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THE CHANGING FACE OF MOTORCYCLE INDUSTRY
By SYED M. ASLAM
Nov 03 - 09, 2003
Until recently motorcycle buyers in Pakistan hardly enjoyed any choice — either in term of product or in term of price. Their choice was limited to just three traditional Japanese models produced locally — Honda, Yamaha and Suzuki- and they have witnessed an incessant increase in prices which pushed an otherwise affordable means of transport out of their reach.
The local two-wheeler industry has been just as over-zealously protected as the automobile industry. In fact, the local motorcycle industry is much more fiercely protected than its four-wheel counterpart as we will see later. Import of cars and two-wheelers is affectively discouraged through excessively high duties the ultimate cost of which is paid by the buyers in high prices.
Years of undeserved protection and the absence of real competition have not only deprived the buyers of choice but have also harmed the industry in many ways. It has resulted in developing monopolistic tendencies on the part of the local industry to increase prices at will on this or that pretext and its failure to improve the quality of its products.
Like all other developed countries motorcycle is seen as an affordable means of transportation here in Pakistan. However, the incessant increases have pushed the prices of the two-wheelers out of the reach of the low and middle income groups years ago. The traditional manufacturers increased the prices at the slightest shedding of value by the rupee but remained conveniently silent to pass off any benefit of the substantial shedding of the value by the dollar after 9/11.
Just how well protected the local two-wheeler industry has been all along from imports is obvious from the following. For years the import of completely built-up two-wheeler was subjected to a high 110 per cent duty which was reduced to 75 per cent a few years ago. However, the duty was increased by 15 per cent to 90 per cent within weeks at the behest of the traditional producers who felt that the 75 per cent duty would be enough to encourage imports at their inconvenience.
In fact, the two-wheeler industry is the best protected industry of the country today. It is better protected than the car: import of two-wheelers is subjected to 90 per cent duty, 15 per cent more than that on cars of up to 1000cc. The fact speaks volumes about the indifference of the policy makers towards the low and middle income segments of the society, the real users of the two-wheeler which is seen fit to be subjected to heavier duties and levies than the four-wheeler.
The total impact of duties and taxes on the import of two-wheeler adds up much bigger than that on the import of cars. The import of motorcycle is subjected to 90 per cent duty, 15 per cent sales tax and 6 per cent withholding tax the total impact of which adds up to a high 140 per cent. On the other hand, the import of new 1000cc or smaller car is subjected to 75 per cent duty, 15 per cent sales tax and 6 per cent withholding tax the total impact of which totals around 115 per cent, much less than that on the two-wheelers. The two-wheeler, thus, remains an even better protected industry than its more expensive counterpart, the four-wheeler industry.
Though it took no time for the policy makers to increase the duty on the import of completely-built-up two-wheelers from 75 per cent to 90 per cent a few years ago, it was nevertheless enough to give an opportunity to a handful of importers to bring in affordable Chinese two-wheelers. Today, business at Karachi's Akbar Road, the biggest motorcycle market of the country, has picked up to regain a level lost over the two decades in phases.
The transition is helped by the presence of a number of affordable Chinese two-wheelers, locally-produced as well as imported. It has completely changed the face of the motorcycle market in Karachi in particular and would have a long-term impact in other parts of the country in the time to come. The competition has provided the buyers with real choices both in terms of products and prices. It has forced the traditional producers, particularly Honda which is the market leader, to cut the prices of their products substantially. It has also provided the people with a choice of affordable Chinese alternates, the prices of which run between Rs 39,000 to Rs 42,000.
The transformation has turned the market more buyer-friendly because of choices that caters to need of all tastes and all pockets. It has helped bring down the prices of not only locally assembled motorcycles but also affordably priced locally assembled and imported Chinese brands. The heating up of the competition has changed the market in many ways for the benefits of the buyers by providing real choices to the transport-starved middle-income segment of the society which could not afford to buy a new, or for that matter a used, motorcycle any longer.
INCREASED LOCAL PRODUCTION
A few years ago the local motorcycle industry comprised just three players — the traditional producers of three Japanese brands. About three years ago the market started to change when two new assemblers Sohrab and Qingqi, both Chinese, initiated the production. Today, the number of licensed two-wheeler assemblers in the country stands at total 14 including 3 traditional and 11 Chinese.
Muhammad Sabir Shaikh, the assembler of Guangta Chinese motorcycle, told PAGE that monthly sales at Akbar Road has crossed the 4,000 mark for first time ever and is expected to touch 6,000 level in the coming months. He claimed that 75 per cent of the 4,000 motorcycles sold each month at the Akbar Road are Chinese, both locally assembled and imported, while the rest of the 1,000 units are sold by the 3 traditional producers collectively, Honda with 750 units being the top.
Sabir said that during fiscal 2002-03 a total of over 210,000 motorcycles were produced in the country, about one-third of 70,000 of which were Chinese. "The motorcycle production this year is expected to touch 300,000 mark, one-third or about 100,000 units of which would be Chinese, of which 85,000 would be produced within the country while the remaining 15,000 would be imported."
The increased production, however, would not be able to meet the demand which is increasing at a much higher rate. It would fall far short of the 'real' demand which has always remained 500,000-700,000 units per annum but was kept systematically suppressed by the traditional assemblers so as serve as a pretext for not allowing imports. It also helped the traditional assemblers to dictate the prices to continue benefiting from the monopolistic tendencies to bleed the people to pay high prices.
It is clear that the Chinese motorcycles have been able to make a respectable niche.
The prices of locally produced 70cc Chinese motorcycles range from Rs 39,000 to Rs 44,000 while imported counterparts are available for an extra Rs 5,000. In all, about 10 brands of 70cc, 6 brands each of 125cc and 150cc and two brands of 250cc motorcycles are imported from China and the presence of them all at Akbar Road has given the market the boast that it is enjoying at present.
So the Chinese two-wheelers have been successful in winning one-third share of the over all market due primary to affordable prices and competition which was just not there for the benefit of the buyers.
DUTIES AND TAXATION
The import of completely-knock-down (CKD) kits used in the manufacture of two-wheelers is subjected to 30 per cent duty and 15 per cent adjustable general sales tax. The import of replacement parts is subjected to 25 per cent duty, 15 per cent sales tax and 6 per cent withholding tax. Assemblers of Chinese brands of motorcycles say that duties and levies on the import of CKD and replacement parts are high and so is its overall impact. Since the Chinese assemblers are already working on minimum margins to compete with traditional assemblers who have substantially cut the prices of their product on the one hand and to keep their retail prices attractive to win buyers, the total impact of duties and levies on CKDs and replacement parts is unfavourable to the new breed of producers.
But that represents only a part of the problem. A number of assemblers of Chinese motorcycles said that the Customs officials are in connivance with the top traditional assembler find it fit to evaluate duties and levies on much higher C&f prices way above the actual prices. For instance, the Customs is evaluating the duties and taxes on the import of 70 cc CKD kits from China at fixed C&F value of $ 280 even if it is imported at a lower C&F price.
Sources said that the import of Chinese-origin motorcycles is being systematically discouraged tacitly in another manner- evaluating the duty, and thus taxes, on higher C&F value than on which it is being imported. Sources told PAGE, a completely built-up unit is available for as low as $ 240 per unit, depending on the quantity, but Customs authorities has fixed different C&F prices for the purpose of valuation which differ from a producer to producer. For instance, the C&F price of 70cc motorcycles is fixed at between $ 280-285 for different producers for the purpose of valuation which is around $ 20 more than the declared value.
The valuation on the higher C&F value means an arm and leg for the importers which are working on extremely thin margins already. Sources told PAGE that a 20 dollar difference makes all the difference between profitability and to remain competitive as it pushes the retail prices by an average Rs 3,000 — the margin most of the importers are operating on to compete with each other and traditional producers.
Importers say that the Customs authorities have fixed the C&F values on the higher side to tacitly discourage imports by making them expensive so as not to be price competitive the ultimate victim of which is the buyer. "As is, the import of completely built-up motorcycles is subjected to highly discouraging duty and taxes and the valuation on the higher side makes the situation worse. While it is true that the increasing presence of Chinese two-wheelers has forced the traditional producers to cut their prices substantially the valuation on fixedly high C&F value pushes the prices of imports to levels where they just cannot be seen as attractive anymore. Why the low — and middle-income people are deprived the right to have access to affordable two-wheelers."
The traditional assemblers still enjoy the biggest share of the market but the Chinese two-wheelers are increasing their share with each passing day. It took 20 years for the traditional Japanese assemblers to help win the trust of the buyers since the import of two-wheelers was banned. On the other hand, the positive response to Chinese counterparts can be attributed to affordable prices in a market where the traditional assemblers increased the prices of their respected products way beyond the reach of the middle and low-income groups a long time ago.
Let's look at the financial results of Atlas Honda, the market leader, for the first quarter ended September 30. Honda's sales increased by 38 per cent to Rs 2.24 billion over the corresponding period previous year while operating profit registered over 61 per cent increase to Rs 203 million. Pre-tax profit jumped from Rs 123 million to Rs 199 million and after-tax profit increased from Rs 80 million to Rs 129 million.
Market sources told PAGE price cuts of Rs 10,000 and Rs 5,000 announced by Honda a few months ago has helped it regain a lot of market, particularly in the biggest province Punjab.
Sabir said that unlike Karachi the Chinese two-wheelers have yet to make an impact in Lahore, which also serves as a distributing point for other close by cities. "The monthly sales volume has already crossed the 9,000 figure, more than double the previous high of 4,000 units, of which 8,000 products produced by traditional assemblers of which Honda is the market leader. However, Karachi has always been a trend-setting city for the rest of the country as obvious from the fact that it was it which backed Honda when it enjoyed little market in Punjab. The whole-hearted welcome accorded to Chinese motorcycles by Karachi would be reflected elsewhere in the months and years to come. The Chinese motorcycles are here to stay."
However, for the time being the traditional assemblers like Honda can afford to play the market because it enjoys the trust of a large captive market. The thriving sales at Honda can be attributed to substantial reduction in prices which was aimed at giving the new assemblers, as well as importers, of Chinese bikes a shock treatment because they just could not afford to reduce the prices already working on low margins and are busy to find a dependable niche in the market. The motorcycle market, price-driven as it is, still respects the Japanese products which are seen as technologically superior than the Chinese counterparts.
The much calculated decision by Honda to cut the prices of its products would cost the company over one billion rupees in lost revenue this fiscal. Honda sold over 120,000 units of its CD 70 and CG 125 models in fiscal 2002-2003. Honda's 70cc model contributes around 70 per cent to its overall sales while its 125cc model contributes the remaining 30 per cent. Honda slash the prices of its 70cc model by Rs 10,500 and 125cc model by Rs 5,000 in July this year, the first month of the fiscal and yet the financial results of the company for the first quarter shows increased sales and profitability.
IMPORT OF CBU FORM
As stated earlier, the import of two-wheelers in CBU form is subjected to 90 per cent import duty, the total impact of which along with sales and withholding tax adds up to an otherwise discouraging 140 per cent. And yet these imported two-wheelers despite subjected to such high duties and levies are affectively competing with their locally assembled counterparts just about Rs 3,500-5,000 more than the locally assembled counterpart and competitively priced against with the traditional products. Chinese two-wheelers deserve the credit for igniting a competition by offering people a choice in product as well as price thereby bringing in a real competition for the benefit of people in country reeling from a low annual per capital income of $ 400 or around.
The duties and taxes at the landed stage adds up to around 140 per cent and yet the completely-built Chinese motorcycles are competitively priced to compete not only with locally produced counterparts, both Japanese and Chinese.
The retail price of completely-built-up Chinese motorcycles is only marginally more than their locally produced counterpart by an average Rs 5,000 at the max in some cases and at par in other. The price of 70cc bikes imported from China retails between Rs 39,000 to Rs 43,000 compared to locally produced counterparts whose prices range between Rs 44,000 to Rs 49,000. The prices of around 6 brands of 125cc two-wheelers imported into the country in the finished form run between Rs 56,000-72,000, that of over 6 brands of 150cc ranges between Rs 70,000-85,000 while two models of 250cc are retailing for around 104,000. This highlights the mergence of competition in types of motorcycles both in term of price as well as models to suit various purse size and taste.
The availability of increased numbers of locally-produced and imported two-wheelers have not provided buyers with choice but has also pushed sales for the benefit of all those associated with the trade. Just a year ago, retail outlets at the Akbar Road used to sell just 600 units a month. Today some 4,000 units are sold each month and the figure is expected to cross 6,000 units soon. The market has not witnessed such sales activity for around a decade when Karachi used to be the biggest two-wheeler market in the country.
Despite the expectations that total sales at the Akbar Road would cross 6,000 units soon, Karachi still lags far behind Lahore, which houses half the Karachi's population, with much higher sales of 9,000 units. In fact, despite an otherwise welcome in sales the expected increase in its volume would match sales figures twenty years ago despite substantial population growth.
The competition has also transformed the Akbar Road in another way — there are more new two-wheeler today although there has no change in the number of dealers. Two years ago, there were a total of around 125 dealers at the market around 100 of whom were engaged in buying and selling of used motorcycles due mainly to high volume of trade in used two-wheelers. Today, the ratio has been reversed due to availability of locally-produced and imported products and buyers' willingness to buy new bikes which are comparatively affordable. At present, 70 of the 125 outlets are engaged in new bike business and around 50 are engaged in buying and selling of used ones.