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Where other countries have graduated their automobile industry from assembling to manufacturing, and progressively moving up the value chain, the hallmark of Pakistan’s industry is “ON” money and the booking system which has birthed it. “ON” money is a premium, undocumented charge paid by the buyer for immediate possession of a vehicle they have purchased.

PIDE research estimates, in the last five years, buyers paid at least PKR 150-170 billion (assuming own being charged on over 90 percent of vehicles) as “ON” money on new car purchases in Pakistan. This means, Pakistani car consumers pay an additional PKR 30-34 billion annually in undocumented transactions under the guise of “ON” money for the purchase of cars.

The “ON” money culture is not hidden from anyone, and while the regulators (i.e., Auto Industry Development Committee on the supply side, and Competition Commission of Pakistan on the demand or market side) and companies might not be actively involved in this, but they have not taken any positive steps to eradicate the practice. Instead, their (in)actions have ended up aiding the “ON” culture.

But why does this premium, this black-market charge exist? The answer is simple – we assemble only a limited number of vehicles every year and have a booking system to manage demand, backed up by import restrictions which further restrict supply and distort the market. Under the booking system, buyers register their intent to purchase a vehicle by booking it and deposit a hefty portion of the total price of the vehicle.

The said vehicle is then assembled over 3-6 months (minimum) and delivered to a dealership when assembly is complete. The buyer is forced to pay a considerable amount in advance for a product that is delivered at a future date (invariably pushed forward for any number of reasons). But dealers offer customer a way out of this conundrum by charging a premium or “ON” for expedited delivery of the vehicle to interested customers.

When the assembler opens bookings for a vehicle, the dealers themselves, and other investors book several vehicles. Not only does this create artificial demand at the time of booking, but it also creates hype about the vehicle in the market.

Potential buyers fear that the longer one waits to book a vehicle the longer will be their waiting period; thus, better to book immediately. Assemblers are unable to meet this pent-up demand, leaving the field open for buyers to be exploited. When the vehicles booked by dealers and investors are delivered to them, they start offering the car to buyers with an immediate delivery in exchange for the “ON” premium over and above the vehicle’s actual price.

So, we have assemblers who only assemble a limited number of vehicles every year, levels that are far below the demand in the economy. We have a booking system which restricts the supply and exposes the buyer to the “ON” money premium. We also government policy which disincentivises the assemblers from increasing supply of vehicles or becoming more competitive, making an untenable situation even worse.

The government policy ends up aiding the “ON” culture by distorting the market. Originally, they need to shield domestic assemblers from foreign manufacturers till they became competitive. This meant that vehicles were not imported as a matter of course for sale in the domestic market, but only on a case-by-case basis. Under successful instances of infant industry protection local producers usually outgrow the need for this protection in about five to ten years. Unfortunately, our automobile industry is still stuck in its infancy after over 50 years.

When our current account deficit was surging out of control earlier this year, the government identified numerous goods that were contributing to the increase. Naturally, automobiles were part of this group, and the government banned their import for several months to curb the deficit. Setting aside the negligible impact of the ban on the current account, it adversely affected “ON” premium rates.

PIDE research suggests that the ON premium rate (ratio of ON money to the final price of the vehicle) averaged 7.92 percent in 2021. It jumped to an average of 15 percent after the ban was implemented, further adding to the woes of the buyer. Clearly, the government policy has so far not been able to rid the country of the scourge of “ON” money.

The “ON” has gone on for 50 years. No ministry/government agency regulates this “ON”. No one reviews this part of the undocumented economy that sucks up investment funds. Parliament or cabinet has never even debated this issue.

The consumers have no voice in this system!

What can be done to make a car market and move away from a car black market that prevails?

Copyright Business Recorder, 2023

Nadeem ul Haque

Nadeem ul Haque is Vice Chancellor at PIDE. Twitter Handle: @nadeemhaque

Usman Qadir

Usman Qadir is Senior Research Economist at PIDE. Twitter Handle: @UsmanQEconomist


Comments are closed.

Asad Feb 08, 2023 10:32am
ON payments are encouraged by eager purchasers and vehicle investors willingly. Thus the onus of encouraging and partaking in ON money lies on the consumer and not the manufacturer. Further, this does not tantamount to any kind of protection to the manufacturer since the practice is not initiated, conducted or encouraged by the manufacturer. We have seen premium markets emerge in currency, masks, essentials, etc. You name it and there has been at least one instance where hoarding and black/grey markets have emerged. The malafide approach to a single industry seems uncalled for from PIDE's employees.
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Builder Feb 08, 2023 01:53pm
Why should Pakistan be an automobile manufacturer at large when auto industry is just producing for local market and not generating any export revenues? We have created a mess on the roads (and environment) as well as on balance sheets by encouraging people to have multiple vehicles at homes. We should have focussed on good public transport and it's still doable.
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Mushtaque Ahmed Feb 08, 2023 11:06pm
In simple terms the "On Money" racket in the car market is black marketing of cars. The dealerships make gains and benefit from the informal system. They derive unreported income and the car buyer is forced to pay a premium. The assemblers are a party to the planned shortages.
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Nasim Beg Feb 09, 2023 01:55pm
The advances taken by the assemblers amount to deposit taking, which only banks are allowed to. The SBP needs to enforce the law. If cars are sold only if available in the show room. The short supply will naturally impact prices in the market, the only way to address that is to phase out the sham by gradually increasing the import duties on CKD and allowing imports of CBUs
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Baig Feb 09, 2023 05:18pm
The demand supply gap also arose due to the assemblers intent to run their plants below capacity for whatever reasons best known to them. On the other side the regulator should also devise a mechanism to filter out the genuine customers from the investors by dividing the production of each company into three categories: Genuine customers, Investors, and institutional buyer. Genuine customers can be identified if the booking record on periodic basis is consolidated in a data base by the regulator based on the CNICs. Priority should be givne to the genuine customers and then others.
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