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At the current pace, the automotive industry volumes will shrink to less than 160,000 units by the end of FY23, a rather serious drop from last year’s 300,000 units which was the largest volumetric sales attained industry-wide since inception. But the pace might be getting even slower as the country plunges into a dollar shortage and waning foreign exchange reserves. Though the SBP announced that assemblers would no longer be required to obtain prior approvals to open LCs, banks have been instructed to only allow essential imports.

Already, in 5M, volumes have shrunk 39 percent for passenger cars, LCVs, and SUVs (not including non-PAMA members such as Lucky Motors assembling Kia vehicles or Chinese Changan Motors) but the industry faced similar difficulties in FY20 during covid and post-covid and had much lower volumes prior to FY16. In terms of average monthly volumes too, FY23 is not near a low volumetric mark—making about 13,000 units per month—and in fact, delivered a lower number of cars every month before FY16. Since that year, capacities were raised, new models were introduced and new entrants began assembling. In any given year, when the cost of borrowing was lower in the form of interest rates, rupee-dollar parity was more favorable, or the government was offering tax cuts, demand improved. FY23 is unique because the problem is not in demand at all. One would be hard-pressed to accurately assess demand given the supply restrictions currently in play. (Though let’s face it, in a market like Pakistan, starved for public transport, there will always be demand for cars. What really changes are circumstances).

As a consequence, assemblers (Suzuki, Toyota, and others) and auto parts/components manufacturers are keeping plants closed for days at the end as they simply do not have enough inputs available to continue production. As discussed earlier in this column, this could have been shielded by better long-term policies that would have created a competitive industry with all the necessary preparation and tools to target markets abroad. Being so heavily dependent on high-value dollar imports, the industry—not just auto part makers, but OEMs and assemblers—have to earn in dollars. Instead, they buy inputs in dollars and sell high-priced, inferior products in the domestic market in rupees. They also naturally charge higher when they hold all the pricing power in the market with little to no competition from imports (because of very high duties and taxes on imported vehicles), or even domestically where players operate in their own specific segments. Even used car imports, allowed under the baggage scheme and misused by traders, have all but ceased.

Though the last automotive policy promised increased competition, what transpired was something really different. Perhaps it is impossible for any brand or vehicle to compete with the Japanese models that have placed a stake so strong, they are invincible. Or perhaps, pricing power is a really strong motivator and competition does not serve anyone well, especially in a protected market. Thus, even new entrants such as Kia Motors have tried to create their own categories to operate in spaces that did not exist before (such as Sorento and Sportage), focusing on high-end and mid-end SUVs, rather than competing in segments that already existed. Because if they were competing, everyone would have to up their game. Policies should have been targeting exports all along and protection should have been time-bound.

The point is, the more than 50 percent drop in automotive market size this year—which if it continues will undoubtedly lead to job losses—in the currently precarious economic environment was always written on the wall.

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