Challenges ahead!



By Syed M. Aslam
June 23 - 29, 2003 





This has been an eventful year for the Pakistani auto industry. During the first 10 months of the current fiscal ended April, a record 48,664 cars were produced in the country and collective production volume is expected to touch an all time high of 65,000 units when the fiscal comes to a close this month. Except for tractors, the production of all other types of vehicles, including two-wheelers, has registered a substantial increase over the previous years.

The year is also marked by announcements made by the manufacturers to enhance their production capacity to keep up with the growing demand driven mainly by car financing schemes offered by numerous leasing companies and also by a number of commercial banks having liquidity like never before. Many of them has also announced to cut the prices, more symbolic than real, to pass off a portion of the benefits of the shedding of the value by the dollar.

Two of the three producers of Japanese cars Honda and Suzuki have announced to cut the prices by Rs 2,000 to Rs 17,500. Honda has announced to cut the prices of its City and Civic models by Rs 12,500 and Rs 17,500 respectively while Suzuki has announced to cut the prices of its Mehran Standard and Deluxes model by Rs 2,000 and Rs 3,000 respectively. On the other hand, Indus Motor Company, the assembler of Toyota Corolla and Daihatsu Cuore cars, has announced to reduce the booking price on its Corolla models from 100 per cent to Rs 100,000. The scheme would also be applicable to those who already booked a car on 100 per cent advance the company has announced to refund the balance over Rs 100,000. Indus has also announced to enhance its production capacity by 20 per cent from 1,500 units per month to 18,000 units per month.

The production of Suzuki cars has also been on a constant rise from 600 units a months two years ago to 1,000 units a month last year to 1,800 units a month during the current fiscal till March this year and touched 2,000 units in April.

The record production of cars and the growing demand augurs well for the automobile industry in particular and all other related industries, particularly engineering, in general. The auto industry already employs over 125,000 persons already either directly or indirectly. It is contributing revenues worth billions of rupees and offering substantial savings in import substitution.

However, the absence of the economies of scale is resulting in the transfer of technology at a much too slow a pace thereby leaving the industry heavily dependent on costly CKDs, parts and accessories particularly the expensive precision-engineered parts. According to an estimate, import of 50,000 CKDs alone costs the country around $ 225 million annually which translates into over Rs 13 billion at the current rate of exchange.

The critics of the local auto industry say that it has failed to fulfil its major promise of providing affordable cars to the buyers despite enjoying protection against imports. They also say the absence of genuine competition has resulted in monopolistic tendencies giving car producers to fix prices at will. For its part, the industry blame high taxes for the high prices of locally assembled four-wheelers saying that on an average as much as 30 per cent of the retail price of cars comprise governmental taxes, import duty, sales tax, corporate, CED, etc., etc. They also blame the rising cost of inputs for ever increasing production costs.

Despite the growing demand and enhancing of production capacities by individual car producers, the collective car production volume still remains below the level necessary to create economies of scale. This under-utilisation of the collective production capacity discourages the creation of the economies of scale necessary to help reduce the prices. Despite attempts by the government buyers still have to wait for a long time for delivery, in many cases way beyond the promised delivery period, even after making advance payment of 100 per cent. Low production volumes and under-utilisation of the production capacities discourages the creation of the economies of scale, which results in heavy dependence on imported CKDs, parts and accessories, spares and raw materials not only to burden the economy but also takes a heavy financial toll on the buyers.



The auto market of Pakistan still primarily remains a used car market, the prices of which is dictated by the prices of new cars. Increase in the prices of new cars mean increase in the prices of old cars. Over 4 old cars are traded for every new car sold in the country. The involuntary customer royalty in the absence of genuine competition affectively discouraged by high import duties 75 per cent on cars upto 1000cc, 100 per cent on cars between 1001-1500cc, 125 per cent on all vehicles above 1500cc has deprived the local producers of the much needed goodwill that the industry needs. In his Budget 2002-03 speech, Finance Minister Shaukat Aziz justified the reduction in import duty on cars and said that "duties on import of vehicles are extremely high and thus there is no competition ... the sense of lack of competition tempts the local manufacturers to be costly and less quality conscious thus jeopardising the legitimate interests of customers."

Shaukat Aziz who quit his post after October elections last year was later elected as a Senator and rejoined the cabinet once again as a finance minister to present the Budget 2003-04. This time around he announced to slash the import duty on 1801cc and above vehicles by 50 per cent to 150 per cent, bringing it at par with the duty on 1501-1800cc cars. Pakistan is not only primarily a used car market but is also mainly a small car market. The reduction of duty on 1801cc and above vehicles this time around would not benefit the majority of car buyers.


The growing demand for new cars unmatched by producers inability to meet it has resulted in rampant unscrupulous practises the most blatant display of which is the 'premium' a soft word for black-marketing charged by the dealers over and above the fixed retail price. Those willing to pay the 'premium', which runs in tens and even hundreds directly proportional to the fixed price of a vehicle, you can walk-away with a new car from the showroom instead of waiting for months for the delivery of a vehicle booked on 100 per cent cash. Ironically, the 'premium' on the small cars is more than that on the high-priced ones due mainly to the fact that the demand for smaller cars surpasses that of their expensive counterpart.

For instance, just a month ago the 'premium' on a small car retailing for Rs 299,000 was Rs 42,000 or 15 per cent of the fixed price. On the other hand, a 1,245,000 car was available at a 'premium' of Rs 80,000 or less than 7 per cent of the fixed price. The buyers of small cars are the worst victim of the unscrupulous practise because they form the single biggest group of the buyers in a market which tilts heavily in favour of small cars.

An indirect sufferer of this rampant unethical practise, which continue unabated despite measures taken by the government, are the buyers who booked their cars on 100 per cent cash basis. The inability of the producers to meet the growing demand and the ability of the dealers to make a killing has resulted in extending an already long delivery backlog. People have to wait for months beyond the prospective delivery date as dealers are more interested to sell the cars on 'premium' to walk-in buyers for reasons much too obvious.

Observers say that the four local assemblers, two of them producing more than one brand, are collective sitting on a stockpile of around 47,000 cars enough to keep them busy for next nine months. Meanwhile, they added, the producers keep on booking more orders to worsen an already bad situation. Would the producers able to honour their delivery commitments to tens of thousands of people who have booked their vehicles?


The substantial shedding of value by the dollar has not moved the local car producers to pass off any benefit to the people. Unlike their counterparts in China and India, who has slashed the prices of their products by 22-40 and 22 per cent respectively, the car producers in Pakistan has remained conveniently silent to pass off the benefit of the strong rupee to the buyers. Two of the three manufacturers of Japanese brands have cut the price only marginally while the third seems satisfied with announcements about enhancing the production capacity and making the bookings on reduced initial payment.

While the auto industry is accorded the extra-ordinary protection against imports, the interests of the buyers remain unprotected at large. The prices of cars have risen constantly over the years on the smallest surge in the value of the yen, or for that matter the dollar, though the weakening of it has not resulted in any meaningful price reduction. The least expensive car is priced at Rs 299,000 while the most expensive carries a price tag of Rs 1,245,000.

The expected record production this fiscal would not be able to satiate the demand which observers say runs between 90,000-100,000 units at present. The heating up of the competition in the car financing market backed by substantial reduction in mark-up rates, and the target market shifting from the affluent to middle-class segment of the society are expected to serve as a fuel for the new car market.

An already wide gap between supply and demand is feared to get even worse, particularly if the 'premium' practises remain unchecked by the authorities. An otherwise welcomed 20 per cent increase in the car production during the first ten months of this year over the comparative period last year would still fall short of the demand which stands at 90,000-10,000 new cars per year. The increase, however, is feared to fall short of the demand fueled mainly by availability of numerous leasing options and significant reduction in mark-up rates.

Price cuts, enhancing of production capacity and reduction of initial booking payment make a good symbolic gesture. However, the widening gap between supply and demand in a market where car financing has only recently started to trickle to the mainstream require strict regulations that centre around protecting the interests of the buyers. It is time to eradicate the 'premium' practises so that the thousands of car bookers would be saved from prolonged delays way beyond the tentative delivery periods.



With the WTO just around the corner, the local auto industry will be needing the goodwill of the people for a time when it would no longer be able to enjoy the protection against imports. This makes it all the more important for the industry to convert the 'involuntary loyalty' into a voluntary one, which would only come by establishing a relationship based on mutual trust.

The price cuts announced by one of the car manufacturers is less than that announced by the traditional producers of Japanese motorcycles not only in amount but also as percentage of the retail price.

Just how important is building of mutual trust is evident from the First Quarter Report of the State Bank of Pakistan for the year 2002-03. The central bank said that the manufacturers, instead of transferring the benefit of lower import costs to consumers, preferred to increase their margins. In fact, it added, that assemblers apparently failed to increase supply in response to rising demand. As a result, the time lag between the sale of a vehicle and its eventual delivery... increased from 3-6 months to over 8 months, since the beginning of CY02.

The SBP also expressed apprehensions at the booking practises on complete down payments saying that the amount of down payments made at the time of the booking was also raised from 25 percent to 100. Thus, car manufacturers, instead of borrowing from banks, were utilizing the advance payment to support financing for their operations. For instance,, if a 1000cc car at the rate of Rs 0.6 million is booked on 100 percent down payment with a six-month delivery period, a manufacturer would be saving approximately Rs 36,000 by financing production... Clearly, an increase in the sale-to-delivery time lag would result in additional gains (savings) for manufacturers, the report added.


Leasing, as stated above, has helped push car sales during the last couple of years. It is expected to play a greater role in the near future to contribute even bigger share in car sales which presently stands at over 40 per cent. Banks sitting on immense equities has found auto market a profitable credit market, so much so that the leasing companies now complain of absence of level playing field, and the mark-up rate on auto financing is expected to slide further to give a great boost to the local auto industry. The interest rates on auto financing have been cut by almost half in last one year alone to give a tremendous boost to the auto industry. The question is: would the auto industry be able to perform?


Increased incidents of car thefts and snatchings are also forcing many well-to-do buyers not to buy a new car, particularly in Karachi, the biggest market of automobiles of the country. On any given day around a dozen cars are either stolen or snatched on gunpoint in the city. The incidents have become much too routine and the insurance companies have time-and-again express concerns about declining breakeven margins.

The forced austerity translating into preference to buy used cars so as not to draw the attention of thieves and robbers is depriving the industry of substantial business. However, the industry itself busy to keep pace with the growing demand is oblivious of the sales thus lost.


Just a few years ago, PAGE highlighted the adverse impact of under utilization of the production capacity as one of the top problems of the Pakistani auto industry. The situation has changed for better to a point where the producers are unable to meet the growing demand announcing to enhance their production capacity by adding another shift this month. There has also been price cuts, nominal as is, and at least one of the producer has also announced to reduce the initial down-payment on the booking. Numerous leasing companies as well as banks now offer car financing schemes at mark-up which has come down drastically. A record production is expected this fiscal and yet it will still far below the demand for new cars which currently stands between 90,000-100,000 units per year. In addition, the new car market is expected to expand even further riding high on comparative lower interest rates on car financing amidst heating up of the competition.

Meanwhile, the WTO is just around the corner and there are already talks of imported cars retailing for way below the prices of local counterparts. The local auto industry will face many challenges once the WTO comes into affect on January 1, 2005. The days of protection for the local industry are nearing their end making it imperative for it to create a good-will to stir voluntary loyalty.












(Upto April '03)























































Source: Pakistan Automobile Manufacturers Association (PAMA)