If history is any guide, consistency in policy has never been a strong suit of subsequent Pakistani governments. Despite announcing an investor friendly automotive policy back in 2016, the PLM-N government remarkably failed to tackle a variety of issues that threaten competition and inject uncertainties in the sector, toxic not only to consumers but investors as well. Automakers on the other hand have not been absolved of blame either. They have been accused of assembling sub-standard vehicles, deliberately not raising capacity to meet demand and keeping prices high and hiking them up recurrently. Together, this doesn’t a well-oiled machinery make.
In fact, the Competition Commission of Pakistan (CCP) heard a number of these grievances by consumers and stakeholders in a hearing recently. The government has failed to regulate the used car industry and legitimize the largely informal sector (Read: “Hello, used cars!”, Feb 23, 2018). The “own money” premium market is still rampant partly because of ineffective regulation bolstered by the late delivery of cars by OEMs. Meanwhile, with the latest restriction on non-filers (Read: “Cars: Anti-growth prospects”, May 25, 2018), it is estimated that demand for vehicles will move down as nearly half of car buyers in the country are non-filers.
If the handful of automakers that are entering the market are not concerned about these three major issues, they are either not planning to stick around for a long time, or they are waiting for the new government and hoping for better administration and policies.
On the other side, existing automakers appear to be focusing on the present market share. With the rise of global steel prices and currency depreciation against the Dollar, Yen and Thai baht, all three carmakers have raised prices up to 9 percent. In fact, after twice consequent price hikes, Pakistan Suzuki has now raised prices across all its variants for the third time in three months.
Localization levels in the industry may not be as high as some claim. BR Research calculations (Read, The Fault in our Cars”, Feb 6, 2018) suggest localization was around 51 percent during FY17 but the number should be lower since it did not take into account some of the new variants such as Toyota Fortuner and Honda Br-V or in the small-car segment Suzuki Wagon-R. The latter is a very high volume car which has seen its demand skyrocket since its launch. Assemblers are sensitive to exchange rate changes with high dependence on imports.
Though consumers have been protesting—there was a social media campaign that called for boycotting vehicles manufactured by the three assemblers—demand has remained consistent. This is probably why assemblers have raised prices without expecting retaliation. Whatever they are producing, they are selling. The rise of investor-driven premium car sales only indicates that consumers are willing to pay extra money to get their cars on time. Incremental price hikes do not affect the buyer of Honda and Toyota at least.
Having said that, looking at price indices, where the CPI grew by 28 percent between Jan-12 to May-18, the motor vehicle price index grew by 22 percent, and motor vehicle tax index grew by 38 percent during this time period. BR Research calculated that taxes constitute between 21-23 percent in the price of an average car. There may be some truth in the assemblers’ claims that it is the taxes that make car prices so high for consumers.
On the other hand, the grievances of consumers go beyond just car prices. They believe that at the current prices, the cars assembled in Pakistan haven’t evolved in terms of technology with the rest of the world. India manufactures similar cars but with better more sophisticated technology which prolongs the life and improves the functionality of the car.
There is no argument that while local assemblers may enjoy the spoils of rising demand for cars in the short run, they will have to work a lot harder come 2019 when many of the new players will launch their vehicles.
The incoming government on the other hand will need all hands on deck to make these upcoming investments a long term success.
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