Passenger cars in the country have had quite a run this year, growing by 22 percent in 9MFY18 while motorcycle sales (two-wheelers) grew by 17 percent. The volumes however between the two segments are far apart. In fact, the number of motorcycles bought in a month by consumers is close to the number of cars bought in an entire year in the country. The difference can be gauged from the fact that two wheelers constitute 81 percent of the total auto industry sales, against 10 percent for passenger cars. This gap has widened in only the past few years. These numbers in India are pretty close too—the share is 75 percent for motorcycles and 15 percent for cars.
In fact, the ratio of cars to two-wheelers in Pakistan used to be 40 percent in 2007-08. That was the time when the country saw the highest car production in history, until now, that is. This ratio, however, fell and now stands at 15 percent.
According to a global PEW survey, 43 percent of the households in Pakistan have motorcycles; India (47%) and these shares are significantly high (above 82%) for some East Asian economies. Nearly eight in 10 people in Thailand, Vietnam, Indonesia, and Malaysia reported owning one. The share is less than 18 percent in some of the more developed economies. Of the three means of transport surveyed however, motorcycles were the least common with high concentration only found in South and Southeast Asia.
On the flip side, car ownership is substantially higher in Europe—70-89 percent of households—in the US (88%), and pretty high in the Middle East and Asian countries like Japan and South Korea. India, one of the most populous countries in the world has merely 6 percent car ownership; Pakistan (3%). There is a high correlation between rising income and higher car ownership. But the question is, as incomes rise, will there be a transition from motorcycles to passenger cars?
It is clear that motorcycles sales have ballooned because of the affordability factor. The organic demand is there because of rising population, mostly younger; a lack of public transport; and the need for easy transportation on busy, congested roads. It has also helped that new brands (mainly Chinese) entered and garnered a healthy competitive among players. As a result, most companies that intended on staying had to keep prices more or less steady. Meanwhile consumers can buy a motorcycle with a nominal down payment, relaxed installment plans and multiple options for financing at their disposals.
A clear transition has happened in India where low-engine categories (70cc) have made way for better, premium quality motorcycles (above 150cc). In fact, the latter outpaced the growth of the whole motorcycle segment which makes a strong case for the same happening in Pakistan. It is clear that consumers in Pakistan appreciate the affordability of the motorcycles but they also complain about the sub-standard quality of some of the brands. But these are the brands that have seen quite the growth so the existing trade-off that consumers are willing to make is clear: a cheap motorcycle with a compromise on good quality.
However, a boost to incomes would lead to a higher purchasing power of an average consumer. When consumers start choosing quality over nominal differences in prices, volumes for higher engines will go up. It will be a matter of time that the low to premium engine transition happens. The motorcycle to car transition however, is a little trickier.
True, studies have shown that higher incomes do boost car purchases. With so many new players entering the market, volumes are expected to go up to 600,000 over the next three years from the current 200,000-250,000. Used car sales are a good proxy to gauge market demand for cars which are now nearly 40 percent of the locally assembled cars.
It is possible that those who took the bus could now afford a motorcycle, or opt for a better quality over their Chinese brand. Young people starting a family could think about getting a small car. Middle income families could go for a Kia, and sell off their Mehran.
It comes down to the price gap between low and high engine motorcycles; to low and high engine cars and whether it closes. Auto financing and interest rates will also play a prominent role as nearly half the market for auto assemblers is now credit based. Whatever transition there may be, one thing is clear, the market expansion is in the offing. In the short-run, all segments would grow, given government policies remain conducive.
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