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June 27, 2019

Localisation shields domestic auto sector from devaluation


June 27, 2019

LAHORE: Car sales have declined by 25 percent, but the domestic auto sector remained shielded from the shrinkage in production and sales, as the hit has mostly been taken by the imported used cars which cannot be imported by commercial importers.

Pakistan produced 285,000 cars last year. The import of used cars was 65,000. The total car sales in Pakistan reached 350,000 units last fiscal. The market has shrunk this year by 25 to 28 percent that is in line with the decline in sales of most of the manufactured items. Last year, the share of imported cars was 19 percent.

This year, most of the left over stocks of used imported cars were available in the market and very few cars were imported by genuine users. We can safely say that used cars spared a market of 60,000 cars for the domestic manufacturers.

A look at the production of cars, jeeps, vans etc reveals that in the first ten months of this fiscal, Pakistan produced 226,245 units (cars jeeps, vans) at an average of 22,625 units per month. By the end of June, we expect that another 44,400 units would be added.

The final 12 months production would be around 270,000. There were around 10,000 leftover already imported used cars, so the final appetite for cars in Pakistan has declined to 280,000. Thus, market has shrunk by 20 percent, but the domestic industry lost only five percent of its share.

We are talking about the already established three players that are fully operative in the market. They enjoy the benefit of substantial localisation of auto components. The decline in rupee value played havoc with those industries that were entirely dependent on imports to assemble their cars. Impact of decline in rupee value is lower on industries that have high local component.

Steep decline in rupee value has impacted all the new entrants negatively. New entrants were allowed to import fully built up units at lower duty in their first two years of operation. The cost of vehicles has increased by 50 percent in rupee terms. Most of the new entrants have not yet started localisation of auto parts of their variants.

They would find it very hard to compete with the existing players with a higher level of localisation. Additionally, the 5 to 15 percent FED imposed on all vehicles from July 1, 2019 would hurt them more, because the price of their imported cars would be much higher than the cost of three Japanese assemblers that have localised most of the components of their cars.

It is worth noting that the new entrants were eyeing the small car market of Pakistan, as most of the used cars that were imported in the country were of less that 1000cc engine. Only local variant that competed with these small used cars was Suzuki Mehran that was an out dated car.

It was priced Rs800,000; still the used imported versions of even 660cc power fetched higher price of above Rs1.2 million. A new entrant is the Chinese version Bravo, which sold at Rs800,000/unit.

The car had updated features that Mehran lacked. However, once devaluation of rupee started, it was not possible for the new entrant to maintain that low price. In the meantime Pak-Suzuki introduced its 660cc version under the name of Alto. This fully automatic and loaded version is priced Rs1.2 million, and can compete in quality and performance with the imported used cars.

Experts say that it would be an uphill task for any new entrant to match the price of their smaller car with Alto. They say the reason is that Alto, at the time of its launch, had 60 percent local components and 40 percent imported components.

Manufacturer was fully aware of the advantage of localisation that shields it from frequent fluctuation in rupee value or appreciation of foreign currencies, particularly Japanese Yen. The company provided the designs of components of the car to its vendors about a year before its launch.

These parts were developed and approved from the Japanese principals. About the same time rupee started declining and the company was shielded from expensive imports. It is high time that all new entrants start developing components of their variants through local vendors to stay in competition with both small and medium-sized car manufacturers.

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