Unlike many other sectors in the country, its automobile industry performed very well last year and is expected to experience further growth this year. The figures shared by the industry show that cars sales increased by 20 per cent in the first half of the fiscal year 2017-2018. This means more than 100,000 units were added to the sales during the period from July 2017 to December 2017 as compared to the sales during the corresponding period last year.
This boost in sales is a major one and keeping in view the fact that the production levels are not optimum, one realises the demand is far from fulfilled and there is enough scope for further growth. This phenomenon is quite interesting against the backdrop of developments taking place in other parts of the world with respect to the automobile industry. There are instances where production units have been closed down altogether or the number of cars produced there brought down considerably.
What are the factors pushing up the sales of cars, attracting new players from Korea, Europe and China in a market so far dominated by Japanese companies? A general perception is that sales have grown due to low interest rates, availability of consumer finance, low oil prices, entrance of cab services, like Uber and Careem, and so on. However, there is a need to look deeper into how the sector will perform in the near future.
Amir Allahwala, former president, Pakistan Auto Parts Manufacturers Association (Papaam), does not agree that the demand for cars is shrinking all over the world. He says it is continuously growing worldwide, especially in developing countries, such as China, India, Brazil, Indonesia and Thailand. The reasons he cites are growth in the per capita income and economy of the respective countries. Regarding Pakistan, he points out the country is going through a phase of economic expansion and massive infrastructural investment for the last 2 to 3 years and, hence, demand for automobiles is rising in the country.
Regarding the inability of the industry to fulfill the existing demand, Allahwala explains producing automobiles is a huge investment and requires setting up of vehicle assembly plant, a vendor base, development of tools for production of local parts, establishing a dealer and service network all over the country and creating a pool of well trained employees. These activities, he says, "require a long lead time as well as substantial financial investment worth billions of rupees".
Also, global automobile companies desire a stable long term policy for local manufacturing before they commit wholeheartedly to these long term investments. But, unfortunately, he laments, "Pakistan has not enjoyed a good track record in terms of policies for the auto sector."
He points out that since 2005 the government has turned a blind eye to massive misuse of gift, baggage and Transfer-of-Residence schemes for import of used cars that have captured 25 per cent to 35 per cent of the total market share. This facility is exclusively for overseas Pakistanis but being used by dealers to make easy money. "Also, from time to time, several changes in the government policies that affect the auto sector, such as recent imposition of regulatory duty on raw materials have had a dampening effect on investment plans by auto assemblers and auto-parts vendors," he adds.
There has been a major growth in the sales of cars with 1000cc engine capacity and Suzuki WagonR is one such variant. Besides other reasons, the introduction of Uber and Careem taxi ride service has attributed to increased sales in this case. Yousaf Hussain, a car dealer based in Lahore, says people, especially those from the low-income category, are acquiring these cars that become an asset as well as source of income for them. "There are many cases where these cars have been financed by banks and the owners make a good saving even after paying their monthly installments to the lending banks," he adds.
Ali Asghar Jamali, Chief Executive Officer (CEO), Indus Motor Company (IMC) Limited attributes the increased demand for automobiles over the last 3 years to favourable macroeconomic indicators and positive consumer sentiment in the country. Like Allahwala, he believes the availability of consumer credit and increased investment in urban infrastructure has continued to drive auto industry sales. In his opinion, there is enough room for growth because the penetration of vehicles in Pakistan is 16 for every 1,000 individuals whereas in other countries it is much higher.
Jamali thinks the perception that the demand for vehicles is not being met in Pakistan is wrong. Vehicles are available in the market but are booked by investors who then sell these vehicles. "Of course, you have to understand that there are over 50 variants of each of our brands, for example the Corolla, and multiple colours of each variant. It is possible that a particular variant and colour is not available in the market at the time of booking, which may create the perception of vehicle non-availability." He says they have recently cancelled over 1200 bookings and decided not to entertain multiple bookings against a single CNIC besides running an awareness campaign titled, "Say No to Premiums."
The question about prices and affordability for customers also crops up amid the impression that prices have always been on the higher side. Allahwala disagrees, saying the Corolla made in Pakistan (net of taxes) is cheaper than it is in Thailand or India. Same, he says, is the case for Honda Civic and Honda City.
He says prices of smaller cars are also competitive when compared with Thailand or Indonesia. However, small cars prices in Pakistan are higher than those in India. "This is due to the fact that the Indian automobile market, at 5 million vehicles annually, is almost 20 times bigger than that of Pakistan and results in the economies of scale, which are critical in reducing the cost to produce small cars," he adds. Besides, he says, taxation on automobiles in Pakistan is extremely high and stands around 33 per cent to 34 per cent of a vehicle’s sales price.
He says they expect that Hyundai, KIA, Renault and some Chinese companies will start local production of vehicles by 2019-2020 but their price levels are not likely to be lower than those of the existing vehicles. "However, there will be competition and product promotion that will stimulate an increase in market demand."
Jamali comes up with similar figures and terms the opinion that local industry is heavily protected inappropriate. He says all other countries that have sizeable automotive industries go to great lengths to heavily protect them through custom duty as well as restricted imports. Sharing an example, he says, custom duty on car imports in India is 125 per cent whereas in Pakistan it starts from 50 per cent.
Yousaf Hussain, the car dealer cited above, thinks otherwise and hopes the prices will come down once initial investments are made and recovered partially by the new players. The existing players, he says, "have enjoyed the monopoly that is why they are unable to predict further". He also supports the policy of importing used vehicles because he thinks these are far better in terms of material used and facilities.