Why do we Buy Cars? An Examination of the Economics Surrounding the Automotive Industry (Part 1)

Your palms are sweaty. In front of you, a pushy salesman is trying to sell you the latest model of the Proton X70. The price is high, but you feel like you are getting your money's worth with the quality and the specifications of the car. You hesitate as you flip over the other brochures of other car models, and the salesman is listing down all the pros and cons of the various cars, asking you question after question about what you think.

I most certainly can empathize. Buying a car in Malaysia is not cheap, and we don’t view them as an investment in contrast to properties. If you buy one that is priced at RM50,000, you can watch that value go down the next year to about RM45,000. In finance and accounting, that’s called depreciation. So why do we still buy cars knowing their value will go down in the future? Take a deep breath and let’s look at the economics of our decisions to buy a car in this first part and the automotive industry in the second part.

We buy cars to get to places we can’t get to if we walk or take public transportation.

Obviously, this is what comes to mind for everyone. It’s staring us in the face or rather the place we want to get to will when we get there with a car. But is there something deeper that we need to consider?

Let’s break it down. Where do we go very often in our lives every day? For a working person like you and me, that answer will probably rank like this.

1. Office
2. Supermarket / Malls
3. School, Tuition (If you have kids)
4. Recreational Sports Facilities

You have to go to the office to work and make money to support yourself. That’s a given. If you can’t get there, how are you going to make money? You go to the supermarket and malls to buy necessities and the occasional luxury item. If you don’t have food and water, how are you going to survive? You drop your kids at school and tuition because they need an education. If they don’t have an education, how are they going to become productive members of society in the future? Finally, you exercise at the gym or badminton court. If you are not healthy, how are you going to live long and prosper (Ops, got to insert a Star Trek quote).

Hence, these are the main reasons why we buy a car as we need it to conduct our regular day-to-day activities. Let’s say we don’t have a car. It will be harder to look for high-paying jobs in the city or faraway places. You are stuck in your current area, working a lower-paying job. That’s not good as you need money to pay for a car.

Here’s the important point that we need to think about. If you live closer to areas that have high-paying jobs (mostly cities), it is easier for you to earn higher pay, and in turn, it is easier to afford a car that will enable you to do more. And if you have a car, you can also just as easily get to places to earn that high wage. See the importance now?

The point I am trying to hit here is that if you live far away, it is even more important that you have a car. It improves your standard of living in terms of getting a good job and having access to important facilities such as hospitals, supermarkets, and education.

This leads us to the next question. Since we need cars, are they actually affordable?

Cars are not that Affordable for Many of Us, and That is Important to Consider

This analysis here by Wapcar puts Malaysia as the 3rd most affordable country to own a car, behind only Singapore and Brunei. This is certainly good news but that comparison examines the relative affordability only. What about the perspective of the person buying the car in Malaysia?

The right question to ask is — is it expensive for a Malaysian to buy a car? An average Malaysian would need about 3 times the annual salary to buy an average car. Most of the time, we would have to procure a car loan to pay for it. This is not something new as we also take up loans to buy a property. But if we take into consideration that a property price will increase and a car will not, it changes the perspective on the affordability of a car.

Let’s do the math. We will take the most typical Malaysian car model, Perodua Myvi. Its price range is from RM46.5 k to RM59.9 k, and we will take the middle price of RM53 k. From the car loan calculator, this means a downpayment of RM5.3k, 10-year loan and an interest rate of 3.5%. The combination of these assumptions yields a payment of RM536, and this means that the person needs to pay RM81,090 in 10 years.

Carsome here projects that the Myvi will probably lose about 50% of its value in 5 years time, taking the Myvi value down to RM26.5 k. In another 5 years, it’s safe to say that the Myvi will probably lose about 50% more in value, culminating in a final value of RM13.3 k. Basically, you are spending about RM67 k to use a car for 10 years and go do the things that you can’t do without a car.

The takeaway here is that you need to at least make more than RM6.7k in a year to break even with the cost of buying a car. How does that compare to average household income in the last 10 years then? An average household made about RM2,841 in 2009 compared to RM5,873 in 2019. That means monthly salary has on average increased by RM300 every year, which translates to about RM3.6 k increase every year. See the big discrepancy here now?