deadline.

The system was introduced in the 1970s as part of a strategy to encourage bumiputra participation in the automotive industry.

In its current form, the so-called open APs are given to bumiputra entrepreneurs to import any vehicles from overseas, while car distributors are given franchise APs, which are restricted according to models and brands.

Miti’s data showed that the number of companies that are eligible for AP allocation stands at 98 today, compared to 254 in 1987.

According to Miti officials, the number of APs issued are limited to 10% of the total industry volume (TIV) recorded the previous year. It is a sort of import control for foreign vehicles sold in the country.

Assuming that the TIV this year will match the Malaysian Automotive Association (MAA) target of half a million units, about 50,000 APs can be issued next year. Of this amount, 60% will be allocated for open APs, while the rest as franchise APs.

The Government’s plan to sell the open APs – they were given free in the past – will contribute as much as RM300mil in revenue every year for the next five years.

A portion of the money will be channelled into a fund to help bumiputra car dealers wean off their dependence on APs.

“It is extremely lucrative and risk-free ... It is easy to see why (AP holders) will not give up the business,’’ stockbroker Kenanga Research said in a recent update issued after the NAP review. The firm estimated that open APs has a “street value” of about RM40,000 each.

Most of these AP holders purchase used cars in overseas markets – the current hot models are the Japanese MPVs – which are then sold here as re-conditioned cars at a good margin.

Post 2015, after the abolishment of open APs, will the quota for AP issuance remain at 10% of TIV? Will the open APs be converted into franchise APs in the period leading to 2020?

One sure thing is that demand for imported cars will remain. Given the capital accumulated over the years and the expertise and network built up, open AP holders can easily transform their business and become official distributors.

The Naza Group is the most well-known among the existing crop of AP holders to have taken this route. Westar is another example.

Today, control of the Naza group remains with Nasimuddin’s family. Over the years, the group has built up its empire to include property and construction, as well as in food and beverage. But the group’s bread-and-butter business lies firmly in its automotive roots.

Another of these so-called AP Kings, Weststar Group, had in June aborted a plan to acquire a British-based van maker LVD Group Ltd. Like Naza, Westar’s car showrooms are situated at prominent locations around the Klang Valley area.

While the two firms were often cited as proof that the AP system had actually work, what about the rest? But the real question to ask is whether an open tender system would be a better alternative?

The deadline for the dismantling of the AP system is a long way off. It was put off before, and it may possibly continue to haunt policymakers for a long time."

END OF SOURCE.

REFERENCES:
1) http://biz.thestar.com.my/news/story.asp?file=/2009/10/31/business/5007860&sec=business


That's all folks, thanks for having the time and patience to read this interesting, neutral (politically-correct), well-written article...

200th post: National Automotive Policy – still stuck in neutral

This is "my" 200th post. I won't write anything on my own, instead, I'd like to share with all readers one of the most well written neutral article published in The Star Today. There's NOT 1, BUT 3 of them. Here's the 1st one/3...

SOURCE: The Star, The StarBizWeek, Saturday October 31, 2009

National Automotive Policy – still stuck in neutral
By JAGDEV SINGH SIDHU

"The National Automotive Policy has been revamped to now include several new measures. But are they enough to move Malaysia’s auto industy ahead of its regional rivals?"

"WHEN International Trade and Industry Minister Datuk Mustapa Mohamed admitted at a press conference on Wednesday that Malaysia was behind Thailand in the auto industry, there were no gasps of disbelief nor expressions of shock.

However, there must have been a reflection of regret that Malaysia has lost much ground after it had stormed into the lead in the regional auto business when it launched the national car project in the mid-1980s.

Now, we have been overtaken by a neighbouring country that has basically given its investors the very things that have been asked of the Malaysian government all this time.

The “loss” to Malaysia may amount to billions of dollars and employment opportunities many times the size in Malaysia that have migrated northwards. This time around, though, the Government intends to rectify the situation.

Although the broad objectives of the national auto policy (NAP) review do not deviate much from the original policy announced in 2006, the Government has spelt out its intention of growing the industry and developing its long-term competitiveness with a slight twist.

“Given the strengths and weaknesses of the Malaysian automotive industry, the Government’s move to focus on high value added segments makes sense,” says Kavan Mukhtyar, partner and head of automotive and transportation practice, Asia Pacific, Frost & Sullivan.

“By focusing on the luxury vehicle, electric vehicle/hybrid/precision engineering segments, the Government hopes to attract high value added new investments without competing directly with Thailand, and at the same time continuing support for the national car makers that focus mainly on the compact and sub-compact vehicle segments.

“The NAP review has also clearly signalled that Malaysia will go through the process of gradual rather than rapid liberalisation. The clear timelines attached with the liberalisation process give enough time for the domestic players across the value chain to become regionally competitive or to diversify into other businesses.”

One of the main differences between the 2009 auto policy and its predecessor is the granting of full-fledged manufacturing licences to foreign auto companies, in categories that do not compete with the national passenger car players.

“Considering the competition from Thailand, which has firmly established itself as the ‘Detroit of Asia’, the lifting of the freeze on manufacturing licences is a good move that puts Malaysia on the right path to attracting foreign direct investments by global carmakers wishing to expand their operations in the region,’’ said CIMB Research in a note.



Turning to Europe

The carte blanche given for new manufacturing operations of certain type of cars, such as those above the 1,800cc and RM150,000 in value, is a start, but the issue is, will manufacturers bite?

There is a school of thought that foreign car companies from Europe may pay a little more attention to the measured liberalised environment in Malaysia.

OSK Research, in its note on the NAP, points out that Thailand trumps Malaysia on incentives as it offers lower excise duties on vehicle prices and the exemption of import duty on plant machinery, in addition to having an already established supply chain.

The only problem is that to qualify, investors need to fork out a huge sum of money, the minimum being RM1bil.

“To date, Thailand has seven global OEMs (original equipment manufacturers) and a few smaller ones that have set up plants with capacity totaling 1.625 million units as of 2008. These are mainly OEMs from Japan (Toyota, Mitsubishi, Isuzu, Honda, Nissan) and US (Ford and General Motors).

“As none represents the European region, we may potentially see Malaysia trying to attract global OEMs from this region instead. This was hinted in the announcement, with respect to relaxation of the ruling on foreign manufacturers in the luxury passenger car segment,’’ said the research house.

Having competitive incentives is one thing, but the years of distrust and doubt that foreign players have built up against the direction of Malaysian auto policy, is working against the possibility of them committing huge sums of money in the future.

“Fiscal incentives and flexibility in ownership are just a few factors to attract FDI (foreign direct investment). Foreign investors will evaluate the entire ecosystem in Malaysia, including the availability of supporting supplier industries, access to regional markets, domestic demand, availability of human resources,’’ says Kavan of Frost & Sullivan.

“For example, to become a manufacturing hub for hybrids/electric vehicles, Malaysia also needs to have an attractive home demand for such products. Follow-on measures will be critical in creating an attractive ecosystem for foreign investors in the high value added segments.’’

He feels Malaysia’s biggest challenge is to strengthen the supplier base and help those suppliers develop competitiveness.

“In summary, the NAP review will definitely attract attention from the foreign investors but actual flow of investment will depend on how the entire automotive ecosystem responds to this opportunity,’’ Kavan says.


Note: Please double click to enlarge...

Time to change

The main thing the NAP has failed to do is to cut tariffs and consequently, the price of vehicles in the country. Maybe this is due to the already huge strain on the government budget, which has been running deficits for more than a decade now.

“Most of the consumer-centric measures are more towards improving safety standards and the environment friendliness of the vehicles. In the short term, imports of used CBU (completely built up) imports may be constrained as gazetted prices will be used for duty computation,’’ says Kavan.

“Consumers in the luxury segment may benefit in the medium term if foreign automakers make Malaysia their hub for vehicle manufacturing.”

The NAP also manages to liberalise the auto sector while still giving protection against the national car makers, a stance the Government has not wavered from, since starting the national car policy in the mid-1980s.

Whether that is an acceptable to the rest of the industry is moot, but there are quite a number of people who feel that is not the right way to go.

“(There is) still ample protection for national producers, including maintaining high excise and import duty structures, extension of freeze on assembly of rebuilt commercial vehicles such as trucks and buses. And, the liberalisation of manufacturing licences does not encroach into the mass market segment, which the national producers currently serve,’’ UOBKayHian points out in its note.

And there are people in the industry who feel the time has come for that to change.

“We have to look at the national auto industry in particular and not only focus on the national car company alone,’’ says DRB-HICOM Bhd group managing director Datuk Mohd Khamil Jamil.

“Having the technology and product for the domestic market alone is insufficient. We must also be accepted by the market overseas, at least regionally.’’

Khamil feels that a collaboration with a strategic partner is important in promoting and enhancing the capabilities and opportunities of Proton and the industry.

Malaysia is a country that has a long history of making cars. Notwithstanding the national makes, the employees of the industry are widely regarded as trainable and skilled. Just ask Mercedes Benz.

Its plant in Pekan, Pahang, started out making four units a day of just one model. Today, it assembles the S-class, E-class and C-class Mercs, and annual volumes has now reached 5,000 units. That makes it the largest CKD (completely knocked down) assembly outside Germany.


Picture above: NEW PROPOSED MOTOR VEHICLE TAX AND DUTIES STRUCTURE vs OLD...


“Consolidation and strategic alliances within the industry is important as many major manufacturers are moving towards multiple brands sharing the same engineering platform,” says Khamil.

“Asean is a high-growth region for the automotive business. There are threats of new markets like Vietnam and the Philippines. So we have to entrench our position.”

Changed, but still the same

The crux of the issue in Malaysia has been overcapacity, competitiveness and the lack of exports. Khamil feels that future growth will have to be export-led, and Malaysia needs to establish its position as an auto manufacturing hub.

“There must be a balance between the national car brand and enabling a sustainable auto industry,’’ he says.

While the auto parts manufacturers would welcome the NAP, the other winners from the entire review would surely have to be the national car makes,” he adds.

The greater tax exemption for exports of vehicles will benefit Proton and Perodua, but analysts feel those companies would need to produce cars that are competitive on a global scale in order to greatly gain from such incentives.

That will entail additional costs to engineer such cars, making it essential for Proton to form a strategic partnership with a larger foreign player. Proton and Volkswagen are engaged in talks to reach such an arrangement.

While the NAP review is a step in the right direction, many things need to be in place for the measures to materialise into something significantly tangible.

“On a whole, the measures are unlikely to have much immediate impact on the auto sector. Most of the measures announced – albeit being positive in navigating the industry towards greater liberalisation and competition – are not significant enough to alter the prevailing industry dynamics. In a way, the scenario, duties and ultimately, car prices, have not changed,’’ said Affin Investment Bank in a research report."

END OF SOURCE.

References:
1) http://biz.thestar.com.my/news/story.asp?file=/2009/10/31/business/5013872&sec=business

That's all folks, thanks for having the time and patience to read this LONG Article...

ARTICLE: F1 entry – good timing or big risk?

SOURCE: The Star, Saturday September 19, 2009

F1 entry – good timing or big risk?

By YEOW POOI LING

EYEBROWS were raised when news broke that Malaysia is participating in the Formula One (F1) race next year via the Lotus F1 team.

The team is a collaboration between the Government and a group of entrepreneurs linked to AirAsia Bhd and the Naza Group, with Proton Holdings Bhd’s British subsidiary, Lotus as the constructor.

Sceptics are many, especially since big names in the auto world such as Honda and BMW have withdrawn their participation from the sport due to the global economic crisis.
BMW Sauber Formula One crew pushing Nick Heidfeld’s race car past stacks of tyres at the Sepang International Circuit during the F1 race in April.

As the United States and countries across Europe and Asia are still trying to revive their economies, why would Malaysia choose this time to join one of the world’s most expensive sports? More importantly, who is forking out the money?

Let’s talk money

F1 is well known for its huge spending. The reported 2008 team budgets ranged from US$45mil to US$445mil (RM158mil to RM1.6bil) for sponsorship, supplier deals, prize money, team owner contributions, tyre provision and supply of customer engines.

In May, the Federation Internationale de L’Automobile (FIA), the ruling body of F1, decided to cap the budget for 2010 to £40mil (about RM228mil) in a bid to prevent more teams from dropping out and to encourage the entry of new contenders.

Datuk Seri Tony Fernandes, the AirAsia Bhd boss and one of the investors in 1Malaysia F1 Team Sdn Bhd, which owns the Lotus F1 team, told CNN in a recent interview that the budget cap, coupled with the huge F1 following, made it “a good time to join F1”.

His co-investor, as well as partner in AirAsia, Datuk Kamarudin Meranun concurs, calling the venture “a commercially viable one”.

While Lotus F1’s budget remains sketchy for now, Kamarudin reveals that an initial investment of £10mil (RM57mil) has been made to start the construction of the vehicle. “We’re starting mid-way. So we need to be quick to get the approvals for the car,” he says.

While FIA’s capped budget covers team expenditure, it does not include marketing and hospitality, remuneration for test or race drivers, fines or penalties imposed by the FIA, and engine costs, which may come up to few hundred million ringgit more.

It also does not include the setting up of the new headquarters at the Sepang International Circuit (SIC), for which 8,000ha to 12,000ha of land have been allocated.

An SIC official says the two- to three-year development cost for the state-of-the-art facilities for the new HQ could reach millions, or perhaps billions, of ringgit.

The funding of F1 teams is usually supported by sponsorship. Companies form tie-ups with the teams in various capacities for brand-building purposes.

Sir Richard Branson’s Virgin Group, for example, took up a substantial sponsorship deal for Brawn GP in March this year (Virgin’s involvement, however, ends in November).

Fernandes is not new to such arrangements since his low-fare carrier has a three-year partnership with the AT&T Williams team as its official airline since 2007.

The Lotus F1 team, one suspects, will follow the same marketing trend of searching for potential corporate sponsors. Since its entry is supported by the Government as an opportunity to profile the 1Malaysia theme, government-linked companies are likely to be roped in.

F1 a nationalism symbol?

Talking about country profile, motor racing started out as a country-based competition and eventually evolved into a commercial sport involving independent teams and car manufacturers.

The existing F1 teams do not have specific country identity, with the exception of Force India, which used to be Spyker F1 team before it was sold to a private consortium comprising Indian millionaire Vijay Mallya and successful European e-businessman Michiel Mol in late 2007 for 88 million euros.

Force India’s main sponsor is Kingfisher, the flagship brand of Vijay’s beer and aviation businesses. His conglomerate, the UB Group, has annual sales of over US$4bil and a market capitalisation of US$12bil. Forbes puts Vijay’s net worth at US$1.2bil, one of the richest in India.

The team uses an Indian flag in its logo but the drivers are non-Indians – Adrian Sutil is from Germany and newly promoted driver, Vitantonio Liuzzi, is Italian. The team is solely driven by its private-entity owners and does not involve any Indian government initiative.

Similarly, India’s hosting of the F1 Grand Prix in 2011 is also an initiative driven by individuals. The project owner, JPSK Sports Private Ltd, owned by the Jaypee construction conglomerate, is funding the circuit construction costs.

The Malaysian entry, in contrast, has the Government’s backing, although the idea of Lotus F1 was mooted by both Fernandes and Kamarudin.

“There’s an opportunity to participate (due to the spot vacated by BMW Sauber) and so we went ahead to conceptualise the idea of our own team, roped in SM Nasaruddin SM Nasimuddin (executive chairman and chief executive officer of Naza Group) and Proton, and approached the Prime Minister for his blessing,” explains Kamarudin.

“The concept of 1Malaysia is not limited to people. My view is that it should be extended, to encompass the partnership of the private sector and the Government.”

Separately, Fernandes says the entry is “great for Malaysia” as it will further utilise its “hardware” at SIC while developing “the soft side – drivers, engineers, management”.

But what about risks?

As with any investment, there will be financial risks. In this case, the millions of ringgit that will be spent to set up the F1 team is at stake. Some argue that the huge investments are well worth the money because of the brand recognition gained internationally.

National oil company Petronas claims its annual cost of sponsoring F1 is less than 5% of what it would cost to gain similar exposure. Last year, its exposure via F1 was valued at about RM1bil.

But Petronas’ involvement is different as it does not run an F1 team. It supports BMW Sauber as its lubricant sponsor, and rightly so, since it’s in the oil business.

(It is uncertain if the national oil company’s sponsorship of BMW Sauber will continue since BMW has withdrawn from the team and Sauber does not have a firm entry for next year’s race.)

Aside from financials, there could also be the intangible risks. A poor performance may bring more detrimental publicity than the desired high profile.

Note that Malaysia’s first F1 driver, Alex Yoong, drove for the Australian-owned Minardi F1 team back in 2001 and 2002. Yoong only managed to finish five races out of the 11 in 2002, because of setbacks like engine, hydraulics and gear box problems.

Lotus technical director Mike Gascoyne is, nevertheless, confident of Lotus’ future performance. He told the British press recently that Lotus F1 was “a very substantial team.”

Gascoyne has over 20 years’ experience in the sport, having worked with Force India, Toyota, Renault and Jordan Formula One teams.

Still, it remains to be seen how Malaysians would feel, watching with millions of viewers worldwide, when Malaysia’s team finishes weakly, or perhaps not even completing races.

Lotus no newcomer to F1

The association of Lotus and F1 is not foreign. In fact, Lotus was a well-known participant in the glamorous sport in the 1960s. Between 1958 and 1994, the original Lotus team achieved 73 grand prix wins, 102 pole positions, six drivers’ world titles and seven constructors’ crowns from 489 starts, with illustrious names of the calibre of Jim Clark, Graham Hill, Sir Stirling Moss, Emerson Fittipaldi, Jochen Rindt, Mario Andretti, Ronnie Peterson, Nigel Mansell, Ayrton Senna, Nelson Piquet and Mika Hakkinen in its roll call of drivers.

Its success track record is mainly linked to founder Colin Chapman, who remained passionate about the sport until his death in 1982. Lotus’ last F1 race was in 1994.

The Lotus company, meanwhile, had been struggling with financial difficulties and had different shareholders trying to revive its finances. Proton has been the major shareholder since 1996, but it has long been rumoured that it wants to divest its stake.

OSK Investment Bank, however, said Proton had no urgency to sell Lotus Cars as the subsidiary had returned to profitability since 2008 with net earnings of £1.5mil.

While the Government’s involvement in the Lotus F1 team is via Proton, analysts do not expect the national car company to offer financial support. Proton’s role in the F1 venture will mainly be as the coordinator for Lotus, says an analyst in a recent report.

END OF A WONDERFULLY WRITTEN ARTICLE... Hope you enjoyed it...