Recent almost dramatic hikes in car prices have certainly thrown a wrench in the vision of policymakers that have been adopting various means to facilitate volumes in the industry. The logic is that greater volumes will induce more localization. But vehicles becoming drastically more expensive means a cut in volumes, rather than growth. The Ministry of Industries and Production now wants to conduct a detailed analysis of car prices in relation to key cost-pushing factors such as rupee depreciation, high commodity prices, freight rates etc. Such an analysis would eventually stray into the “price controls” territory which is making automakers unhappy.
The Pakistan Automotive Manufacturers’ Association (PAMA) believes that Pakistani autos is a free market and it is the market dynamics that determine end-user prices, not the government or state. Theoretically, the statement is not wrong in itself. In a truly free market, prices are determined by demand and supply dynamics. But in this specific case, nobody can call the Pakistani automotive market an open and free one. An open market would require the government to drop or eliminate all duties and tariffs on imported vehicles which would then induce competition in the market. Imported CBUs have heavy-duty levies on them which protects and safeguards domestic players from any significant competition.
Even within the domestic industry, competition has only just begun, and barely at that. Suzuki remains the only true assembler of small cars. Both Honda and Toyota enjoy their own space in the market. New players like Kia are trying to carve their space by introducing options in the SUV segment. Hyundai hasn’t had a lot of success in getting volumes going. And a host of new Chinese have entered the field with capacity as well as investment, but where the market has to take a substantial leap of fate.
Without true competition (from imports as well as other players), and restricted supply/capacity, the automotive industry in Pakistan is small and far from free. Aside from CKD kits, most inputs (steel, plastic etc.) are imported from abroad which then makes assemblers very sensitive to volatility in international prices as well as a depreciating rupee.
Only six or so months ago—before the mini-budget—the government had announced cuts in duties and taxes to make cars more “affordable” (though nobody has attempted to define what vehicle affordability means for a market like Pakistan). That was a myopic move. Car prices were momentarily brought down as a result of tax cuts. But another round of rupee depreciation brought everything back to square one. Automakers had to raise prices.
While the government should not be fixing or controlling prices which has been suggested under the the Price Control and Prevention of Profiteering and Hoarding Act, 1977(and its subsequent orders), it is imperative that anti-competitive and unfair practices that affect consumers are investigated. Such an investigation is especially needed on evaluating the prices mechanism of a not-so-nascent industry that has enjoyed government protection for decades, often at the cost of consumers. However, price fixing when costs are not fixed and are constantly in flux would be a foolish endeavour if there ever was one, driving new investments away. Perhaps, it is time the government starts to seriously consider liberalizing the automotive market. All other moves have failed.
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