Spearhead Analysis – 26.08.2016
Pakistan with a rapidly growing population and increasing urbanization has a vibrant automobile market. From the low-end to the high-end, there is a demand for all types of motor vehicles. The availability of relatively low-cost auto financing is further fueling this ever-expanding market. While there is a developed manufacturing base for vehicles, imports continue to play a significant role in the local market. What is the rationale behind spending billions on the import of vehicles in a country that has three major manufacturing units, producing a diverse range of vehicles, and where the government is making hectic efforts to attract foreign investors?
Table -1: Auto Sector Performance
Table-1, based on data for production, sale and import of popular brands of vehicles provides a comprehensive view of the Pakistan automobile market. Honda has around a 19% share of the market, while Toyota commands around 40% share within this market segment. Suzuki remains the dominant manufacturer, with its smaller, lower-cost vehicles with a 41% share in this segment. On a total market basis roughly 215,000-230,000 units are sold annually, including imports of around 53,600 units in 2015/16, the latter accounting for approximately 25% of the total market.
On the one hand, there are rumors of some major European manufacturers looking to enter the Pakistan automobile manufacturing sector. On the other hand, we see a market flooded with imported vehicles of every size, capacity, and make. As per data on used cars imports during the FY2015/16, a total of 53,600 cars were imported at an approximate cost of Rs.75 Billion, including small cars, SUVs and pickup/vans. In contrast in 2015, Pak Suzuki Motor Company recorded sales of Rs.85 Billion; Honda Atlas Rs.38 Billion; and, Toyota Indus Rs.97 Billion. This comes to a cumulative spend of Rs.295 Billion, with imported vehicles accounting for 25% of the market. The Rs.75 Billion (US$700 Million) spent by Pakistanis on the import of used cars in FY2015/16, is sufficient to facilitate an investment of around $600- $700 Million in two plants the size equivalent of Honda Atlas Cars Pakistan, with each plant having a production capacity of around 25,000 vehicles per year.
With a population of around 190 Million, of which 55% are below the age of 30 years, Pakistan needs to focus on generating employment opportunities. Currently, the automobile sector is estimated to be employing some three million people in Pakistan, but has the potential to become to grow significantly as has been the case in a many other Asian countries, such as Japan, Korea, Thailand, Indonesia, Malaysia, India and China. The sector offers a potentially viable conduit to generate jobs in the skilled and semi-skilled sectors, and the development of an ancillary vendor industry. The import of vehicles is a non-productive activity leading to outflow of foreign currency as opposed to creating productive revenue-generating options locally. While the imported vehicles provide the government with much needed income in the form of duties and taxes, and creates some jobs in sales, it would be far more conducive to have a manufacturing base within Pakistan that would provide long-term and far-reaching economic benefits. At the same time an expanded and competitive automobile manufacturing base offers opportunities not just within Pakistan, but in a global context through potential export markets.
While the local manufacturing sector is losing out due to imports, the consumers are being short-changed due to higher prices for older used cars, non-availability of spare parts, and lack of after-sales service and technical support. With adequate safe-guards and government incentives, the local industry could capitalize on the available market to utilize and enhance production and to make future investments in capacity creation and new models introduction. There could be far-reaching effects in terms of prospects for foreign investment, development of the industry, employment of labor, and investments by producers and vendors. At a time when the country is faced by high unemployment rates, declining exports, and rising debt levels this could be a lucrative potential source for providing a much needed boost to the economy.
One of the major concerns highlighted is the relatively lower quality of local vehicles and the value for money proposition in terms of options available with those vehicles. For example, the best selling Suzuki Mehran has been in production for over two decades without any modification and has minimal safety and comfort features. A buyer now has the option to import a much higher specification used car in this category by paying a little more. Similarly, with price of the new Honda Civic or Toyota Corolla in the range of Rs. 2.0-3.0 Million, buyers do seek out import options, with better perceived build quality and higher specifications available on those units. On top of it, with the introduction of newer models, consumers are being forced by local dealerships to dole out hefty premiums to buy the new cars. The fact that the imported segment has touched the Rs.75 Billion mark shows the buyer confidence in these vehicles and a relative failure of the local manufacturers to fill the demand gap.
The import of used cars could prove to be a big impediment in bringing new investment into the automobile sector through new entrants or existing manufacturers. Any prudent investor would question as to why they should make a long-term investment worth millions of dollars in a country, where they would be competing with 50,000 plus units (and growing) imported every year. A cohesive policy framework needs to be devised and implemented for the automobile sector, for the long-term benefit and economic sustainability of the country. Imports are a drain on the meager economy without offering any resultant benefits. Indigenous production, properly implemented, offers the benefits for the development of the ancillary industry and labor, and provides the potential for long-term economic benefits for Pakistan. With the growing population base, and limited growth opportunities in the manufacturing sector, Pakistan needs to focus on developing its local industry and the automobile sector, through collaborative efforts, offers a viable option for economic growth.
Realizing the importance of the sector the PML-N led government after three years in power has finally drafted a new auto policy. Dubbed as AIDP-2 (Auto Industry Development Programme-2) the policy aims to target foreign investment, enhance competition, lower auto prices for consumers, and offer enhanced employment opportunities in the country. The policy’s main features include:
Foreign automobile manufacturers will be able to import machinery for a 3-year period on a duty-free basis.
Custom duty on Completely Knocked Down (CKD) kits has been reduced from 32.5% to 30%, while import duty on non-localized parts would be 10% and on localized parts 25% for new entrants.
Parts for cars below 800 cc would be imported at 10% import duty.
With foreign manufacturers such as Renault, Volkswagen and Fiat having expressed an interest in the local market these incentives should make the market more competitive, reduce prices for local consumers, offer environmentally friendly benefits, and provide opportunities for entering the export markets. It would also provide opportunities for developing a skilled labour force and introduce the latest technology in the local market. In addition some of the shut-down capacity of Nissan, and Hyundai might re-enter the market to offer further competition to the existing manufacturers and the imported vehicles.
There is however the question about the sustainability of the policy framework. As in the past if the Government does not show the proper resolve to implement these policies and succumbs to pressure from vested stakeholders, the whole proposed edifice might come crashing down. The opportunity is there and it is attainable. The government needs to step forward and implement it for the long-term viability of the sector and the country.
(Spearhead Analyses are collaborative efforts and not attributable to a single individual)