AUTO INDUSTRY: TREMENDOUS GROWTH
Since 2001-02 the automobile market is growing up rapidly by over 40 percent per annum
FROM: SHAMIM AHMED RIZVI, ISLAMABAD
Apr 10 - 16, 2006
The automobile industry in Pakistan has witnessed tremendous growth during the last few years. It applies to all sectors including motor cars, buses and trucks as well as motor cycles. The growth in car manufacturing, however, has been more spectacular where production rose to almost 200,000 units by end 2005 from about 40,000 in the year 2002.
Since 2001-02 the automobile market is growing up rapidly by over 40 percent per annum and if an average annual growth of 30 percent per annum is maintained, Pakistan's market will cross the milestone of 500,000 units by the year 2010. Long-term investment friendly policies of the government and up-gradation of production facilities are considered as pre-requisite by experts for achieving the automobile vision 2010 of 500,000 units.
INVESTMENT PLANS IN AUTO SECTOR
Indus Motor Co
New Assemblers & Vendors
( $ 307 M)
HINO PAK (Trucks & Buses)
( $ 25 M)
( Approx $ 332 M)
The increase looks all the more impressive given the fact that the car leasing finance, believed to have boosted the demand, has lost some of its attractiveness. Over the last one-year the leasing companies' interest rates have risen from around 8 percent to nearly 13 percent, which should have acted as a dampener on the sales activity. But it has not, and as the sales figures indicate, people continue to buy, preferring local cars to imported ones. The imported vehicles, though they may have the same labels as the locally assembled ones, are not exactly of the same type. Which means spare parts for these vehicles are either difficult to find, or are much too expensive. Also, the facility of company-trained experts is unavailable to do repair work. Hence, people have continued to go for the locally assembled vehicles.
This tremendous growth, has, however, not translated into the easing of the buyers' travails. They still have to wait, after the full payment of the price, for several months for the delivery of the purchase, unless of course, they are willing or able, to pay extra money, called 'on', to the car dealers. Thus the vehicles, which are already, much overpriced as compared to most other countries due to heavy taxation, become even pricier for the buyers, including those interested in small utility cars.
In view of the rising gap in supply and demand and with a view to lessen the hardship being faced by the tail-end buyers or users the government allowed import of new and used cars at a reduced rate of duty. Recently the government has allowed overseas Pakistanis to gift cars to their brothers and sisters under gift baggage or transfer of Residence scheme. The local car industry is protesting against this decision of the government without any suggestion to meet the gap between supply and demand and reduce the period of 'waiting for the turn' by their purchasers.
At a recent presentation to Engineering Development Board the representatives of the auto industry complained that the industry was quickly losing its market share to imported cars. They expressed apprehension that continuation of the current policy of liberal imports might block investment in this key sector, affecting its future expansion plans.
The industry in its presentation informed the Engineering Development Board (EDB) that 2005 had witnessed unprecedented increase in import of cars, and if the trend continued in the coming days it would hurt the local industry very seriously. The representatives of the industry held 'low tariff' as an attraction for buying imported cars, in particular the used ones. They informed the EDB that Pakistan has spent a sizable amount of 2.231 billion dollars on the import of motor vehicles since FY-04. The country imported 653 million dollars worth motor vehicles in 2003-04, 972 million dollars in 2004-05 and further imported 660 million dollars vehicles in five months of 2005-06. The current trend of vehicles import of road motor vehicles would surpass one billion dollars mainly because of liberalization of import policy.
Since last financial year the import of four wheelers has increased substantially mainly because of tariff reduction and relaxation on the import of luxury cars under the 'Gift, Transfer of Resident and Baggage' schemes for the overseas countrymen. In the current budget, the government has further relaxed these schemes, allowing expatriates to gift cars to their relatives and friends and this strategy is aimed at meeting growing demand of cars, control black marketing of brand new four wheelers.
However, despite the import of over two billion dollars worth motor vehicles in last two and a half years, there seems no relief in black marketing of cars as the dealers continue to charge premium on immediate delivery of four wheelers. The details of imported cars show that customs cleared over 23,000 cars in 2005. This included both new and old cars. The customs report indicated that over 13,000 used and around 10,000 new cars were imported into the country in 2005. The models and makes of imported cars cover a large range of varieties Honda, Toyota, Mercedes and Land Cruisers were among the firs choice of the importers.
Buying of a car has become a terrible hardship for most Pakistanis in the last few years. They have to deposit the full price of a car in advance with the designated showrooms and join a long queue for a long period or pay a handsome amount, known as premium, to the dealers over and above the factory price for ready delivery. This is not all. Most of the dealers prefer to sell cars through leases offered by various financial institutions, and it is up to them to decide whether to opt for this route or not. The government is sandwiched between the demand of car buyers to allow liberal import of new and reconditioned cars to ease their difficulties and the desire of local venders and assemblers to protect their investment and facilitate their expansion plans and encourage growth of local industry and job promotion. In the current year's budget, import duty on cars was slashed to reduce the demand supply gap and alleviate the difficulties of customers but imported cars have only been able to cause a small dent in the premiums of top of the line locally produced cars.
According to a survey by a leading auto loan-providing bank, premiums on locally assembled cars still continue to be in the range of Rs. 20,000 to Rs. 200,000 depending on the model of the car and its demand at a particular point of time. Of late, however, the premium on cars costing above Rs. 900,000 is reported to have been largely eroded while the premiums on cheaper brands, which are preferred by ordinary consumers, have not declined. At present the delivery period also continues to range between two months and six months depending on the model in demand. The consumer's preference for a particular color and a surge in demand for diesel and CNG engine vehicles - due to price difference between petrol and other fuel are said to be the major reason for the persistent gap in supply and demand. Failure of tax authorities to nab the so-called "investors" - who are not on the radar of the authorities, seems to sustain the premium levels.
Some analysts feel that about 30 percent rise in production with the expansion due to be completed next year, would mitigate the menace of premiums. Aggressive auto financing by various banks obviously has played a major role in escalating the demand in this sector. In fact, almost 65 percent of cars in Pakistan are sold through different leasing schemes offered by financial institutions. At the end of June 2005, total auto financing amounted to Rs. 66 billion or 32 percent of total consumers loans of Rs. 206 billion advanced by banks. During the past two years or so, the growth in auto loans has been tremendous. It was expected that car sales would decline with the rise in interest rates, but has not happened thus far and the auto financing activity continue to be brisk as before. While the interest rates haven't had any major impact on auto demand, car assembles have benefited from the rise in interest rates due to their holding of huge cash balances deposited by the prospective car buyers and the 'investors' with them.
The government has to perform a balancing act between the need to generate local employment and consumer's demand for early delivery at the lowest cost of cars. An equally important task is to check the growth in the oil bill and expand the road network, which is totally choked in cities and prospering towns. Another aspect, which the State Bank must look into, is the sudden raising of monthly installments on existing leases by some banks. Legally, the fine print in the contract may permit it. But it puts an unreasonable burden on the family budget. In the past, SBP had asked them to keep safe cushion. However, competing to outperform each other some banks may not have complied with the instruction. Banks can raise the mark up on new leases but must refrain from jacking them on existing leases.