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Changes afoot in auto sector

Changes afoot in auto sector

24 Aug 2023

IN the coming decade, the resounding roar of the internal combustion engine (ICE) could give way to the whisper-quiet revolution of electric vehicles (EVs). Concurrently, the decades-old dealership model employed by car manufacturers is undergoing a dramatic shift as the rise of the agency model paves the way for direct connections between automakers and consumers.

With the surge of EVs and the adoption of the agency model by car companies, the local automotive industry is bound for a major shake-up. And it is no exaggeration to suggest that the industry has reached a point at which it can no longer ignore these shifts. This moment could prove pivotal for car makers, dealers and everyone involved to buckle up and get on board with the new ways of doing things.

Take Tesla Inc and BYD Auto Co Ltd. The American EV giant is offering its Model Y at a starting price of RM199,000, while the Chinese EV powerhouse is teaming up with Sime Darby Bhd to launch the Dolphin, priced from RM99,900. While their pricing may not be deemed affordable for many Malaysians, the fact remains that the prices of EVs are getting more competitive.

Although this appears to be an early positive sign from the consumers’ perspective, what does it mean to local automotive players? Will EVs give ICE cars a run for their money?

“The way I see it, every EV sold in Malaysia essentially means one less CKD (completely knocked down) unit being sold here, which also means at least one CKD player and its auto parts suppliers will be affected. Everyone is so excited about EVs, but we have to study the cost-benefit,” says an automotive industry veteran.

“The question is, why are we ‘incentivising’ only Tesla? What about other auto companies that have been investing here? If I may sum it up, the emergence of EVs is paradise for consumers, but a nightmare for automotive companies.”

Is that a sweeping statement or a precise summary of what is to come for the sector?

EV game-changer

According to Munich-headquartered management consultancy Roland Berger, after a slight dip in the share of EVs sold globally in the first half of 2022, sales started to pick up again in the second half of the year, owing partly to lower electricity prices, before reaching a new record high of 15% of the total market by end-2022.

EV sales were highest in China, followed by Europe and the Middle East. More than half of all cars sold are expected to be EVs by 2030.

“The market for EVs and charging stations is undergoing a transformation. The awareness of sustainable mobility is growing, and EVs are finding increasing acceptance among consumers,” says Roland Berger senior partner Ron Zheng in an August press release.

Zheng points out, however, that the market’s further development depends on closer collaboration between automakers, energy companies and other industry players, both in the nationwide expansion of charging infrastructure and in innovative solutions to meet the growing demand.

Bettina Plangger, vice-president of sales and marketing at Mercedes-Benz Malaysia, stresses that the German marque believes “the future is electric”.

“As the company steers towards carbon neutrality in support of our Ambition 2039 and sustainability goals, electric mobility will remain our core business strategy towards our ‘Electric Only’ goal. Therefore, the plans for EV and ICE cars will echo our global direction, which is to go fully electric by the end of the decade, where market conditions allow,” she tells The Edge

From the consumer’s perspective, says Plangger, Mercedes-Benz recognises that the low petrol prices in Malaysia, owing largely to the government’s subsidy, may present challenges to the adoption of EVs.

“However, we believe the long-term benefits of EVs, such as reduced carbon emissions, lower operating costs, improved driving dynamics and environmental sustainability, will gradually make EVs more appealing to consumers,” she elaborates.

Plangger acknowledges that the automotive industry is going through a massive transformation as Mercedes-Benz transitions its portfolios from the conventional ICE to battery electric vehicles (BEVs).

“In Malaysia, we are encouraged to see that the EV landscape is picking up. We are on track to keep the momentum. This transformation demands a rethink and redesign of several elements that are needed to ensure the success of the automotive environment in the future,” she says.

Bermaz Auto Bhd (BAuto) group CEO Datuk Francis Lee Kok Chuan believes ICE will remain relevant in the next four to five years. “Currently, only BYD and Tesla are making some inroads into the market but not in a big enough volume to affect the mainstream non-national segment players like Toyota and Honda — and, of course, Mazda,” Lee tells The Edge.

“Range anxiety and the lack of infrastructure like charging stations all over the country make consumers think twice before buying an EV. Currently, most of the buyers in this category of higher-priced EVs have ICE cars at their disposal, and EVs are mostly standby cars for them. Moreover, petrol prices in Malaysia are still very cheap and it doesn’t make sense to own an EV at this moment.”

As far as BAuto is concerned, Lee says ICE still has a role to play, and the group, which currently distributes Mazda, Kia and Peugeot in Malaysia, may go into hybrid or plug-in hybrid electric vehicles (PHEV).

“EV is the future, but not in the next four to five years. At BAuto, we are getting ready for the eventuality and have been talking to a few parties purely in the EV space so that we are not left behind,” he adds.

While the automotive industry is always evolving, Lee remains confident that BAuto could easily adjust to the changes happening in the marketplace. “Our senior management team has many years of experience in the automotive trade and it has always been said that the automotive business is a sunset business, but it has been like that for the last 20 to 25 years and we are still relevant,” he says.

“We will change with the times and I believe EV is the future and that is why we have trained our people to be EV-ready and actually spent a lot of time and money to face the EV challenges going forward. In the meantime, however, we cannot neglect our bread-and-butter ICE cars, as we are still selling a reasonable number of these cars to meet the current demand and, thus, maintain our profitability to continue paying good dividends to our shareholders.”

When contacted, UMW Toyota Motor Sdn Bhd, a 51%-subsidiary of UMW Holdings Bhd, says it does not see EV as a threat to its ICE cars in the near future. UMW is a distributor of Toyota vehicles in Malaysia.

‘Evolution starts now’

Sime Darby highlights that EVs have started to change the automotive landscape in the form of new BEV brands such as Tesla and BYD, as well as new product offerings from incumbent ICE brands.

“This has created an opportunity to expand our brand portfolio, which we have capitalised on with the distribution of BYD vehicles and the assembly of Chery vehicles for the domestic and export market,” says its spokesman.

Looking at Malaysia’s total industry volume (TIV) in 2022, New Hoong Fatt Holdings Bhd (NHF) managing director Chin Jit Sin notes that, of the 720,000 units sold, only about 2,600 units were EVs.

“Malaysia still has a big portion of the population in the B40 and M40 categories, and most of them won’t be talking about EVs yet. Yes, the pricing of Tesla and BYD seem attractive for the T20. But whether it’s RM200,000 or RM100,000, I think it’s not affordable for most Malaysians, who have been buying national cars at RM50,000 or less,” he says.

“So, prices of EVs need to drop, and people’s incomes need to increase — only then will we see higher EV adoption. Having said that, car companies need to be prepared for the next big wave in the coming five to 10 years. They need to be on the right track. They need to embrace and catch up with the new technology.”

Chin says NHF is an automotive parts manufacturer focusing on the replacement market.

“There are still millions of ICE cars on the road in Malaysia. They are not going to disappear overnight and they still need our auto parts in the next 10 to 15 years. Business strategy-wise, we will continue to do what we do,” he adds.

“Yes, we need to be EV-ready and learn about EVs but as it is, there is really no EV replacement market for us. The volume is very small. No third-party workshop wants to repair EVs, so there is no demand for EV parts, really. But definitely, the evolution starts now. The parts and the requirements will be different. It’s something that we all have to adapt and evolve. It’s time for all of us to get ready.”

Meanwhile, Agmo Holdings Bhd CEO Tan Aik Keong says the app developer embraces EVs as the future of mobility.

“The growing market for EVs, coupled with the potential for decreasing battery costs as the economy expands, makes EVs an economically viable and forward-looking option. Additionally, we see the success and advancements of EVs in other markets like the US and China, which indicates the potential for similar growth in Malaysia as the EV infrastructure continues to develop,” he adds.

To cater for the EV consumer market, Agmo has developed the Agmo EV SuperApp, which allows EV users to locate the nearest charging stations in Malaysia and could help them with route planning while reducing range anxiety.

“While we acknowledge that hybrid vehicles and ICE vehicles may still have a role in the short term, our primary focus remains on EVs due to their long-term sustainability, overall cost efficiency and alignment with our vision for a greener future. Moreover, we will keep a close eye on potential advancements in hydrogen-powered vehicles, which may complement our commitment to sustainable mobility,” says Tan.

Having said that, some listed companies have started to jump on the bandwagon. They include Yinson Holdings Bhd, Genetec Technology Bhd, Amtel Holdings Bhd and Greatech Technology Bhd. It remains to be seen how the venture will reflect on their bottom line as the EV industry is still in the nascent stage.

Agency model — diverse approach or universal shift?

Notably, Tesla has not only sped up the adoption of EVs, it has also roiled the car dealership industry.

Car makers around the world are changing their business model from the traditional dealership model to what is known as agency agreement, following the success of Tesla selling its cars directly to consumers and servicing its own cars since entering the market in 2013. The Covid-19 pandemic may have also contributed to the process.

Most of the cars sold in Malaysia are currently under the dealership model run by corporations such as Hap Seng Consolidated Bhd, Sime Darby and UMW. But changes are afoot, with Mercedes-Benz Malaysia announcing that it had reached an agreement with its retail partners to introduce the agency model in Malaysia last month. The German marque said the new model would offer its customers “a seamless purchasing journey with one best price”.

Basically, under the agency model, an agent does not own the stock of new cars in the showroom and does not take on the risk of car sales. Under the dealership model, dealers have to take on the risk of holding their stock, running marketing campaigns and managing customer service.

Says an industry observer, “The changes in tack by many car manufacturers could put car dealers at risk as they have already invested a lot in their showrooms and warehouses. The dealership model allows dealers to manage their own margins by suggesting the selling prices, whereas under the agency model, the margin is based on the commission from every car sold, which is fixed.”

It remains to be seen how the agency model will affect Hap Seng, which sells Mercedes-Benz cars through its Hap Seng Star showrooms. Nevertheless, the share price of Hap Seng has been battered since the beginning of the year, owing possibly to concerns about the impact of the change in its auto segment. Its share price had halved to RM3.23 last Thursday from RM7.40 on Jan 30.

Another market observer points out that other car dealers could face a similar situation in which car makers may want to change their business model, which in turn could affect their margins.

“Many car dealers have one-year dealership contracts with the manufacturers, with automatic renewal. It’s not like they have a 10-year dealership agreement that can ring-fence them from any changes in the landscape,” he says.

It was reported that Volvo and Volkswagen were also looking to shift to the agency model.

When asked, Sime Darby says it does not anticipate that the agency model will be widely adopted anytime soon in Malaysia for the brands it represents.

“The agency model may change the way we do business, but it may not necessarily affect our profitability or returns in the long term. For Sime Darby Motors’ operations in Malaysia, the agency model has been confined to a limited selection of models such as Volvo’s BEV line-up, and we do not see it impacting the majority of our business operations,” says its spokesman.

Sime Darby, which represents BMW, Rolls-Royce, Jaguar, Land Rover, Porsche, Ford, Hyundai and BYD, adds that dealerships will continue to play a critical role, particularly in the premium and luxury segments.

“As a dealer group, Sime Darby Motors’ strength is in the ability to enhance other parts of our value chain that involve direct engagement with customers, such as after-sales services. While a sale is a one-time experience, after-sales services maintain a long-term relationship throughout the ownership experience. For buyers, the purchase is more than just a transaction, it is an experience,” says its spokesman.

Mercedes-Benz Malaysia’s Plangger says the German brand will place great focus on providing luxurious experiences through its retail network. “Working alongside our retail partners, we are in the process of upgrading many of our showrooms to showcase our latest luxury retail standards.

“In the future, our retail partners will maintain their pivotal role as experts and brand ambassadors, offering customers a luxurious experience through their retail network. They will play a crucial part in ensuring a seamless customer journey of omni-channel experience, from the initial research phase to the vehicle handover upon purchase,” she explains.

Plangger adds that the new agency model will offer Mercedes-Benz Malaysia’s retail partners the opportunity to concentrate even more than before on customers and their support.

Nonetheless, an automotive industry veteran, who is rather pessimistic about the sector’s recent developments, insists that the agency model could be “a huge disaster” for Mercedes-Benz Malaysia’s dealers such as Hap Seng, Cycle & Carriage Bintang Bhd and the Naza Group’s NZ Wheels Sdn Bhd.

“We may not need to have car showrooms in the future. The ‘dealers’ are likely to become ‘mechanics’ that take care of after-sales services,” he says.

Maybank Investment Bank research analyst Loh Yan Jin believes the agency model is being perceived as a flexible strategy for car brands and is aligned with their unique objectives.

According to her, while the agency model offers better control over pricing, branding and customer experience, the dealership model enables brand owners to expand quickly through partnerships, thus sharing financial risks.

“Consequently, we anticipate a diverse approach rather than a universal shift. Therefore, we do not expect this to have a major impact on the existing dealership and franchise holders in the industry,” says Loh.

AP system still intact

Through the government’s BEV Global Leaders initiative, Tesla or other original equipment manufacturers (OEMs) that wish to operate in Malaysia are required to make significant investments here, including setting up a head office in the country; installing at least 50 ultra-fast chargers, with at least 30% of them for public use; and cooperating with at least 10 higher education or Technical and Vocational Education and Training (TVET) centres on knowledge transfer for BEVs or other related technologies.

In an Aug 8 research report, RHB Investment Bank Bhd points out that despite incentives to encourage EV adoption in Malaysia, there are currently none priced below RM100,000 (on the road, with insurance), as the Ministry of Investment, Trade and Industry’s (Miti) approved permit (AP) policy prevents the import of EVs priced below RM100,000.

“[Therefore,] the cheapest EV in Malaysia is still currently the Neta V EV, priced at RM99,800 (OTR, without insurance). We believe this policy is to protect the national marques while they work towards developing their own EVs,” it says in the report.

Miti tells The Edge in an email response that, for now, the government does not intend to phase out the AP system as it is still relevant and necessary for supporting the growth of the local automotive industry. “Nevertheless, to facilitate the entry of top global BEV producers such as Tesla into the country, the government has introduced the Global BEV Leaders Initiative scheme, which [allows for exemptions from] local partnering conditions, but [still requires adherence] to specific criteria and conditions.”

Within three years of this initiative, Tesla needs to comply with criteria and conditions such as developing the EV ecosystem through the following activities and investments: 1) setting up its headquarters and experience or service centres in Malaysia; 2) building a supercharging network to eliminate range anxiety among EV users; 3) setting up partnerships with Malaysian companies in its domestic and global supply chain; and 4) transferring knowledge and skills through various programmes, including internships and collaborations with agencies and technology institutes.

In addition, Miti says the government is working closely with Tesla on its plan for future investment in manufacturing and assembly activities related to EV ecosystem development.

“So far, Tesla is the only applicant for the BEV Global Leaders Initiative. Nevertheless, there are several companies that have approached Miti and inquired about this programme,” it says.

Miti says the government aims to foster an environment in which national OEMs such as Proton Holdings Bhd and Perusahaan Otomobil Kedua Sdn Bhd (Perodua) can catch up and eventually release their own EV models, possibly as early as 2025.

“To facilitate their progress towards this goal, we are actively arranging business-matching sessions with potential partners and suppliers. This strategic approach will create opportunities for collaboration and technology exchange, which will further enhance the capabilities of our local automotive industry in the EV sector,” it says.

While promoting local players, Miti says the government remains mindful of the need for market liberalisation to foster a competitive and dynamic EV market in Malaysia and beyond.

“We are engaging in comprehensive discussions with all relevant stakeholders to carefully assess the benefits and drawbacks of the current policy. Our aim is to formulate balanced and well-considered policies that ensure a win-win situation for both local players and international counterparts,” it adds.

“As we move forward, we are committed to continuously evaluating our policies, keeping in mind the development needs and best interests of our nation’s automotive sector and the overall economy. By striking the right balance between nurturing local players and encouraging healthy competition, we believe Malaysia can emerge as a leading player in the global EV market.” 

Source: The Edge Malaysia