Our first impressions of the auto policy when it first came out was: lets see if some global bigwig will bite; and nearly a year later, many actually did. We have promises of European, Korean and Chinese investments pouring in, not to mention our own Pakistan Suzuki potentially expanding its capacity significantly. Thats all great news.
With the little information available to us, lets see what we can extrapolate in order to understand the new and improved automotive industry we will see in the next 5 years or so (see tables).
The market currently is palpably small compared to emerging economies, and given Pakistans burgeoning population. Existing carmakers have the capacity of 260,000 units and Pakistan is manufacturing less than 200,000 passenger cars, with a total market of about 250,000 units, with nearly 50,000 used cars being imported. Comparatively, Indian manufacturers are producing over 4.5 million cars every year; China 25 million and Malaysia over 500,000.
The rise of used cars (20% of market) has been troubling to the three Japanese automakers who have maintained a stronghold in the country for decades, but it is a useful data point; one that says consumers are looking for more variety.
Another interesting data point is the increasing receptiveness of car sharing apps in Pakistan. In absence of a reliable public transport system (how much the new bus/metro-lines will help remains to be seen), these riding services should give a healthy boost to car sales in the next few years.
Studies show a strong correlation between rising income levels and car penetration. Changes to that affect are also evident. Car financing is more affordable and the evolving demographics point toward higher car demand with rising per capita income, growing urbanization (fastest in South Asia) and an expanding middle class. These are the drivers factoring into the decisions of the likes of Audi and Renault in entering our market.
A 2007 study published by authors from University of Leeds, NYU and IMF finds that Pakistan will gain a market of 8 million cars by 2030 considering its income per capita goes up by 2.2 percent and its population goes upto 272 million increasing by 2.3 percent. Since the IMF projects a growth of nearly 5 percent annually in GDP for Pakistan and population estimated by the UN is 300 million by 2050; per capita income is likely to be much higher than estimated in this study, could the car market in the next 10 years be greater than 8 million.
By our estimations, Pakistan could see around 500,000 cars by the next five years assuming an annual growth of 20 percent in sales (same as FY15 and FY16) and the materialization of the new entrants plans (see graph).
Curiously, the segmentation of the market could see a shift that is unexpected. Globally, especially in emerging economies, it seemed the focus has been on smaller cars. But most of the investments coming into Pakistan are concentrated toward either above-1300cc or 1000cc-1300cc categories, with a marked drop in market share of smaller/mini cars.
In this lower end segment, only two cars exist and one of them, the famed Mehran is expected to be phased out while Suzuki has already stopped producing Cultus to make space for Celerio and Alto. In fact, there are no announcements that indicate that the 800cc category will see any other player entering the sphere.
This is surprising because these same small cars in Pakistan have maintained a market share of 40 percent through the years (50% for compact cars such as Corolla and City/Civic). Imported Daihatsu Mira, Daihatsu Cure and local Mehran have proven to be some of the most popular cars in Pakistan.
On the other hand, demand for hatchbacks (1000cc category) like imported Toyota Vitz, Toyota Passo, FAW V2 (also imported) and locally manufactured Suzuki WagonR has increased significantly over the past year.
Both Kia and Hyundai are expected to bring cars in the 1000cc or 1300cc and above segments, clinching the share from the small-car segment. But this is also where the competition will be much fiercer.
An interesting study of the auto industry in India finds that though the market share of the compact segment had increased over small-engine mini car segments in that country, the latter are more resilient to lifecycles. In fact, mini cars come to life after spending 2-3 years in the market and easily last a decade while compacts are more frequently replaced or have to be updated. Here at home, Pakistani Mehran is an excellent example. It never got old, and its demand persisted through time.
However there are reasons why compact cars gain more traction. The study argues that the market share of compacts has been increasing in India because the customer is becoming more demanding, requiring more features, better looks, more passenger and boot space which smaller cars are not able to provide.
The same study also argues that there is a clear manufacturing bias globally car makers prefer making compact cars over small cars (due to engineering issues), and are more aligned in compacts. Perhaps it does make sense why new entrants here at home are not as keenly inclined toward smaller engines.
Even so, nothing is confirmed yet. The new entrants will probably import a variety of models to test the market first and then decide which ones catch on.
With that in mind, the most important aspect from hereon would be car prices, and prevalence of auto parts and after-sales markets. A McKinsey report tells that car prices globally have remained flat since 1998, even when OEMs introduced new features and upgrades. Greater demand and competition in Pakistan must drive prices down for this auto policy to result in consumer welfare.
Secondly, no new model would stick in the market if after sales services and cheaper parts are not accessible. Much thought and planning is needed to build the foundation for new models and brands in order for them to survive.