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Sunday, February 21, 2016

Did Price Really Went Up? Or Did it Go Down?

Some interesting observation that I had recently noted but only came across my mind today.

Come March 2016, we Malaysians have now 'suffered' under the GST tax regime for 11 months.

Before the clock strike 12am on 1st April 2015, the whole nation was abuzz with calls to bring down the govt for the unfair taxation policy (funny isn't it that you get mad for being taxed 6% equally with the guy who makes at least 5 times your pay, but you're not angry when the same guy enjoys 10 times the petrol subsidy that you could afford to enjoy).

I can still remember the queue at Low Yatt Plaza ATM (yeah, due to unforeseen circumstances, I too was caught up in the last day pre-GST buying spree). Everyone was queuing up to withdraw cash until the ATM ran out of cash.

Due to unforeseen circumstances, recently I had to go for another gadgetry purchasing spree. It didn't go through my mind then as I was rushing, but an NST news article yesterday made me think.

But before I go into what I think I have observed, let me share a few disclaimers.
First, this is a general observation. So I don't have hard data.

Second, the prices of goods I have seen are limited to several locations only. So a more comprehensive study should either validate or invalidate my observation.

Okay, don't shit in your pants. Prices of some gadgets are generally going down.
Not all, but some. While GST did result in prices of gadgets to increase by 6% at the start of the GST tax regime, the prices now seems to be on a downward trend.

Why is that so?

The gadget business is a highly competitive business. Due to gadgetry is now becoming necessity instead of luxury, the demand is high.

While demand is high, technological advancement has helped to make the industry entry barrier to be lowered.

Standardisation of components (read shared chipset) and operating system (read Google) has helped to create many new gadgetry companies. These standardisation allowed these new companies to assemble these gadgets and slap a new brand name onto the product.

Never mind the silly and odd names you will be finding. The gadget substitute product industry had grown to be so large and inclusive that recently in India, a newly launched smartphone called Freedom 251 had been touted as the world's cheapest smartphone and cost less than the SD memory card that can be inserted into the phone.

So basically in the gadget business, there's premium brands and there's substitute brands (also known as replacement brands, btw).

Continuous technological advancements result in new products being launched from time to time leads to a short product life cycle. This forces the price of a premium product down significantly over a period of time, especially when a new premium product of the same brand is being offered.

The downward price push on premium product would slowly enroach into the price preference for lower middle-class, which will eat into the market share of replacement brands. This in turn pushes the price for replacement products on a downward trend also.

As mentioned earlier, entry barrier into the industry today is very low. In some countries, gadget business today is considered a cottage industry where businesses imports the parts to be assembled by housewives.

Therefore, some businesses finding their brands no longer being favoured by the market would just stop producing the product and exit the business, or transform itself into a new brand by slapping on a new brand. This is especially true for replacement products.

That explains the downward push on price at manufacturer level. How about consumer?

Price at consumer level is dictated by several factors, but mainly by competition and currency exchange rate.

Competition will be largely determined at franchise-holder level. In Malaysia, most brands are being held by companies which hold the exclusive rights to import the brands. Not wanting to lose market shares, these businesses largely recommends the price of the products to be sold.

Next would be the exchange rate. As our currency is no longer pegged to USD and is freely traded, currency fluctuation risk is now borne by businesses instead of by Bank Negara. While this business model seems to be unfair to smaller businesses which now have to contend with currency fluctuations, this will help to create more resilient businesses which will augur well in the globalised international business (double-speak!).

In the case of Malaysia, the currency fluctuation last year should theoretically  resulted in a more expensive product line up. RM had dropped more than 30% against USD.

But did price go up 30%? Answer is no. In fact, prices of most goods are maintained at pre-GST level. Save for a short spike in the months of April to June 2015, prices of gadgets is slowly going down. And even lower than pre-GST level in some cases?

As mentioned earlier, the high competition had forced the price of goods to be lowered. Due to technological advancement, prices become more elastic as introduction of newer and better products force older products into their next stage of product life cycle.

Good. So GST really pushes price down.
Not really. The fact that prices had dropped in the gadgetry business is not translated to lowering of price in other sectors.

The most obvious sector is food industry. Food price still remain relatively high. From grapevine, I have gathered that food price remains high due to a myriad of reasons.

High on the list is profiteering. Profiteering is rampant today as businesses claim that the price of goods and raw material have increased due to GST. And the public has accepted this as good despite the fact that GST rate for raw material for food is zero-rated.

So far, the industry is largely untouched by Customs (the enforcer for GST compliance). But I expect this to slowly end. A friend has mentioned that many VAT consultants from Australia had been hired by Malaysian Govt to help in the GST compliance.

Another reason is poor understanding of consumerism in Malaysia.

In fact, in a study on consumerism in Malaysia, it is very typical for Malaysians to verbally complain about breaches to consumer rights but would baulk in making an official complaint. Typical reasons provided are from not wanting to disturb another person's rice bowl to not wanting to get in trouble or waste of time.

This is worsened by intense politicking by opposition leaders who took opportunity to blame government for the price increase (rather than on the act of profiteering) as it was more convenient to blame the government as the causal factors than traders/business owners who are likely to be their supporters too.
(Note: not all the time Opposition play politics. The ruling party too is equally at fault.)

Another clear causal factor to the high price is that importation of many products into Malaysia still require Approved Permit, more popularly known as AP. Yes, many products including Indian onion still require AP. This has indirectly resulted in a cartel-like business model and consumers are put in mercy to these cartels (let's not mince our words, they are cartels).

Thankfully, signing of Trans-Pacific Partnership Agreement or TPPA has now made cartels as undesirable. Let's see how soon government will dismantle this inefficiency in our economy.

Anyway, that's about all for my ranting today. I don't have much time to look into the whole detail. Ideally, the analysis should have been done using the Porter's Five Force Analysis tool. But, time is envious. So I will do it another time.
Ah Knowledge, I can never finish absorbing you.


  1. I don't think I have heard any Opposition politicians talking about anything coming down. They giving the impression everything must go up with GST. Go figure.

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