Changes in price of related goods will affect consumer demand. In this case, petrol and cars are complements (jointly demanded as they are used in combination to satisfy consumer wants), a rise in petrol price will lead to a fall in demand especially for cars with bigger engines since it will require more petrol.
“Petrol remains affordable because it is subsidised by the Government. While high petrol prices may deter some people from buying a car with a higher cc engine, the impact would be minimal because these vehicles, bought by the higher income group, have lower price elasticity of demand,” an analyst said.
For the higher income, the proportion of income that is spent on big cars (and therefore, petrol) is less than that of the middle/lower income. This makes their demand for cars (and hence, petrol) less price elastic.
On Jan 3, New York's light sweet crude reached a record high of US$100.09 per barrel while London's Brent crude hit a historic peak of US$98.50.
The Government is expected to unveil a new subsidy scheme whereby the rich will pay more for fuel and the poor less.
Subsidization occurs whenever the government uses its power to redistribute wealth or access. It probably aims to narrow the income disparity between the rich and the poor. the provision of such services has a strong moral justification and virtually no environmental side-effects. These are clearly of good subsidies, at least in intent. However, when these subsidies are not well targeted and expensive, substantial public resources are diverted from programs that could be of great benefit to the truly poor in society. (http://www.eoearth.org/article/Subsidies_and_market_interventions)
The current petrol price is RM1.92 per litre.
Second Finance Minister Tan Sri Nor Mohamed Yakcop was recently reported as saying that the review of the subsidies did not necessarily mean a reduction in the fuel subsidies, and stressed that the review was unrelated to the general election.
An analyst with a local brokerage said a fuel subsidy cut appeared unavoidable, but the Government would have to tread carefully on the matter.
MIMB Investment bank analyst Rosnani Rasul expects at least a 30 sen hike in petrol price this year, saying the Government could no longer subsidise the oil price at high levels.
“If price of petrol continues to rise, some consumers might become more prudent in their petrol consumption and would opt for a smaller engine car, thus affecting sales of big engine cars,” she said.
Rosnani also cautioned that PLUS Expressways Bhd was still negotiating toll hikes with the Government and any toll hike would discourage people from using toll highways and buying big-engine cars.
However, she expects a 5% growth in vehicle sales this year.
Analysts said fuel-efficient cars might attract increased interest. They said Toyota's models and Perodua's MyVi might stand to benefit due to their fuel-efficiency.
Fuel-efficient cars may be an (imperfect) substitute for cars. CED>1, and is positive. While they may provide the same level of comfort as ordinary petrol-run cars, it is more difficult to obtain the alternative fuels (such as natural gas) since they are only available at limited petrol stations.
“Consumers might complain about rising petrol prices (if it happens), but without a reliable public transportation system, owning a car is important,” an analyst said, adding that public transportation fares would eventually be increased as well.
He said the rise in petrol prices would not dampen the demand for cars because the cost of petrol relative to the cost of a car in Malaysia was almost immaterial, unlike in other countries where petrol was more expensive.
He also said that petrol prices would not impact the sale of commercial vehicles, as they would be needed to conduct business.
Commercial vehicles are more price inelastic since they are deemed as a necessity especially by businessmen/ salesmen/ people making deliveries, as compared to cars being a luxurious good to most other people.
Analysts pointed out that hybrid cars, which run on petrol and electricity, would be the trend going forward. They believed it was just a matter of time before they caught up to normal cars.
“These (hybrid) cars are still relatively expensive compared with normal cars and have limited support in Malaysia,” he said.
Hybrid cars seem to be an upcoming trend yet the demand for such a product will depend on consumers' taste and preference. Advertising by companies producing hybrid cars would help create wants in consumers and create awareness of this type of car.
On the other hand, consumers may expect the price of petrol to go up futher and may consider buying a hybrid car to save on petrol costs in the long run.
However since hybrid cars are 'relatively expensive' they are likely to take up a larger proportion of consumer income, which may deter some consumers from buying it.
He added that although hybrid cars had limited acceptance here, the demand for those cars were very strong globally, especially in the US.
Since hybrid cars and normal cars are substitutes. When the price of petrol decreases, the demand for normal cars will increase, leading to a decrease in demand for its substitute, hybrid cars.
He expects Perusahaan Otomobil Kedua Sdn Bhd (Perodua) to continue to perform while Proton should still do “alright” despite all the negative publicity it had been receiving.
According to the Malaysian Automotive Association (MAA), Perodua remains the best selling car in Malaysia in the first half of 2007 despite a slight decrease in its sales. Perodua sales fell to 75,483 units from 79,738 units previously, with a market share of 34.2%. (1)
Proton was ranked second. Its sales declined to 46,955 units from 60,291 in the same period previously. Its market share also dropped to 21.3% from 24%. (1)
Analysts said the outlook for this year should be positive but manufacturers would still need to keep coming up with new models and market them efficiently. (2)
- Possible market structure of Malaysian cars: oligopoly. Presence of a few dominant firms-- Perodua 34.2%, Proton 21.3% market share, each selling a differentiated product (each car model is different). Entry to industry is restricted due to high start up cost.
- Even when the industry consists of a few dominant firms, they cannot afford to be complacent. They must still engage in R&D leading to product differentiation or to develop new products. They can also engage in advertising campaigns, which once successful, will create a strong brand name and make the demand for that model of car be more price inelastic so that the company can increase price to increase total revenue.
According to Frost & Sullivan, sales in the local motor vehicle industry are expected to improve this year with the total industry volume expanding 7% to more than 500,000 units.
The automobile industry is experiencing external EOS. Automobile firms will likely experience a fall in unit cost of production because the entire industry expands. There could be economies of information where common information services (eg, how to make the most durable cars) are provided and the cost of research is shared. The automobile industry may also choose to spilt up production processes and specialise in a single process (eg, producing tyres, windscreens) as such mass productions lower unit cost.The key factors expected to drive growth include demand from buyers wishing to replace their cars, a favourable economic environment and new model variants throughout most segments.
http://biz.thestar.com.my/news/story.asp?ile=/2008/1/14/business/19975167&sec=business
yuxi :)
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