Financing of auto products substantially increased the demand for personal and commercial use of vehicles in the country

Sep 12 - 18, 2005

Auto sector was passing through severe crises before 1999 due to low demand & resultantly non-performing at optimum capacity. Though there was an ample potential available in the market for financing auto products but the presence of a few financial institutions were not enough to feed the market.

Usually there are two principles behind the concept of financing arrangement, when a person/business does not have enough cash outlay for an outright purchase but future cash flows allow to meet subsequent obligations or when cash flow saving is the objective instead of cash outlay.

City Bank was the pioneer in consumer banking but due to their conventional financing approach, only a little market was explored. Though various leasing companies were also in the market but a major change had been observed when Askari Leasing started its auto financing product "asKar" in 1999 with relatively aggressive approach from its competitors already in the market. asKar was introduced as non conventional weapon tailored for semi documented & non documented segment in the market. Idea was rightly conceived & it received tremendous response from the market. Success of the product also opened a new window for other players in the market. In the era of 2002-2004, consumer financing especially auto financing was talk of the town.

Entrance of new players in the market not only created an atmosphere of competition but also equally benefited the borrowers. As a result financing of auto products substantially increased the demand for personal and commercial use of vehicles in the country. Local auto manufacturing plants not only achieved their optimum capacity but also made various expansions and replacements to meet the growing demand of the industry. Another factor that further added to this trend was lowering of interest rate by the government in 2004 which further increased direct and indirect flow of the market towards auto products in the country. Auto sector in Pakistan has marked tremendous growth during the past few years & this growth is a legitimacy of aggressive public demand for auto products in the country.

GDP contribution of the sector has been visibly improved. All these favorable trends also contributed a lot for allied industry and as a result demand of fuel/CNG, spare parts, skilled labor, workshops, and auto insurance has been reasonably increased. Similarly, respectable revenue has also been generated for the government in shape of sales tax, registration & route permit fees.

Suzuki & Toyota both brands grabbed major market share, especially Suzuki Mehran came up as hot selling brand in the light vehicle category. Cars belonging to Honda family also attracted their selective market and made respectable profits. Besides these local brands, some imported personal use brands i.e. Mitsubishi Lancer, Chevorlet, used Mercedez & Land Cruisers were also slightly absorbed in the market. In commercial use category, branded vehicles of Hino, Nissan & Sind Engineering were hotly demanded by the market whereas used imported chassis of Hino & Nissan were slightly absorbed in the market. Local new entrants in commercial fleet "Zabardast" of Adam Motors & Star Truck of Delta Innovations also attracted & showed their presence in the market.

Presently, auto financing has become a regular feature for almost every financial institution, besides their other conventional arms. These banks/NBFIs are playing a vital role by providing financial facilities for the purchase of personal and commercial use assets to their borrowers. More realistically, if it is said that the financial institutions revived this sick industry, it will not be wrong. No doubt due to all these positive signs an economic activity in the country has been started for some past years, but it seems that the entrance of financial institutions and to some extent speculators (person who is not a real purchaser of a product) have put this sector to an abnormal growth whereby many questions arise in mind with respect to the future of this sector in the light of following:

1. Is our local auto sector capable enough to meet the prevailing demand in the market with an affordable price for a common purchaser?

2. Is the quality of the vehicle produced up to mark in growing demand scenario?

3. Does our infrastructure allow such large volume of vehicles?

4. Do financial institutions need market segmentation & differentiation of product for their profitability & continuous support for the sector?

5. How can speculation be eliminated from this sector to eradicate artificial shortage.

As far as first question is concerned, no doubt speculative buying and change of trend both lead any product to an abnormal growth until enough supply is not provided to end the situation. Low interest rate regime served as incentive for automobile products & auto financing emerged as a new trend in the market which visibly increased the demand of auto products in the country. Though our local manufacturers were not fully ready to face the situation in the past but after passing 3 to 4 years it seems we are still on the same road where we started. No sincere efforts by the government and private auto sector to resolve this situation led to price hike & many other issues. Extra ordinary delay in delivery time for a new vehicle with 100 % up front payment has created another bad element i.e. premium money (an additional amount asked for ready delivery with respect to vehicle demand and its marketability).

It has been observed that most of the local auto manufacturers are taking 06 to 08 months & in some cases around 10 months for delivery of their new vehicles with 100% upfront payment. For example if we take the delivery schedule of Suzuki Mehran VX CNG by Pak Suzuki Motor Co.Ltd. we see the vehicle's ex-factory price is Rs. 345,000/- whereas it is available with a dealer at a price of Rs. 415,000/- or more for instant delivery, which clearly shows that the manufacturer capacity is not enough to produce a vehicle in a justified time to avoid bad elements like premium from the market. This behaviour can be observed with all brands in the market, difference is the premium with respect to marketability & delivery time of a brand. In the case of Corolla an additional amount of more than Rs. 150,000 is demanded by the dealers for prompt delivery of a vehicle.

Present delivery time by the local manufacturers is totally unjustified and allows bad elements like premium in the market. After 100% payment and delivery of the asset with this timeframe is totally unjustified, immoral and against the basic consumer rights. All these facts are good enough to prove that manufacturing capacity of our local vendors is not matching with the growing auto demand in the country. Similarly, now a days a new practice has emerged that dealers are not taking out right bookings or asking black money of Rs.20 to 30 thousands reasoning short of the quota or closing of booking by the manufacturer. As per law of demand low manufacturing capacity with aggressive demand lead to over pricing, which throws out a large segment of common purchasers from the market & their dream of a car cannot come true till the time situation changes or some other alternative comes.

It is also important to mention here that in our neighboring country Suzuki Mehran is being manufactured at around Rs.150,000, which is a big question mark for all relative quarters in the government. Current trade policy signal for foreign imports in the country is the one step to end this issue but efforts should be made for more auto plants in the country, which will result an economic activity and reduce severity of unemployment in the county as well. Financing of auto products has become a permanent feature in the market, which demands more plants in the country instead of imports to save the country's foreign reserves.

As far as second question is concerned, quality of a vehicle with respect to its performance and material used is another question mark with some vendors who are frequently changing their prices with reasoning some external factors but totally ignoring value of the money return to their customers. If we compare an old model of a specific vehicle with its present version, this can be easily proved that some vendors are producing only quantity to avail maximum benefit of the situation ignoring what they are delivering to their customers.

As far as third question is concerned our infrastructure is not fully supporting present volume of vehicles in the country and there is an immediate need for more roads & expansions of existing roads especially in populated cities. Increase in auto products result heavy traffic and increase in traveling time. Non awareness of basic traffic rules & irresponsible attitude of traffic authorities both lead to another mess. Development of existing infrastructure is the one solution, whereas ban on older vehicles more than five years is another option to end severity of the issue.

Regarding fourth question, I think yes because auto financing is now facing regurgitate scenario & financial institutions need to rework their long tem strategies with respect to their market share and consistent growth. Non availability of lending products of banks & especially leasing companies in rural areas adversely affects the market potential there in shape of ex-Pakistanis, agriculturists & farm owners, that can be explored more effectively with the presence of such products there. Similarly, there is an immediate need for product differentiation exclusively catering to business executives, corporate employees, owners of SMEs & financing of light commercial use assets to fresh & small earning segments of society on relatively soft terms.

As far as fifth question is concerned, speculation can only be eliminated from the market by providing enough supply of the vehicles as per demand because we have already seen the results of fresh bookings on national tax number basis. Another way to remove these elements from the market is awareness of society, which should not be expected at least 50 years or more in our prevailing situation.