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
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
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
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?
THEFTS & SNATCHINGS
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
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)
Automobile Manufacturers Association (PAMA)