KUALA LUMPUR: Experts believe the internal combustion engine (ICE) dominated domestic used car market will be one of the casualties of the growing push for environmental, social, and governance (ESG) compliance, leaving it burdened with escalating costs and taxes bringing to question the viability fo the business.
Particularly concerning is the industry's reputation for lagging in ESG integration, with the used car market being deemed environmentally unfriendly due to its reliance on old, polluting vehicles that consume fossil fuels.
Malaysia's used car market was valued at US$25.14 billion (RM111.57 billion) in 2021.
Minority Shareholders Watch Group chief executive officer Devanesan Evanson said financiers closely examine ESG disclosures of ESG-affected companies, and offer lower interest rates to ESG-compliant firms, and impose higher rates on those that do not adhere to ESG principles.
For non-ESG-compliant companies, this could lead to higher finance costs, affecting profits negatively.
This dual challenge will likely impact used car sellers, causing write-offs, stock-related costs, and increased financing expenses.
Companies like ELK-Desa Resources Bhd, which deals with used car sales, said in a report that they see an uphill battle in adopting ESG standards in their operations. In contrast, major automotive players like UMW Holdings Bhd and Bermaz Auto Bhd have embraced ESG agendas.
UMW, the sole distributor of Toyota and Lexus brands, has pledged carbon neutrality by 2050.
"Further, the decline in demand for ICE vehicles could intensify with reduced EV taxes or increased subsidies, making EVs more economical.
"Additional taxes, if any, on ICE vehicles could discourage their use and encourage the shift to EVs. "These will hasten the death knell," Devanesan told The New Straits Times.
He said that to clear their stock, the sellers may drastically cut the selling prices of ICEs, and there may be a price war. This will benefit consumers who still prefer ICE.
"Conversely, those who wish to sell their current ICE to a used car seller will be met with low valuations as future demand will be low due to EVs gaining traction," he said.
ESG expert Professor Dr Harald Sippel said that with a local and global push for more ESG-compliant products, including fuel-efficient and low-emission vehicles, the used car industry might thus be the subject of closer scrutiny from regulators going forward and, overall, suffer a blow on its bottom line in future if the perception is not disabused.
"Another challenge the used automobiles industry faces when it comes to ESG is that it mainly depends on the cars to be re-sold.
"This is outside the control of car dealers, who rely on the cars they get from people who opt for a new car. "There is thus little to no room to make improvements. However, ESG is here to stay.
As mentioned, the trend worldwide is that businesses would have to comply with ESG," said Dr Harald, a lawyer who holds a certificate on ESG and regularly advises his clients from Malaysia and Europe on the topic.