Relaxation for users, headaches for the makers

After the bout of tough negotiations between ministry officials and auto manufacturers, on whether the government should relax the used-car import policy, the government gave the verdict against the local manufacturers.
In a negative development for car manufacturers, the government relaxed the age limit on the import of used car to 5 years from existing 3 years (under personal baggage, gift and transfer of residence schemes.)
However, so far, the depreciation rate has been kept constant at 1 percent against the proposed 2 percent. The current decision represents a 180-degree turn to the governments decision in FY08, when the age limit of used car had been reduced to 3 years from 5 years.
Used passenger car imports were around 23,000 units in FY07, nearly five times higher compared to the imports during the last two fiscal years.
Now, a maximum of 50 percent depreciation allowance benefit - compared to maximum 36 percent under previous 3 years used car import policy - is overwhelmingly enough to boost the passion for imported cars in Pakistan.
Given this, it seems probable that this year, used-car imports will grow. But, keeping in view the declining purchasing power and considerable rupee depreciation against yen and dollar, the market doesn expect used-car imports to jump back to FY07 levels.
The rupee has depreciated sharply against both the dollar and yen by 29 percent and 63 percent respectively, since June 2008. Besides, the availability of car financing facility has also reduced massively compared to FY07. On the other hand, depreciation rate also stands lower at 1 percent compared to 2 percent in FY07.
"Since the decision has come in the middle of the fiscal year, car imports are expected to reach around 8500 in FY11. While it may reach around 12,500 in FY12," Furqan Punjani, an analyst at Topline Securities told BR research.
The governments move is primarily aimed to benefit the general public through increasing competition, since prices of locally assembled cars increased sporadically during the past few years.
But given that auto manufacturers are gripped with cost pressures and are nursing poor margins on account of low capacity utilisation, chances look slim that prices of local manufactured cars would decline. Therefore, the automakers have to bear the brunt in the form of declining market share.
Poor economic performance of the industry can be gauged from the fact that one of the largest auto assemblers, Pakistan Suzuki Motor Company has posted thin net profit margins of 1.2 percent during the first nine months of CY10, while Hondas bottom line remains in red - posting a net loss of Rs156 million during the half-year ended September 30, 2010, after facing two consecutive loss making years
Moreover, the availability of used cars in the market will also increase price competition within the secondary car market as importers would pay only $2750 to import a 5-year old 1000cc Japanese car, compared to $3,520 on a 3-year old car. Since the market will see influx of imported cars starting from next month, it is difficult to estimate the likely shift in price curve of used cars in Pakistan.

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              Used-Car      Age limit    Depreciation

           imports (units)   (years)              (%)

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FY06         33,584             3                   2

FY07         23,603             5                   2

FY08         13,744             3                   2

FY09          4,531             3                   2

FY10          5,366             3                   1

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Source: Industry sources