Growing competition has forced the traditional Japanese producers to announce substantial reduction in the retail prices of two wheelers


Aug 04 - 10, 2003



The availability of comparatively affordable Chinese two-wheelers, both locally produced and imported, has completely changed the face of the motorcycle market in Karachi, and for that matter across the country, for the benefits of the buyers. The heating up of the competition in a market not too long ago dominated by three traditional manufacturers of Japanese brands Yamaha, Suzuki and particularly Honda which enjoyed around 70 per cent of the market share has changed the market in many ways for the benefits of the buyers. It has provided choice to the transport-starved middle-income segment of the society, both in terms of price as well as variety.

One of the most significant benefit that the growing competition has offered is that it has forced the traditional Japanese producers to announce substantial reduction in the retail prices of two wheelers. For instance, Honda slashed the prices of its 125cc model by Rs 5,000 to Rs 73,000 and that of its best selling 70cc model by Rs 10,500 to Rs 58,000. The reduction is all the more prominent as local assemblers conveniently remained silent to reduce the prices despite erosion of the value of the dollar during last 20 months.

Just how the competition has changed the face of the market is evident from the following facts. A total of seven locally produced Chinese two-wheelers are available in the market in addition to around two dozen counterparts imported from the same origin. Just five years ago the customers had no choice but to buy one of the three traditional Japanese brands produced locally.

The prices of seven Chinese motorcycles produced locally Star, Hero, Pak Hero, Super Star, Sohrab, Qingqi and Metro range from Rs 39,000 to Rs 44,000. In addition around 10 brands of 70cc, 6 brands each of 125cc and 150cc and two brands of 250cc counterparts imported from China are also available at Akbar Road, the biggest sales market of both new and used motorcycles in the city. The imported 70cc two-wheelers are retailing for around Rs 5,000 over their local counterparts due primary to higher duties and taxes. In addition, three other manufacturers namely Guangta, United and Excel are waiting to get a license from the Engineering Development Board of the Ministry of Industries and Production to commence production of 70cc motorcycles.

Chinese products have been successful to take away over 25 per cent share of the two-wheeler in a market influenced heavily by prices by bringing a much needed competition which was not there just five years ago. The constantly price increases resorted to traditional producers and the absence of genuine competition pushed the prices of two-wheelers to unaffordable levels a long time ago. While observers say that the move by the local manufacturers to slash the prices of their products was primarily aimed to counter the growing competition, it was a calculated move to give a shock treatment to the local producers and importers of Chinese bikes because duties and taxes on the import of Completely Built-Up (CBU) and Completely Knock-Down (CKD) units are aimed at providing protecting to the local producers. The producers and importers of Chinese motorcycles are already working on small margins of profits and thus would be unable to compete with the traditional producers if they decide to reduce the prices of their products any further. "Unlike the traditional producers the manufacturers and importers of Chinese two-wheelers just don't have the margin to reduce the prices any further because import duty and taxes on the CKDs and CBUs are just too high."


The import of CKD kits is subjected to 30 per cent duty, 15 per cent adjustable general sales tax and no withholding tax if imported by a licensed producer, including the 3 traditional Japanese as well as 7 Chinese producers presently. While the duty and taxes on the import of CKDs for both the traditional and new producers are the same what can explain the higher prices of the two-wheelers producer by the former even after the price reductions last month?

Observers say that the local producers of traditional brands enjoy the trust of the buyers driven mainly by technological superiority that Japan enjoys over China. In addition, the Japanese products have been able to gain the trust of the buyers since the import of two-wheelers was banned and simultaneously was initiated twenty years ago. On the other hand, the reason the Chinese two-wheelers were able capture a niche of the market primarily due to the fact that they offered an affordable choice to the buyers in market where the prices of the products of three traditional Japanese producers were long went out of the reach of the middle and low-income segments of the society over the last decade.

That can explain the reason for the thriving sales of Honda after it announced to cut the prices of its products substantially last month. The strategy was aimed at forcing the non-traditional producers as well as importers of the Chinese motorcycles to show their cards in market which despite heavily driven by price still prefers Japanese products over Chinese ones.

But what could explain the sudden decision by Honda to cut the prices of its products so drastically to kiss goodbye to revenues which according to crude estimates adds up to over Rs 850 million a year. Honda sold over 108 units of its 70cc and 125cc models in fiscal 2001-2002 and expects to better it for the year ended June 30 this year. Honda's 70cc model makes up around 70 per cent while its 125cc model contributes 30 per cent of its total sales. Beginning last month Honda announced to slash the prices of its 70cc model by Rs 10,500 and 125cc model by Rs 5,000. The price reductions on both its models would be around Rs 850 million during the current fiscal ended June 30 next year based on assumption that it manages to sell just 100,000 units 70,000 units of 70cc and 30,000 units of 125cc. The actual loss of revenue to the producer would be much bigger as the calculation is based on just 100,000 units.



The decision to absorb such heavy revenue loss poses many important questions. Were the prices all along were on the high side? Otherwise how could one expects a producer to absorb such enormous revenue loss. Secondly, and more importantly, are the prices still on the high side to offer profitability to the producer since no one can afford to sell a product at a loss. Thirdly, and as importantly, is there a margin to cut the prices anymore to make the competition run for its money?


The import of motorcycles from China in the CBU form is subjected to 90 per cent duty, 15 per cent general sales tax which is adjustable and 6 per cent withholding tax. 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.

As mentioned earlier, the price of completely built-up Chinese motorcycles is only marginally more than their locally produced counterpart by an average Rs 5,000 at the maximum in some cases and at par in other. Sources told PAGE that over 10 models of 70cc bikes imported from China retails between Rs 41,000 to Rs 44,000 compared to locally produced counterparts whose prices range between Rs 39,000 to Rs 44,000. 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 retaining for around 104,000. That illustrates the choice that buyers have in term of price as well as models to suit various purse size and taste.


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 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 2,500 units are sold a month and the figure is expected to cross 3,000 units in August. 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 3,000 units this month, Karachi is still lagging far behind Lahore, which houses half the Karachi's population, with much higher sales of 4,000 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.

The entrance of Chinese two-wheelers in the market has instilled a healthy competition for the benefit of the buyers. An equitable valuation system can help bring down the prices even lower to provide people with the most affordable choice.