Cambodia gets rolling [Cambodia produced its first car]

Despite prohibitive taxes on imports, car sales are on the rise and a local manufacturing industry is taking shape as well. 

Published: 7 May 2013 

Bangkok Post

Writer: Philip Heijmans 

It is hard to imagine, but Cambodia makes its own cars. A country known for its low-skilled workforce, Cambodia exceeded expectations with its release in January of the Angkor Car, a mini-electric vehicle able to get up to 300 kilometres per charge.

Designed and made in Cambodia, the Angkor gets around 300 kilometres per charge and sells for around $10,000.

The small but sleek Angkor Car can easily navigate the narrow streets of Cambodia, while with an electric engine saves on expensive fuel costs. It may cost $10,000 per vehicle, a bit steep for most local people, but the vehicle is a welcome testimony to Cambodian ingenuity.

And it is well timed as well, as Cambodia’s automotive sector is just beginning to make some noise. The number of cars that are registered with the government more than doubled since 2006 to 231,352 at the end of last year, according to data from the Ministry of Public Works and Transport.

The tendency to buy high-end automobiles is also on the rise, growing 27% in 2011 compared to the year before, according to the World Bank.

At the same time, reputable brands are lining up to enter the market. The first authorised BMW showroom broke ground in Phnom Penh in December, while banners have gone up around town for Mazda vehicles, expected to hit the market this year.

In fact, a number of distributors recorded growth in 2012 as Toyota Cambodia reportedly sold 800 units, up from 500 in 2011, while Ford recorded 15% growth in sales.

“The number of cars in Cambodia is still rather limited compared with neighbouring countries, so it is natural that that number will continue to increase over time while the economy is performing well,” said Hiroshi Suzuki, chief economist at the Business Research Institute for Cambodia.

“However, one of the issues customers face is the price because of very high customs duties on imports that is nearly 100% of the value of the vehicle,” he said. “It varies from the type of car, but if you want to buy a new car the price is twice that of neighbouring countries.”

Indeed, Cambodia charges some of the highest import taxes on vehicles in the world. Whether you are a car distributor or somebody looking to ship in a vehicle from home, you will be will have to pay a 45% excise tax, a 35% import duty and a 10% added value tax on the value of any vehicle brought into the country. Those taxes compounded with logistics fees and other “informal costs” can bring the total cost of importing a car well over its original cost, making it almost impossible for some distributors of imported cars to turn a profit.

Pily Wong, CEO of Hung Hiep (Cambodia) Co Ltd, the lone distributor of Mercedes-Benz, said that his is one such firm.

“Being a distributor, I tell so many people that it’s not making money. I would say that if I included all the operational expenses that my profit margin is near zero. This is why my company is diversified, selling other consumer products,” he said,

Marking up vehicles to match what he said was a 116% tariff on imports, he said that the price of a Mercedes was anywhere from $50,000 to $600,000. Even so, what little profits are generated after taxes are lost in a slew of operational costs.

“The land already absorbs a big chunk of it, then there is the building and facilities, we have to be compliant to the corporate design, then we have to have our staff and mechanics properly trained, buy special tools and we pay a licence for software,” he said.

But this is only one part of the problem. Distributors have to compete with a number of variables including a heavily present grey market. While operating legally, these car distributors — easily spotted in makeshift open air car lots with crude tin roofs — sell a variety of cars, none of which are authorised by the brands they claim to represent.

“The number one challenge for an authorised dealer is the grey market and unfair competition. People are selling the same or similar cars without any warranty or service and while making very minimal investment,” said Rami Sharaf, chief executive of RMA Cambodia, the lone distributor of Ford automobiles.

“On the other hand, we have the used car market, which is dominant with roughly 80% to 90% of the market. The challenge of that is once again, unfair competition and major safety issues,” he said.

He said that even while the market demand for used and new imported cars has grown to about 30,000 a year, growing at a rate of 20-25% each year since 2009. Of those sales that are new cars, the grey market is snatching up between 30% and 35% of the market without offering as much as a reduced rate.

Wong said that because of the rampant grey market, Mercedes-Benz sells just 20 to 40 units in a typical year and 60 units in a really good year.

“My grandfather got the distribution of Mercedes-Benz in Cambodia during the 1950s while his business was doing well and before the civil war occurred we were selling 400 Mercedes each year,” he said.

He said that of the 2,000 to 3,000 Mercedes currently on the roads of Cambodia, at least two-thirds were obtained in the grey market.

Despite these issues, it is not just the distributors who are paying the price, but the customers themselves. With little quality control on vehicles by unauthorised distributors and no government regulation, the cars on the streets of Cambodia are widely known to be unsafe and require frequent and expensive detailing.

New cars being sold in the grey market are not fitted with the equipment able to handle Cambodia’s rough terrain and require certain equipment such as reinforced fuel pumps, air-con boosters and shielding underneath the car to prevent damage from stones coming off the ground.

“The regulations are not tight regarding the import of used cars compared to the region, nor is there a limitation on the age or quality of the car,” Sharaf said. “So what happens is that rejected vehicles from other countries wind up being channeled into Cambodia and we sit here asking ourselves the same thing, ‘Why should Cambodia be the trash can of the region?’ ”

In an effort to curb these issues, distributors from 15 brands last year formed the Cambodia Automotive Industry Federation, but they have yet to propose anything to the government.

In what is perhaps the worst of all the issues facing the auto industry — low-quality automobiles, poor infrastructure and a lack of enforceable traffic laws are contributing to an endemic problem of traffic accidents.

The number of people killed in Cambodia due to traffic accidents has grown every year since 2000, according to data from the Interior and Public Works ministries. The most recent numbers show 1,518 recorded deaths through the first nine months of 2012, a slight uptick compared to the same period in 2011 — a year when a total of 1,890 people were killed. In 2000, there were just 401 fatalities.

With regard to total road accidents in Cambodia, there were 3,279 from January through September last year, down 15% compared to the same period in 2011. Despite the figures, many traffic accidents are never reported to police for various reasons and hence, never recorded.

“It is a very challenging issue on not just passenger cars, but freight trucks as well since they clearly affect accident rates,” said Hiroshi Suzuki of the Business Research Institute for Cambodia.

Where the auto market has many dark corners, there is some light as high wage costs abroad have resulted in some manufactures establishing assembly plants in the country. Hyundai opened its $62-million assembly plant in Koh Kong’s special economic zone in January 2011, while Ford opened an assembly plant in Preah Sihanouk province last year able to produce 6,000 vehicles a year.

“When you look at China, the wages are far higher than they once were and if you look at neighbouring Thailand, the minimum wage is also higher, so in Cambodia, you are saving on wages between 75% and 80%, and those savings will go right into your bottom line,” Sharaf said.