Failure of Nissan and General Motors

Written by Ivan W.

Article based on:
http://www.freemalaysiatoday.com/category/business/2012/10/05/fledging-electric-car-market-in-turmoil-with-few-buyers/

This article have sparked interest into me, according to it, the sales of the electric car worldwide have shown weak starts and the situation is not improving in year 2012 despite media frenzy and the fluctuation of petrol prices. Malaysia is one of the country that have shown poor demand for electric car, from the economy update, there are currently only 11 pure electric source on the road of Malaysia which is not even 1% of the total car sales in Malaysia. Why is it this phenomena happening in Malaysia? With my basic knowledge in economics, my opinion towards the factors behind the unsuccessful product line of huge company such as Nissan and General Motors towards the sales of electric car is due to the microeconomics of Malaysia.

Firstly, what is electric car? Unlike hybrid vehicle which runs on both fuel and the power source of electric, electric car purely depends on electrical power. Due to its unique engines, it runs like our phones where charging was a must to provide sufficient electrical power to function. Unfortunately, according to the reviews of many, it is very time consuming and it could not last as long as fuel powered vehicles. Furthermore, Malaysia have yet to establish any charging station for electric cars making it a major drawback for Malaysians. According to Peter Chin, the minister of energy, green technology and water, unless Malaysia starts providing charging station on the road, until than Malaysians are not ready to accept electric cars. This is one of the factor that caused change in demand as it affects the convenience of the consumers which would shift the demand curve to the left due to the drop of quantity demanded.

The cost of electric car compared to a fuel powered car about the same size and power, the cost of the electric car is 10% higher than a fueled car and would be still be higher as the technology needed to increase the efficiency of the vehicles are getting more complicated and expensive. According to the law of demand, if others things remain the same, the higher the price of a good, the smaller the quantity demanded; thus, making the quantity demanded for electric car less due to its price. A substitution effect takes place where the price of the electric car rises, its opportunity cost rises. Fuel cars became the better substitute due to the incentive to economize on its use.

Still, there are other factors that bring changes in demand, for example the prices of related goods such as a substitute or competition, Protons and local Malaysia cars which are fueled powered vehicles are cheaper thus, people buy less of electric cars and more of the fueled cars.

Secondly, the expected future price of electric car is lower as the minister of international trade and industry, Mustapa Mohamed have announced earlier this May that the government would shows support promoting electrics cars by offering incentives to Malaysians together with 100% import duty exemption for electric vehicles below 2200 cu centimeters while stating that additional measures would be promoted in the future to further attracts demands from Malaysians. Since the expected future price of the car will falls, the opportunity cost of buying the good today is high relative to what it will be in the years to comes thus Malaysians buy less of the good now causing the demand for the goods decrease today and might increase in the future.

The preferences in Malaysian consumers have greatly affect the sales of electric cars too, with the lack of facilities such as charging station to cope with the vehicles and the trouble of hours needed just to charge up the car compared to fueled car that only takes a few minutes to refill which in turns affect the quantity demanded. Let’s not forget the urban economics where other there are still many places in Malaysia that have difficulty accessing to enough electricity to power a car. The electricity rate in Malaysia is at a constant increase due to the increasing of population that leads to the increase in usage, electricity could be considered as the complement product with the electrical vehicles, with the increase in electricity rates, the quantity demanded for electrical cars decrease. Not to mentioned it was harder to find replacement parts of an electric car as it was still a new technology in Malaysia.

From what I researched, the quantity demanded for electric cars in Malaysian is strongly affected by the opportunity cost and other influences such as preference, facilities and complement effects. To cope up with the situation, the government have imposed some aid regarding electrical cars and have hope that the future price of the cars would decrease and the quantity demanded would increase, thus there is hope that the sales of electric vehicles would be slowly improve in the future in Malaysia.

Hybrid revolution

Written by Wei Yoong L.

Article based on:
<http://paultan.org/2012/07/19/breaking-honda-to-produce-hybrid-cars-in-malaysia-starting-with-the-ckd-jazz-hybrid/>

Cars are important transportation equipment to the citizen in Malaysia especially to those people who live in the city center. Everyday, we can see long line of car sticking bumper to bumper during the peak hours. According to statistic, every family who live in the city will own at least 2 cars. In fact, some of the families that have a lot of family member will own up to 4 to 5 cars. So, cars have played a very important role to the citizen. If a person’s car broke down, will result, as the person cannot travel around from places to places. In this recent time, the trend has change from fuel consumption to hybrid cars. Hybrids cars are cars that run with electric. Therefore, there is reason that causes the demand of hybrid car to increase.

Demand is the wants that people want to buy, or people who can afford and plan to buy. So, in order for people to increase in demand in hybrid, the firms need to consider of the wants of the car, could people afford the car or are the people planning to buy a car. Petrol is the most important resource to make a car move. Therefore, this shows that petrol is the complement good with car. The demand and supply curve below will show the demand change from fuel consumption cars to hybrid cars effected by the petrol price.

(Figure 1.1)

Figure 1.1 insulates the quantity of fuel consumption car demanded on the x-axis and the y-axis shows the price of fuel consumption cars. Besides that, the red line show the supply curve of the fuel car and the blue and yellow line show the demand curve of the fuel car. Initially, there is equilibrium in the car’s market at the quantity of Q1 and the price of P1. When fuel price increase and it will affect the market of the cars. As we all know that the petrol is the complement goods for car, without petrol the car cannot be function. As the price of the petrol increases, the people will find a substitute to replace the fuel car. So, this action has causes the demand of the fuel car drops and made the demand curve shift to the left. So, the shift of the demand curve has form another equilibrium point which that the quantity reduce from Q1 to Q2 and reduce the price from P1 to P2.

Due to the increase in price, people will find a perfect substitute to replace the fuel consumption car. The increase in price of fuel will lead to an increase in price of traveling cost. Therefore, people will find the best way to reduce the cost by change their trend to hybrid cars. Thus, the changes of taste in car have effect the market of hybrid car. The demand and supply curve below will show how the price of petrol effect the change of hybrid car.

(Figure 1.2)

Figure 1.2 show that the demand and supply curve of the hybrid car. The x-axis shows the quantity of the hybrid cars and the y-axis insulates the price of the hybrid cars. In addition, the red line shows the supply curve of the hybrid car and the blue and yellow line show the demand of the hybrid car. Initially, when there is not change in price of petrol the, the equilibrium point of quantity is at Q1 and the price is at P1. If the price of the petrol increases, this will lead to people will buy more hybrid car instated of fuel consumption car to reduce their expenses on traveling. As a result, this led to and increases hybrid car and cause the demand curve shift to the right. This action has causes an new equilibrium form at the quantity increase from Q1 to Q2 and the price increase from P1 to P2.

The selling price of the hybrid car in Malaysia is slightly higher than the fuel consumption car due the capital investment pour into the hybrid technology. Beside that, the new technology that newly introduced have very little competitor and mainly dominate by Honda in Malaysia. So, the company has control over the price of the hybrid car and causes a price inelastic. But people still is willing to buy the car, because it saves up at least 30 to 40 percent of fuel consumption. The selling price for hybrid car is expensive, but percentages that save up on fuel are worth more than the fuel consumption car ever thought it look cheaper in selling price. As a result, the fuel saving on hybrid car make an increase in demand for hybrid car. In addition, the subsidy are given by the government to hybrid car have increase in demand. The government eliminates the import duty and exercise duty on hybrid car with engine size less than 2.0 litters. The subsidy has made the price of the hybrid car even lower than before that more people can afford on it. This makes the demand to increase as well.

The hybrid car is mainly dominant by Honda and it creates a market structure called monopoly in the short run. Because this new technology just establish, this result very little firm adapt into this technology causes very little competitor to compete with Honda Company. So this make the company to set there price high and sell to the consumer. In contrast in the long run, there will be more firms establish into this technology for example, Toyota, Proton and etc in coming time. So when these companies come out with their new hybrid car will cause a competition among firms and lead to an oligopoly market structure. When there is competition, the firms will sell their product at a lower price in order to fight with other firms to survive in the market. Eventually, the price of hybrid car will fall in the long run time frame. Furthermore, if the price of hybrid car drops more than the fuel consumption car, the fuel consumption car will slowly decrease from the market. This will happen because the hybrid car is perfect substitute to fuel consumption car and hybrid car bring more benefits towards the consumer.

In conclusion, the hybrid car will bring a revolution in our car industry, because it brings more benefit and cost saving toward the consumer. I hope that, these technology will be more establish all around the world so everyone can enjoy using it.

The Culprit Behind Traffic Congestion

Written by Kaiwen C.

Article is written based on the text in this Link

After coming back to Malaysia from overseas, I always wonder why the traffic always is so congested. Looking through the internet I came across some answers such as “too many cars”, “roads are not wide enough” and most stating that the main reason is “accidents”. Those reason all makes sense, but I believe that the main reason of the problem is the poor public transportation system, causing a chain reaction to people buying more cars. In addition to poor infrastructure planning, the road cannot grow in pace with the increasing cars on the road. 

It might not make sense thinking that the failure in public transport can cause so many chain reactions; hence I will analyze this issue using an economic point of view using bus systems as the main example. Looking around the Kuala Lumpur region, there’s only a few bus operators such as Rapid KL, Cityliner, etc. Since there are only a small number of firms that are competing in the market, this can be classified as an Oligopoly. 

Take a look back in time, the bus system consist of both mini buses and normal buses. And for mini bus, anyone can be a bus driver as long they have a bus driving license. And the bus operator would need to obtain a specific route license to operate. Even though the bus operator must have a special license, the barriers for entry are still low. This can be classified more of a perfectly competitive market. 

Assuming that the market structure of the bus services is as analyzed above, the change in market structure is more likely caused by the changes in government policy towards the issuing of bus licenses. Before when there was no limit to apply for the government license, it was not considered a barrier to enter as everyone was eligible to apply. However with a limit set, this can be seen as a legal barrier to enter the market. 

While comparing the difference between the two market structure, price is an inevitable factor to analyze. When the bus services are in a perfect competition market, everyone are price takers as they do not dare to take the risk of increasing or lowering the price, the price for bus fares are usually at the price range where both bus service provider and the bus service consumers can accept. Bus operators take their prices from the bus association which set their prices according to the equilibrium of the market and government. Whereas in an oligopoly, the pricing is more moderate compared to a monopoly due to the existence of competition, but still much higher than a perfect competition. We can interpret that the price is the equilibrium between the demand and supply of a market. After the change in structure the price of bus fares should increase. 

The price of the bus fare before cost around RM 0.50, whereas now it cost from RM 1.00 up to RM 3.00 depending on the distance. However, the reason of the increase in bus fare is more likely due to inflation. Hence a question arises: Why after the change in market structure, the change in price for bus fare wasn’t much affected? 

This can be explained that the bus services price is still under the control of the bus association. Whereas in order to increase the bus fares, the bus association have to apply for an increase to the government. However in order to satisfy the public instead of the individuals that own the bus companies, the government controls the price tickets for buses at a lower price. This is probably also another reason why many privately owned bus companies closed down due to insufficient fund and low profit. As a result, the market structure for bus services shifts more towards an oligopoly. The concept of price control is similar to a price cap, where limit is set towards how much one can charge in a particular market. And also it will cause inefficiency in the market similar to how price cap does. 

With controlled price imposed, private bus companies will exit the market as the profitability will decrease by a huge margin and might even cause a loss. Controlled price makes the price for bus services reduce resulting in a decrease in supply and an increase in demand. The supply of bus services is already really scarce as mentioned in the first part of this article. As the quantity demanded is higher than the quantity supplied, a shortage will occur (QD – QS). 

However, the demand for buses aren’t that high anymore. This can be explained by the change in number of consumers. In short, the market size of bus services is shrinking. Instead of using public transport, a big portion of the consumer chooses to personally own their transportation. Personal cars become a substitute for buses in this case. Hence resulting in “too many cars” as mentioned before. 

The failure in public transport was able to affect the personal car market by increasing its demand. The government took advantage of the increase of demand to promote the automobile industry in Malaysia. By imposing higher tax on imported cars, local manufactured cars have a better competitive edge compared to imported cars. 

However, the implementation of taxes is inefficient. As shown in the graph, a deadweight loss occurs and the victim of the loss is both the customers and the supplier. Due to the implementation of tax, the price increases, and the quantity demand decreases. On the other hand, the quantity supplied remains the same, resulting in a social loss as resources are wasted on products that the society does not value. 

If I were to classify transportation as a firm, it is inefficient in terms of short run. However achieving efficiency in a long run is not impossible. In the short run, cars are considered as a variable factor and the roads are considered as a fixed factor. But in the long run, both cars and roads are variable factors. Sadly, the roads are not built or expanded in Malaysia. The fault lies within poor infrastructure planning by the government. Another possible reason is that the actual problem in every big city is that there are too many cars entering the city even though infrastructure was well planned. 

In conclusion, the situation of traffic congestion can be improved only if the government had a better infrastructure and administration planning. But the real problem lies on the number of cars itself. There are too many cars on the road due to the failure in public transport. As the Prime Minster recognize that “An efficient public transport system is crucial for the development of the community”. I do not foresee that in budget 2013, the implementation of Prasarana Rapid bus services can improve the condition of public transport in Malaysia. I strongly believe if the public transport is not interfered by the Government, it could possibly improve the public transport system. By doing so, it will turn the public transport market back into a perfectly competitive market. Like before the government intervened, the market is efficient and both suppliers and consumers will benefit the fullest of their surpluses.