The automotive industry is in deep trouble, but if we are playing the blame-game, neither the industry nor policymakers at large can be let off the hook (read more: “Automotive: Hindsight is 2020”, Jan 3, 2020). But the few amongst us that are forward-thinking would implode us to bury the hatchet and start anew, provided past mistakes are not repeated. That would be good advice given that there are several new assemblers entering the space, and the world, as they say, should be their oyster. In its latest quarterly report, the SBP does exactly that.
For sure, it is not going to be easy in the beginning. Economic slowdown, reduced purchasing power, inflationary pressures, and higher cost of borrowing have yielded demand substantially insufficient in the auto sector. So much so that, current assemblers have had to keep their plants closed for days at end. They could think of alternative ways to resuscitate demand (read: “Automotive folly and its fall”, Dec 26, 2019) but as it stands, they haven’t really planned ahead it seems for when economy starts to underwhelm. That part is also evident in the persistent price hikes by auto assemblers, which did not make sense during FY19 when demand was only slowing down, but now as demand has shrunk dramatically, makes even less sense.
In latest Pakistan Bureau of Statistics (PBS) Large Scale Manufacturing (LSM) index, the industry is one of the worst performing segments in manufacturing, and while commercial vehicles took the lead, passenger cars are not behind.
New players have even a greater challenge on their hands. They have to introduce completely new vehicles in the market and pique interest of prospective car buyers enough for them to want to take a chance on an untested vehicle. But even when overall demand improves, new entrants will have to have a long term plan in place which would ensure them optimal chances of growth, and potentially insulate them from when the economy contracts.
The SBP suggests three interventions: “(i) increasing the localization content in automobile assembling; (ii) providing a level-playing field in the sector by doing away with protective policies; and (iii) addressing market frictions in the auto financing business”. The first one is simple to understand but difficult to implement. Greater local content would of course, reduce dependence on imports which are subject to duties, and assemblers would be less sensitive to exchange rate changes. But this would also require a lot of investment in the auto parts industry. Today, assemblers make mostly functional or cosmetic parts. The investment (as well as expertise and knowledge transfer) is needed in the technological parts which are value-add, and cost assemblers a lot more as well when importing.
The second one is also easier said than done. If past is prologue, there has never been an open import policy in the automotive industry. Automakers have always enjoyed high duty concessions on car imports while commercial import of used cars are also not allowed (note: though used cars are imported in the country by auto dealers who misuse the overseas Pakistan scheme. But this does limit the import volumes). Will the policymakers let the market be free in favor of competition? It does not seem like it given the government is already contemplating another auto policy once the current one runs out.
The third is incredibly important. A very small share of auto sales are actually leased but this number has grown as banks have slowly come on board. Right now, car purchasing is limited to only a few households in the country as it requires a significant chunk of one’s long-term savings. This essentially keeps a major share of the middle class and low-middle class outside the potential market. If auto financing was more accessible and affordable (through flexible payments plans)—and given that documentation woes and fear of the bank are kept at bay for the average consumer—motor vehicles be it passenger cars or commercial vehicles could reach a wider number of households. And though we will have to have a different conversation about congestion and environment when that happens, car penetration in Pakistan is still pretty low and concentrated. For now, financial institutions (including NBFIs, and DFIs) certainly have a great role to play here.
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