Autos: Ping-pong!

Volumes in the auto industry are stagnating and will likely stay on this trajectory for the foreseeable future despite introduction of new models and new entrants. Multiple factors will play this role. There is SBP’s attempt to curb imports and reduce the burden on the current account by imposing restrictions on financing of CBU cars; policy rate hikes in the last two MPS cycles which will make for costlier auto loans on top of the recent increase in car prices; and the upcoming minibudget which will slap a host of taxes on goods — including vehicles — to limit consumption and imports. Irony dies each time a policy is made in Pakistan only to be dismantled sometime later. Latest curbs in autos lay in sharp contrast to just a few months ago when the government had slashed duties and taxes on vehicles to make them more “affordable” and increase volumes.

The rationale was that if taxes were reduced, OEMs will reduce prices, volumes will increase, which will then make the ultimate target i.e., localization economically viable. But as policymakers went on to learn only a few months after this policy measure, car prices cannot be controlled, and volumes certainly cannot be raised by a measure as simple as cutting down taxes. Perhaps, the longer-term view was always to have a lower tax incidence on vehicles than before to entice auto makers. Nevertheless, auto assemblers raised prices only recently as rupee began to depreciate and imports became costly. There is nothing new about that. Costly production leads to pricier products.

At present though, the goal of raising volumes has been put in the backburner, even as policymakers prepare to introduce the latest auto development policy, which includes incentives for EVs and hybrids (more on that later). Invariably, the slowdown within the industry will be skewed against smaller vehicles that will lose demand faster. Already, the share of luxury sedans and SUVs has been growing as more models have emerged in this space, while mid-size or small engines have been losing steam. With a higher cost of bank financing, demand in the segment will further decline. As demand reduces, import of CKD and CBUs will also simmer down. The larger objective to develop core engineering within the industry and increase localization by building volumes will have to wait a little while longer.