Last week, the Competition Commission of Pakistan (CCP) set up an open hearing to listen to concerns of consumers and other stakeholders of the automotive industry. Among others, the issues raised under discussion by different stakeholders ranged from recurrent revision in prices, lack of technological advancement, late delivery of vehicles, rise of premiums charged by investors, higher import duties and tax structure, and used cars policy. Needless to say, this couldn’t come at a better time.
With the new auto policy in full swing, there are at least eight new automotive joint ventures that are entering the industry which means the existing issues relating to fair competition need to be brought to the table. They can be taken up by assemblers, regulators or even the CCP, if the issue comes under its purview.
Perhaps the most oft-mentioned grievance of consumers is the frequent price hikes in locally assembled automobiles. The prices do not match the quality of the cars either, consumers argue. Between Jan-Mar 18, the three players raised prices between 4-9 percent across different variants but auto assemblers argue they are in the right to.
They argue that nearly 30 percent of the price of the car constitutes government taxes and levies. BR Research’s earlier calculations suggest tax and duty constituted between 21 to 23 percent of the average ex-factory price of the car—(“The Fault in our Cars”, Feb 6, 2018). Moreover, with localization levels of around 51 percent on average, the industry is dependent on imported content (this number should be lower for new cars such as Wagon-R, Honda Br-V and Toyota Fortuner which aren’t as localized). In fact, it is no secret that the local auto vendor industry caters to low-value or low-tech cosmetic parts while the functional parts are imported.
https://www.brecorder.com/2018/02/06/397319/the-fault-in-our-cars/
Dependence on imported content means assemblers are sensitive to exchange rate changes. Between Dec 4, 2017 and Mar 30, 2018; Pakistan rupee depreciated by 9.5 percent against US dollar and by 16.4 percent against Japanese Yen. This is how assemblers justify high prices and price hikes. It remains a question how regulators or the CCP can intervene.
While no firm answers are forthcoming on why the quality and functionality has not been improved over the years, it is inevitable that as demand for cars and competition among assemblers grows, to survive in the market, OEMs will have to work on the quality side, introduce more features and bring globally competitive products.
Another major concern is the late delivery of vehicles. Today, most of the Honda and Toyota cars are delivered in 5-6 months. Per the auto policy, assemblers have to pay Kibor+2 percent on each car that is not delivered within 2 months. But this has not discouraged late delivery. Assemblers are clearly unable to meet the demand, which is also why a huge influx of used cars has been seen that can be delivered whenever a consumer desires.
On this front, it would make sense for regulators to introduce a better used cars policy because there is a cloud of uncertainty on the current one. On the one hand, it doesn’t make sense to not commercially allow import of used cars when local assemblers are not keeping up with demand. On the other hand, the used cars business is largely an informal one where dealers use documentation of Pakistanis living abroad to avail the three schemes introduced exclusively for overseas Pakistanis. These cars are then sold commercially by dealers, even though officially there is no policy of commercial imports of used cars.
A few months ago, the government tried to double down on what appears to be an illegal industry; it was unable to come up with a solution (“Hello, used cars”, Feb 23, 2018). The industry is a source of revenue for the government which is one of the reasons why the misuse of the schemes has continued with full knowledge of the customs and revenue offices. Undoubtedly, this issue needs to be addressed within the next few months until the new players enter the market. Whether protection is given to assemblers or not, the used cars economy needs to be formalized and should operate in a transparent environment.
Another crucial problem is the rise of the “own-money” market where cars are brought in bulk by investors—who are looking to get a quick return—and sold at premiums to consumers in exchange for on-spot delivery. These premiums go up to Rs300,000 for many variants while can go up to Rs600,000 for cars like Toyota Fortuner.
https://www.brecorder.com/2018/02/23/400870/hello-used-cars/
Assemblers are now refusing to take multiple bookings on a single ID while Indus Motors cancelled thousands of bookings of investors that were potentially involved in this practice. The government tried to regulate with the introduction of tax on the transfer of vehicle registration, record maintenance of buyers’ IDs and imposing higher WHT on non-tax filers; but all this without much success. Perhaps, together with doubling down on dealerships, the only surefire way to eliminate this is if assemblers expand capacities and push up production to meet demand and delivery schedules.
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