Growth Trajectory: Pakistan Automotive Sector

Spearhead Analysis – 16.11.2017

By Farrukh Karamat
Senior Research Coordinator, Spearhead Research

Everything in life is somewhere else, and you get there in a car. (E. B. White)

The Pakistan Automotive Manufacturers Association (PAMA) has released the October 2017 data for automotive assembly and manufacturing, showing robust growth across the sector. During July – October 2017 sales grew by a cumulative 31.31 per cent in the Passenger and Commercial vehicle category, over the same period of 2016. A total of 89,084 vehicles were sold in the 2017 period (2016: 67,841 units). With a large and growing population base and rising GDP Pakistan is poised for further growth in the consumer goods industry, including automobiles. For a country that is often portrayed as being beset by serious economic problems these are solid numbers, that suggest robust consumer purchasing power, whether it is in terms of cash purchases or on instalment plans. Auto financing has increased substantially, doubling from Rs.20 billion in 2014 to over Rs.40 Billion year-to-date in 2017. Furthermore, the entry of Uber and Careem into the local market has spurred vehicle purchases as people register with these companies to provide their vehicle for hire. The higher number of vehicle sales also reflects the inadequacy of the public transport system in the country, a fact borne out by the increasingly high growth rate within the low cost motorcycle and three-wheeler segment.

Table-1 details the sales and production date for the local manufacturers.

TABLE-1: VEHICLE PRODUCTION AND SALES

Honda:

The sales for Honda cars (Civic, City and BR-V), were 17,111 units during July-October 2017, up   54.72 percent over the same period last year. Honda has received a tremendous response for its newer models, such as the 10th generation Civic and the BR-V. This growth momentum is likely to be maintained as the company re-launches the Civic Turbo; and, with the expected launch of the revamped City in 2018. In terms of market share in the passenger car category Honda stands at 24.6 percent in 2017 (2016: 21.5 percent).

Toyota:

The sales for Toyota Corolla maintained a steady trend with growth of 2.24 percent in the 2017 period at 16,981 units. The newer models helped the growth rate as the Fortuner achieved seven times sales growth during the period, while the Revo reported sales growth of 29 percent during the same period. It is rumored that Toyota might scrap the 1300cc Corolla and introduce a smaller vehicle to compete with the likes of Honda City. In addition, it is speculated that the Fortuner will have a Diesel variant. These changes would help increase the sales and market share of Toyota in the coming year. Toyota’s market share in the passenger car category dropped to 29 percent in 2017 (2016: 35.7 percent), mainly as a result of the launch of the 10th generation Honda Civic.

Suzuki:

The sales of Suzuki vehicles out-stripped all other manufacturers. While the Swift maintained a steady growth rate of 2.53 per cent, the newly launched and completely redesigned Cultus achieved a 47 percent growth rate, while the Wagon-R achieved 92 percent growth during the period.  The evergreen Suzuki Mehran sales grew by 31 per cent during the same period. In total Suzuki managed to sell 32,195 vehicles in the passenger vehicle category at a growth rate of 45 percent in the 2017 period. Suzuki improved its market share to 46.31 percent in 2017 (2016: 42.8 percent).

Hits and Misses:

While the Big Three managed to report impressive growth numbers there were some models that failed to make such an impression. Suzuki introduced the much-hyped Vitara SUV and the Ciaz sedan, however, both vehicles failed to take-off in the local market, despite having advanced safety and comfort features. A major reason is perhaps the low-quality image of Suzuki and the high-price point for these imported vehicles. Similarly, Honda’s HR-V has been unable to compete with the imported Honda Vezel, while sales of models like the Accord and CR-V remain negligible. Toyota has also been unable to make a dent in the market with its over-priced Camry or the Prius Hybrid vehicles. FAW Motors has launched the V2 in the passenger category, while having multiple product offerings in the commercial category as well. This Chinese brand is making inroads into the market, but no sales figures have been reported to date. In addition, Hyundai and KIA are likely to enter the market with local production, and another Chinese manufacturer Zoyte may be launching in the small car segment. Automobile giants such as BMW, Audi and Porsche are already marketing their vehicles and Volkswagen is likely to enter the market soon.

Commercial Vehicles:

Sales of commercial vehicles such as Buses, Pick-ups and Trucks were up almost 20 percent in 2017 at approximately 21,000 vehicles, maintaining the robust growth. With higher demand related to CPEC projects, from construction and trade, such vehicles could continue to experience high growth rates in the coming years.

Motor-Cycles:

The motor-cycle segment continues to maintain its growth momentum, achieving almost 26 percent growth in July-October 2017 at 609,989 units (2016: 484,403 units). Pakistan is ranked as the 6th largest motor-cycle market and is growing. One has to step on any road to gauge the volume of motor-cycles in the country. These vehicles remain major contributors to environmental pollution and road hazards, in the face of limited or no regulatory and traffic controls. Honda is the leading brand with almost 60 percent market share followed by United Auto at 22 percent market share. The motor-cycle segment continues to grow in the absence of adequate public transport facilities, low running costs, and convenience. A large number of smaller producers have entered the market and this sector is likely to continue its growth trajectory. Table-2 illustrates the sales and production figures for the motor-cycle manufacturers in Pakistan.

TABLE-2: MOTOR-CYCLE SALES AND PRODUCTION

Three-Wheelers:

Within the three-wheeler category the sales growth has been 44 percent at 27,619 units in 2017 (2016: 19,130 units). The market is split between Sazgar, Qingqi, Road Prince, and United Autos. This remains the preferred mode of low cost transport and has been inducted by Uber in their rental vehicle fleet. Table-3, provides the details of sales within this category.

TABLE-3:  THREE-WHEELER SALES AND PRODUCTION

Which Road to Follow?

Pakistan has been following a protectionist policy for the automotive sector with high tariffs on imported goods. While one would have expected the local manufactures to improve the quality and safety features of their products, this has unfortunately not been the case. The cars manufactured in Pakistan lack the basic safety features of their counterparts in other countries, as the companies aim to curtail costs. Also, the high tariffs have not deterred import of vehicles which remain at all-time high levels.

The average monthly Completely Built Units (CBU) import which stood at US$18 Million in January-August 2013 increased to US$43 Million in the same period of 2017. The growth continues unabated as used Japanese imports in the 660 cc and above category have flooded the market. Given the high spec safety and comfort features these imported vehicles are popular with the consumers. Similarly, Completely Knocked Down unit (CKD) imports have grown from US$35 Million in 2013 to US$60 Million in 2017. The fact that the local sales have continued to grow unabated alongside the rising imports shows the strength of the market and an apparently insatiable demand for automobiles in the country across all categories. With a huge growing population base, a rapidly rising middle class and an increased trend towards consumerism, supported by decent GDP growth and low interest rates in the economy, the sector is likely to continue to expand in the future.

By some estimates around 6,000-7,000 imported vehicles are entering the country every month in addition to the locally produced vehicles. Pakistan’s CBU imports bill is expected to cross US$500 Million in 2017, compared to India’s US$220 Million a year. As per data published recently in the Business Recorder in the CKD category India’s annual imports averaged US$3.2 Billion in the last five years, while Pakistan’s CKD imports rose to US$1.05 Billion. India manufactures 3 million vehicles every year, 16 times more than Pakistan’s 0.19 million. Average CKD import per vehicle in Pakistan stands at US$5,689, more than five times that of India. India also end up earning US$15 Billion annually from auto-related exports. As a result, Pakistan needs to improve its localization of the auto industry and enhance the scale of manufacturing to bring down costs. Hiding behind a protectionist policy in Pakistan the local automobile manufacturers are not passing on the benefits to the consumers, who continue to grapple with issues of safety, reliability and high prices.

A World Bank study on India and Pakistan’s auto sector has clearly stated that increasing duties and tariffs from the already high levels would be counterproductive, and would not encourage quality and competition in the local markets. Investors should be encouraged to enter the market and increase localization, where the demand is growing. While vehicle imports are a burden on the import bill, it also shows the demand that is available and the policymakers need to turn this into an opportunity for manufacturing growth and improving export earnings. Within the CPEC there is potential to develop the automotive sector through improved localization and expansion of the sector through Chinese collaboration. Pakistan needs to harness such opportunities and develop a framework that benefits the consumers, provides opportunities for revenue enhancement and encourages investors into the sector by developing the local manufacturing.

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