The pros and cons of automobile imports
There is a need to produce affordable cars for the domestic market and earn forex through exports.
By Syed M. Aslam
July 19 - 25, 1999
Auto sales not only reflect the basic human desire for mobility but also is an indicator of the prosperity of an economy. The car-person ratio is used as an indicator of the economic prosperity of any nation.
One in 205 persons owns a car in Pakistan as compared to 40 persons in Asia, 4 persons in Europe and 3 persons in North America. The ratio of those who can afford to buy a new car is much lower one person in 2,900. The analysis is based on a population of 131.5 million, car population of 638,800 and the car production volume of 44,000 units in 1997-98.
The car industry in Pakistan primarily comprises of three major assemblers, all of them Japanese Suzuki, Toyota and Honda. Suzuki produces 13 variants of cars, pick-ups, vans and jeeps with engine power ranging from 800 cc to 1,300 cc. Toyotas product range comprises of eight Corolla car and five Hilux trucks. Honda production range includes variants of Civic and City model cars.
Suzuki has an annual production capacity of 50,000 units in two shifts followed by Toyota with 20,000 units and Honda with 5,000 units in single shift. In 1997-98 Suzuki produced a total of 31,302 units, Toyota produced 7,874 units and Honda produced 4,070 units. Suzuki was able to utilize over 62 per cent of its production capacity, Toyota 39 per cent while Honda was able to utilize only 86 per cent of its total capacity. Ghandhara Nissan Limited which finished its first full year of local assembly of Nissan Sunny 1400 cc and 2000 cc cars in 1997-98, produced 874 units against an installed capacity of 6,000 units.
As individual capacity-utilization of the three major car assemblers differs, their collective under-utilization stood as high as 42.5 per cent. Does this imply that new car market in Pakistan has already reached a saturation point where it could absorb just 58 per cent of combined production capacity of 43,000 units per year? If it is true then what could explain the entrance of Rs 750 million Daihatsu project to produce 850 cc Cuore cars next year. The plant will have a capacity to produce 10,000 units annually. In addition, the Dewan Farooque Motors announced earlier this year to assemble Hyundai Santro 1000 cc cars and Shehzore light truck.
Observers say that the car market in Pakistan is a price-oriented market like markets in other developing countries, and the sharp price increases during the last five years have discouraged sales of new cars. This is evident from the activity in the used car market which, according to the chairman of All Pakistan Motor Dealers Association, H.M. Shahzad, sells over 60,000 units annually including 20,000 used cars in Karachi.
Presently, importing a new car with engine capacity ranging from 800cc to 4200cc, is subjected to a duty in between from $5,000 to $175,000. However, cars over 30 months old enjoy a rebate of 30 per cent. The measure is aimed at discouraging imports of both new and used cars by making them highly expensive.
In 1994, the then government withdrew the facility, which was offered to overseas Pakistanis to bring a car under the Personal Baggage and Gift Schemes. (The facility of bringing a car under Transfer of Residence Scheme however, remains unchanged.) Since then the prices of locally assembled cars have increased sharply. For instance prices of 800 cc Suzuki Mehran Standard has gone up from Rs 160,000 in February 1994 to Rs 293,000 at present, showing a 160 per cent increase. Similarly, the price of 1000 cc Suzuki Khyber air-condition has increased by 108 per cent from Rs 209,000 to Rs 434,000 during the same period. Prices of all Honda and Toyota variants also depict a substantial increase during the same period.
Suzuki commenced commercial operations in January 1984, Toyota in May 1993 and Honda in July 1994. Till September 1992 Suzuki was a public company when it was privatized and placed under the Japanese management. Today 79 per cent shares of Suzuki are held by foreign investors. Foreign investors also hold the majority shares in Honda and Toyota; 51.85 per cent and 61.23 per cent respectively.
Sixty-five per cent of the new passenger car market in Pakistan is dominated by small 800-1300 cc segment, the demand of which is met solely by Suzuki at present. Suzuki enjoys a virtual monopoly in this particular comparatively lower-priced car segment at present. Will the production of a competitive 850 cc Daihatsu Cuore help lower prices in this car segment? We have to wait and see when Cuore starts rolling off next year.
The absence of competition in the small car market allows Suzuki to increase the prices at will at the inconvenience of middle-income segment which is the primary market of its product. As mentioned above, the prices have increased drastically making it difficult for the majority of potential Suzuki buyers to buy a new car. While Suzuki keeps on improving its financial performance from an operating loss of Rs 119 million in 1993 to an operating profit of Rs 358 million in 1998 even when its sales volume has declined from 34,714 units to 32,601 during the same period as it used only 62 per cent of its production capacity in 1998. Observers say that drastic price increases during the last five years is the major reason for the profits of the company.
Suzuki has increased prices five times since April 1998, Honda six times since June 1998 and Toyota six times since July 1998.
Since 1994, the price of the standard Honda model Civic EX 1500 cc has increased from Rs 647,000 to Rs 850,000 depicting a 31 per cent increase. Similarly, price of Toyota Corolla 1600 cc GLi has increased by 34 per cent to Rs 999,000 since February 1995.
The increasing price trend in addition to a sluggish economy and a declining purchasing power are the major factors blamed for the slowdown of automobile sales in the country. It also had its impact on the secondary 'used car market' as any increase in new cars also results in prices of used cars. About five years ago a five-year used Mehran car could be had for under Rs 100,000. Today with the increase in car (new) prices the same is available for not less than Rs 150,000.
It is obvious that the used car market is directly related to the prices of new cars. It does not only hurt the sales of new cars but also discourages purchase by those who want to replace the older models with the new ones.
On their part the automobile producers blame the constant devaluation of local currency, the uncertain Rupee-Yen parity, increasing costs of production and the absence of economy of scale to benefit from the purchase of parts and raw materials needed in bulk quantity and at concessionry rates to reduce the prices. They also cite internal policies, discouraging the sales, resulting in massive under-utilization of capacity in the automobile industry.
But the half-yearly accounts of the three major auto producers for the period ended December 31, 1998 shows an overall strong financial performance in spite of the economic sanctions imposed on the country to use its nuclear option in May last year. The results show that despite 17 per cent decrease in net sales Honda bettered its operating profit by 28 per cent to Rs 78 million as compared to Rs 61 million in the corresponding period previous year.
Suzukis net sales improved by 13 per cent from Rs 4.003 billion to Rs 4.53 billion while its operating profit increased by 7 per cent from Rs 222.4 million to Rs 237.5 million.
Similarly, Toyotas net sales increased by 55 per cent from Rs 2.056 billion to Rs 3.199 billion while its operating profit depicted an increase of 170 per cent from Rs 104 million to Rs 280.8 million for half year ended December 31, 1998 over the corresponding period.
The low car-person ratio in Pakistan offers a huge potential for automobile sales in Pakistan. The declining purchasing power and the increasing auto prices, however, seem to render neutralize this potential which is evident from the massive capacity under-utilization. The producers blame it on the inconsistent policy resulting in more than 25 policy and tariff changes related to the industry. They say that their request for a long-term policy for a duration of at least five years to attract the additional investment, particularly in the auto industry, remains unconsidered by the government.
They also claim that over one-fourth of the sticker price of any locally produced car comprises of taxes and revenues to the government.
Thefts and snatchings
Car is the second biggest investment that a person makes after house. The drastic increase in auto thefts/snatchings is also blamed as one of the factors discouraging the sales of new cars in the urban areas, particularly Karachi. On any given day over 20 cars are being stolen/snatched in Karachi, majority of them latest or less than two-year-old. The rampant thefts/snatchings have forced many affluent to adopt a forced austerity not to replace their cars with new ones to decrease chances to lose their newer cars at the cost of producers.
However, the local car producers are benefiting from leasing schemes promoted by a number of leasing companies. Askar leasing has financed the leasing of over 670 new locally assembled cars majority of them 800-1000cc Suzuki cars since the initiation of the scheme in February this year. The company charges an interest rate of 13.5 per cent per annum to finance the car leasing, the down-payment for which depends on time schedule for payment like 30 per cent equity for three-year payment plan; 35 per cent for four years and 40 per cent for five years.
Pilcorp financing is available with as low as 10 per cent down-payment over a minimum 36 months or maximum 48. It charges 13 per cent interest per annum and unlike Askar which allows the leasee to buy own comprehensive car insurance at convenience. The Citibank also finances car leasing at 25 per cent equity.
The car leasing schemes can help boost the car sales by making it possible for a segment of salaried-class which can now afford to buy a new car at the benefit of the producers. Just what kind of impact it would have on the car sales yet remains to be seen.
One of the major objectives of providing protection to the local automobile industry was to help encourage localization. The objective yet remains to be utilized as the automobile industry of Pakistan is still heavily dependent of imported Completely Knock-Down (CKD) kits. Almost all of them are also allowed concessionary Completely Built-Up (CBU) imports to supplement an urgent order.
Suzuki, the market leader, has achieved an overall deletion level of over 60 per cent in 800 cc cars while Honda and Toyota claim to have achieved a deletion level of 38 per cent. The industry has to achieve a 50 per cent deletion by the year 2001. It is imperative to increase the deletion level as the raw material for manufacturing auto parts and components are not available in the country and any currency devaluation increases the price of manufacturing the parts locally. Auto industry not only creates jobs but also has saved millions of rupees in imports.
Today there are some 600 auto vendors in the organized sector and another 400 in the unorganized one. Some 400 vending units supply the parts to the local auto industry. By the end of last year, Honda had 54 vendors supplying over 673 locally manufactured parts. Suzuki had over 200 active vendors while Toyota had over 70 vendors.
The localization is not only highly capital intensive but is also seen as economically unviable due to insufficient production volumes as the vendor industry is operating at just 30 per cent of its capacity due to low production volumes.
Setting an auto vending industry is capital investment as acquiring land, building, machinery and equipment is just the beginning of the job. It takes between 6 to 18 months to just develop auto parts. The molds and dyes are expensive and as the demand for a particular part is only in thousands and return is long-term.
In addition, autopart manufacturing requires special grade materials. The small existing volumes make it impossible to buy these materials in reasonable volumes and especially under concessionary rates.
Furthermore, Pakistan has a Rs 30 billion market for auto spares of which only 20 per cent is served by the local manufacturers, 20 per cent is met by legal imports while the remaining 60 per cent of the demand is met by smuggled counterparts. The biggest portion of the market thus benefits the smugglers at the cost of the local manufacturers.
Today local auto vending industry is manufacturing a variety of plastic, sheet metal, assembly, casting and glass parts. These parts include shock absorbers, gaskets, engine valve, fuel filters, lights and switches, pistons, radiators, seats, batteries, car radio/cassette players, air-conditioners, axle, lights, nuts and bolts, air and oil filters, exhaust systems, etc., etc. The automobile industry is the single biggest consumer of locally made tyres as all vehicles assembled locally have to use local tyres. However, the under-utilization in the auto industry and the massive smuggling is taking a heavy toll on the vendor industry both in the primary market in the first case and after-sales market in the second.
Benefits of Protection
Today Pakistan produces a range of small- and medium-size cars, light commercial vehicles and trucks from 800 cc to 2000 cc. Suzuki, Toyota and Honda provide direct employment to over 1,600 people. The vendor and ancillary industry provides jobs to tens of thousands of others.
Daihatsu Cuore plant will become operational next year and the company plans to produce 10,000 units of 850 cc Cuore cars per annum to bring first ever competition in the small car market. The project will bring in an investment of Rs 75 million. Hyundai Motors of Korea has signed an agreement with the Dewan Farooq Motors to assemble Santro Plus 1000 cc cars and Shehzore trucks this year. The projects will help create not only direct employment but thousands of indirect employment in vending and ancillary industry and distribution network.
The automobile producers have contributed a substantial amount in duties and taxes to the government. In 1997-98, Honda contributed Rs 829 million to the exchequer in sales tax, income tax, customs duty and other charges which formed 30 per cent of its net sales. It has paid a total revenue of Rs 3.4 billion since it commenced operations in July 1994.
Suzuki contributed a revenue of Rs 2.57 billion in duties and taxes in 1997-98. It has contributed Rs 10.86 billion revenue in duties and taxes between 1993-94 to 1997-98.
Indus Motor contributed Rs 125 million in corporate tax in 1997-98 which totalled Rs 297 million since 1993-94 and much more in duties in taxes. Twenty-seven per cent of retail prices of each Toyota car and truck relates to the government revenue. Approximately Rs 200,000 per unit is contributed in the form of taxes and revenues.
The auto producers unanimously agree that the protection is vital for the industry. They argue that auto engineering is exempted from WTO operations and protection is imperative to encourage new investment.
In theory import of new, or for that matter used, automobiles are not banned into the country. In practice, however, high tariff of duties discourages the imports. While overseas Pakistanis have no problem to pay the duty strictly in dollar from July 1 they have to pay Rs 265,000 ($ 5000 at the current exchange rate) in duty alone to bring a new car upto 800 cc when a similar car is available for Rs 293,000 locally. The case of bringing a similar used car over two-and-half year old under the Transfer of Residence (TR) at 30 per cent rebate is in no way different as returning Pakistanis have to pay $ 3,500 or Rs 185,000 in duty alone.
H.M. Shahzad, the chairman of All Pakistan Motor Dealers Association, says that discouraging imports has benefitted the local auto industry immensely at the cost of buyers. The absence of competition and choice forces have created a virtual monopoly of the local producers to control the price and market any way they like, he added.
The assemblers have not honoured to fulfill two of the primary conditions for granting of manufacturing licences. Number one, they were required to raise their annual production by 20 per cent and following a deletion programme to cut the annual imports by 30 per cent per year.
Putting the annual car demand in the country at 80,000 units of which just a little more than half is met by the local producers, he said that a big portion of the remaining demand is met by the smuggled cars/vehicles which deprive the government of a sizable revenue.
The massive under-utilization of the production capacity seems to be the biggest problem of the local auto industry. The vending industry is also operating at only 30 per cent of its capacity. There seems to be a huge gap between demand and supply which is filled in part by used cars and in part by smuggled vehicles.
Meanwhile, the production costs have increased substantially due to a weak rupee, the drastic increase in power and gas tariff, increase in petroleum prices and absence of economy of scale which makes it hard for the vendors to buy the raw materials in bulk at concessionary rates.
The internal policies and external factors keep on playing havoc with the auto industry and yet more and more foreign investors have shown interest to establish a plant in the country. For the first time there will be a competition in the small car market when the first Cuore would be out next year.
The protection seems to have resulted in drastic increases in the prices of locally produced automobiles. In a price-oriented market like Pakistan many who wish cannot afford to buy a new locally assembled automobile. It has also hurt the sales in the secondary 'used cars' market. Any increase in the prices of new automobiles results in increasing the prices of used counterparts. A headway has yet to be made in exports.
It is true that auto industry cannot perform in vacuum. Like all other industries, it requires sound economic fundamentals to perform. It is imperative that the government and the producers should sit together to take comprehensive measures to improve capacity-utilization in the auto sector for the larger benefit of the buyers. The potential is enormous and the stakes are high but this could be done.
GLOBAL AND NATIONAL OUTLOOK
In 1997 the global passenger car production was recorded at 39 million as compared to 37 million in the previous year depicting an increase of over 5 per cent. The world fleet increased to 501 million from 486 million.
The US is the biggest car manufacturing country of the world contributing 23 per cent to the total global production followed by Japan at 20 per cent. Western and Eastern Europe contribute 34 per cent to the global car production while Asia region contributes 31 per cent. In Asia, Korea has developed its own auto industry, Thailand has been successful in attracting huge investment from foreign car manufacturers while Malaysia has developed an indigenous auto industry. India has also emerged as a major auto producer in Asia. The huge investment in Brazil by foreign car manufacturers is seen by many to make it the third biggest auto producer in the world.
The global passenger car population outnumbers commercial vehicles by 2.6 to 1 in 1996 the number of passenger car fleet stood at 486 million as compared to 185 million commercial vehicles.
North and Central America enjoy the car-person ratio in the world 1 car for every three persons followed by Europe with one car for every four persons. South America has one car for every fourteen persons, ratio in Asia is one car for every 40 and Africa one for every 68 persons.
There were 3.7 million vehicles of all types on-road in Pakistan in 1998 including 638,800 cars, 57,500 jeeps and 72,600 station wagons. There were 63,200 taxis. The car, jeep and station wagon population has increased from 527,800 in 1990 to 768,900 which depicts a 45 per cent increase.