Jan 14 - 20, 2008

During the recent past robust performance of automobile sector has kept share of the sector high in LSM, provided boost to financial institutions and insurance companies.

Lately, there has been a deceleration in the sales of cars but increase in the number of light commercial vehicles and motorcycles. Interestingly sales of less than and above 1000cc vehicles show divergent trend. However, one point is very clear that unless import of second cars is stopped completely the local assemblers cannot achieve the production target of 500,000 vehicles per annum.

Another interesting observation is that consumer preference is also changing. The buyers can be divided into two groups 1) buyers of less than 1000cc cars and 2) people having inclination towards buying cars of higher engine capacity. The key factor is that now almost all the models have factory fitted CNG kits but the rich go for those models, which can distinguish from masses.

The preference for smaller cars is large cities is due to a number of factors i.e. fuel economy, ease in parking and advantage of having multiple cars in the family. Auto financing provides the incentive of using the car and paying its cost over the years. Now one can acquire a new car under hire purchase agreement by virtually paying less than half the cost of a ten year old car of the equivalent capacity.

The persistent high demand for new cars was partly due to latent demand and partly due to affordable monthly installment. However, local assemblers have been forced to raise prices due to hike in steel prices and changing exchange parity.

Not only that the prices have been increased, hike in interest rates has resulted in higher monthly installments. On top of this rising inflation has effectively reduced the purchasing power of salaried people, said to be the major beneficiary of auto financing system. Auto sector analysts attribute slowdown in demand to a number of factors including increase in car prices despite some reduction in "on money" and rise of interest rates.

According to the financial sector experts, auto financing business is facing difficult time. Since most of the financing is on "Kibor plus" basis there has been an increase in delinquent loans. As provisioning is on the rise, the profitability of the financial institutions from this particular segment is on the decline forcing them to be more cautious in extending fresh credit. Though, these institutions have been "more than efficient" in confiscating the cars disposal of such vehicles remains the key issue.

Since most of the cars were sold under auto financing plan, hike in interest rates has become a serious impediment. On top of this the cautious approach being followed by the financial institutions has resulted in asking higher down payment and reducing period of financing. Most of the financial institutions have switched over 10% down payment with 5 year repayment plan to 20% down payment with three year repayment plan. This has resulted in deceleration in demand.

A contrary phenomenon observed is rise in demand of expensive/luxury cars. Analysts attribute this to huge influx of remittances and rise in undocumented income. They say that while the officially declared per capital income is still less than US$ 1000, certain segments of populations enjoy as high as US$ 20,000 per capital income. They say that during last ten years the breach between rich and poor has widened, rich are getting richer and middle class is being wiped out. The disparity among different income groups is become more conspicuous. While the roads are jammed by new cars, overloading in buses and mini buses has attained alarming level and becoming reason of fatal accidents.

The automobiles industry has witnessed a growth of only 5% during first quarter of the current financial year, compared with over 11% growth achieved in the same period last year. The first quarter growth is the lowest first quarter growth since 2002. The growth in the automobile industry is generally influenced by the growth in the production of cars and jeeps with nearly 65% weight in the sector. During July-September 2007 the production growth of cars and jeeps dropped to less than one percent compared with 12.7% during July-September 2006. Excluding cars and jeeps, growth in automobile sector accelerated to more than 17%, mainly contributed by rise in the production of motorcycles, LCVs and buses.

According to a research analyst it is interesting to note that despite monetary tightening, consumer financing for automobiles showed a recovery. The contradictory trends in the growth of car production and auto financing are a result of extension of auto financing for used and imported cars by some banks. In addition, increased premium on immediate delivery of some high capacity cars and the substantial imports of cars also indicate that domestic demand pressures remain strong.

Currently Pak Suzuki enjoys the largest production capacity in the country to produce 150,000 units in a year. The market share of Pak Suzuki in the passenger cars segment is also the highest followed by Indus Motors and Honda Atlas. Indus Motors is also planning to expand its capacity to 70,000 units by the middle of next year. Pak Suzuki has the most diversified range of products with products catering to different segments.

The way forward to save the automobile industry is to make it mandatory for the OEMs to export a minimum quantity of CBUs from Pakistan and export locally made components and accessories. This will help in expanding assembly capacity as well as bringing down cost of production and achieve ultimate objective of stopping import of secondhand cars completely.