Being Basic

Automakers have often quoted lofty estimates for auto volumes in Pakistan, citing population growth and demographics leaning into a younger population, the Gen-Zs, that will inevitably be in need of cars as public transport fails them. It’s a rather simplistic approach to project demand, or what the Gen-Z would call “basic”, one that ignores large facets of demand and supply dynamics that come into play. Data suggests, that despite population growth and Gen-Z invasion, actual demand in the market has never crossed the peripheries of 300-350K units in a year—that being the industry’s historic peak. In FY24, it has only slid and slid further than one would have imagined given more assemblers, more models, and undoubtedly, more car buyers peeking into glassed showrooms.

The fact is, that demand in the automobile market is highly sensitive to changes in income—what we typically call elasticity. If incomes are stagnant, or taxes are high and growing, demand in the market disappears. The demand is also highly sensitive to changes in auto financing rates. There is an established and formalized credit market for cars through financial institutions. Nearly all banks have one product or more for vehicle loans and though banks typically shy away from lending to the private sector; consumers in particular, they haven’t shied away from auto loans. When interest rates are low, auto loans are booming. Though banks are still using rather outdated credit assessment techniques—for instance, informal income earners will find it harder to secure a loan as the steadiness of their incomes is hard to verify and assess—there aren’t too many barriers to formal financing for cars, as there are for other types of credit. And so, when interest rates are low, bank financing booms. When interest rates soar, bank financing crashes. This equation can be confirmed by mapping the data for just the past five years alone (see graph).

Policy rate fell to 7 percent in Jun-20 and net borrowing against auto loans shot up in the months succeeding that. But in Sep 21, the policy rate was raised ever so slightly to 7.25 percent; net borrowing started shaking. Between then and Jun-23, the policy rate was raised very few months—car loan seekers well and truly left the market. In fact, by the time, the policy rate hit the peak—at 22 percent—in Jun-22, net borrowing against auto loans had been negative for months. This continues till today—a year on. In Jun-24, the policy rate has reduced, but at 20.5 percent, it’s still going to be far too expensive for new car owners to repay, considering also: higher car prices and heavy taxation on income and consumption across the board. Also don’t forget that the SBP tightened regulations of car financing in Sep-21 and further on May 22 to ultimately discourage imports when the country was thirsty for foreign exchange reserves.

There is no doubt that there is latent demand for vehicles in the market—even if the country’s road infrastructure and climate would dissuade any massive growth in it. But there is no possible way that actual demand in the industry would move too far ahead of its current levels without the basics. The basics being a persistent economic growth that leads to higher income in the pockets, and an affordable auto loan market. It is superfluous to have a long-term view on demand for automobiles because, well, for one, in the long-term, we are all dead, and two, the Pakistani economy operates in short terms; taking one step forward, two steps back. Right now, as it stands, it is many steps back, the market is small, and automobile companies should be happy, nay ecstatic they can still make money off of it.