CAR IMPORTS TAKE A TOLL ON DOMESTIC ECONOMY
SHABBIR H. KAZMI
Feb 28 - Mar 6, 2011
Until 2008 automobile sector was providing impetus to financial services sector. Leasing companies and other financial institutions were playing the lead role. Since acquiring the latest model and enjoying its ride needed just a small down payment and monthly rental, hundreds and thousands of people having regular supporting cash flow chose the option. Along with these, insurance companies were underwriting dozens of covers daily. The quantum of business encouraged leasing companies, banks and insurance companies to open their offices close to the auto dealers. All facilities i.e. cars, installation of tracking system, documentation for credit and insurance were available virtually 'under one roof'.
However, as the world witnessed the downturn, all the participants had to endure the fallout. With eroding purchasing power and hike in lending rates, sales declined, delinquencies shot up, financial institutions became more cautious in underwriting new business and contraction in business led to shrinking of the entire infrastructure.
Auto assemblers, which have doubled their capacities, didn't know how to keep the plants operating at optimum capacity utilization. The added problems were depreciating rupee, and rising prices of steel but opening up import of second hand cars proved 'last nail in the coffin'. Not only the country experienced huge erosion in foreign exchange reserves, but second hand automobiles of all sorts and brands parked in open looked like 'automobile garbage'. One could still see hundreds of vehicles rusting on both sides of Super Highway.
Government's decision to extend age limit of imported second hand vehicles has made many jittery. While dealers of second hand cars see opportunities to mint money and are also creating an illusion that this decision would add to tax collection, experts believe it would add to the woes of assemblers but survival of vendor industry is once again put at stake.
Over the last three years, vendor units are slowly going out of business due to lower demand for parts and accessories. On top of this, rampant smuggling of parts and accessories under the disguise of scrap has rendered hundreds of units bankrupt and thousands of employees jobless. Over the years, the situation has gone from bad to worse. Added to this has been growing import of CKD and SKD kits due to frequent change in models. A positive change was witnessed because overall look of the Chinese and Korean light commercial vehicles assembled in Pakistan has improved a lot.
The overall business of financial institutions/consumer finance has been hit due to low demand for auto financing and rising delinquencies. To begin with, repossessing of vehicles posed a serious problem but disposing off these vehicles was even a bigger predicament. One could see a large number of repossessed vehicles parked at the designated open plots and wearing out fast due to harsh climate of Karachi, high temperature and humid climate and very high dew during nights.
Insurance companies now face twin problems. As long as these vehicles were under hire/purchase agreement, acquiring mandatory insurance cover was yielding a regular inflow of premium but with the completion of the agreement, the renewal business has virtually dried up. The other problem is that those vehicles having more than three years tenor has become major source of claims, partly because of aging of the vehicles and partly because of decline in value. As such, many of the insurance companies are not keen in issuing cover for the car owned by individuals but are still maintaining relationship with the financial institutions still involved in leasing/auto finance through corporate deals.
Since a large portion of vehicles is sold under Ijarah arrangement (Islamic mode of financing), the auto insurance business is also diverted to Takaful operators from conventional insurance companies.
For those having limited cash at their disposal, buying a new car against full cash payment is becoming growingly difficult. Over the years, local assemblers have developed brand loyalty, but have also created class distinction. Most of car belonging to 1300cc and above sold in cash also involves premium. A substantial percentage of up to 1000cc cars is under hire-purchase agreement.
However, hardly any financing facility is offered for light commercial vehicles, buses, prime movers, trawlers and tankers.
JICA is providing funds for the improvement of mass transit system in Karachi. Some of the experts still believe that running local trains (commonly known as circular railway) offers a better solution. However, keeping in view Karachi's map, one can very confidently say that local trains do not offer a sustainable solution. One way or the other people will have to use some other transport to reach their homes/offices. Therefore, some experts say that instead of spending billions of rupees on making the railway track useable, refurbishing communication network and upgrading stations, introduction of long chases CNG buses look better proposal. A couple of leading international brand are being assembled in Pakistan and financing of these buses would create new job opportunities.
However, there is a suggestion that JICA should encourage formation of fleet operators rather than extending credit to owners of one or two buses. Probably, going for public limited companies with assemblers, commercial banks, tyre and battery manufactures becoming the major stakeholders in the corporate set up offers a better and workable proposition.
Historically, many public transport companies have been established in the public sector and also witnessed bankruptcies. Therefore, this time no such effort should be made and let the private sector manage this business. This is a trillion rupees business because Karachi alone needs induction of 1000 buses. Someone may say that the number looks exaggerated but it is only a conservative estimate for the city having population of 20 million.
Running CNG buses, also with air conditioning facility, can help in containing pollution as well as traffic jams on the roads. Experts also say that a dependable as well as affordable public transport system can take hundreds of motorcycles and even car off road and help in saving millions of dollars spent on import of motor gasoline and diesel.