Cars and more cars

Pakistan has one of the highest tariffs in the region on vehicle import. The idea is to keep the local industry protected. It seems to have served the purpose well, going by the robust rise in auto sales of late. But it has not come at the cost of imported vehicles. Car imports in the Completely Built Unit (CBU) category sit at multiyear high, and growing.

The vehicle demand seems to be organic, sustainable, and strong. The success of latest local vehicle models in the 1000cc category even at exuberant rates, tells cars will keep coming, imported or otherwise, economical or not. Auto financing has gone up the roof – slowly but surely – doubling from Rs20 billion in CY14 to over Rs40 billion year-to-date.

Interestingly enough, both the CKD and CBU import numbers stand at all time high in the Jan-Aug period of 2017. The average monthly CBU import that stood at $18 million in 8MCY13 has now more than doubled to $43 million. And it only seems to be rising every month. Similarly, CKD imports have grown strong enough to have averaged $60 million a month in CY17 from $35 million in CY13.

The rise in CBU certainly has not dented the local sales, as evident by an equally strong surge in CKD related imports. There is ample evidence of higher propensity to consume in an expanding economy with a growing middle class, low interest rates, and a consumer driven society. That is enough fuel to keep the auto industry running at full throttle.

In addition to the 17000 local passenger cars being added on the roads every month in the past few months, nothing less than 6,000 imported ones are also queuing up at the fuel pumps. Industry sources say the number is on the lower side, and could actually be north of 7000 imported cars every month, based on an average price of Rs0.8 million before duties.

Pakistan’s CBU imports will likely cross $500 million this year. India’s CBU imports sit at a much lower $220 million a year. The numbers are more astonishing for CKD, as India’s annual CKD imports have average $3.2 billion per annum in the last five years. Pakistan’s CKD imports have risen to $1.05 billion. India makes 3 million cars every year, 16 times more than Pakistan’s 0.19 million. Average CKD import per vehicle in Pakistan stands at $5689, more than five times that of India. To sum it up, read localization. Mind you, India also end up earning $15 billion annually from auto related exports. Scale matters.

There are talks of curbing auto imports by further increasing the tariff. That would surely be uncalled for. Instead, the local industry now needs to up its game by increasing the localization levels. Any further obstacle in the way of auto imports is just going to bring in more complacency to the local manufacturers, and the localization dream would stretch even further.

A recent World Bank study on India and Pakistan’s auto sector clearly states how increasing duty from the already high levels is going to be counterproductive. Leaving the consumer choice angle aside for a moment, it would never encourage quality and competition in the market. Nothing should deter investors to come in and increase localization, when the policy is investor-friendly, and the demand is genuinely growing.

So while rising vehicle imports may well be a burden on the import bill, it offers insight into the inherent strength of the demand. And that should be enough reason for the policymakers to lure more investors and then bring the imports down naturally, rather than forcing it without ever achieving efficiencies. All imports are not bad, especially in an expanding developing economy. It is time the issue is converted into an opportunity.