The auto sector of Pakistan is in a deep crisis of economic contraction process, which raises several questions regarding the future of the new entrants. Several analysts and stakeholders believe that there is no light at the end of the tunnel for them. The new players entered the auto sector of Pakistan with investments worth billions, but the current situation is making their presence hanging by a thread. Will the government reconsider and bring consistency in its policies before it’s too late? We will have to wait to find out!
Pakistan Automotive Manufacturers Association (PAMA) recently released the sales stats for the first month of the fiscal year 2019-20. It reveals that car sales declined by 42% to 10,968 units in July 2019 as compared to 18,875 units during the same period in 2018. We have also been consistently talking about the dropping car sales in the country but what has been behind this terrible situation? There is definitely not a single reason but several factors which have together contributed to pushing the auto industry to the verge of absolute demolition. First of all, the constantly changing policies of the government have left the investors in uncertainty. The imposition of a high amount of taxes and duties on locally assembled vehicles has further dented the sector with low sales. At the same time, such a sharp and record depreciation of rupee against the US dollar has forced the automakers to jack up the prices of their vehicles. In the past year, the rupee has devaluated by nearly 26%, which created a negative impact on the overall face of the auto sector during this period.
Furthermore, the duty on completely built units (CKD) was also increased by the government from the previous 30% to 37%. It didn’t end here as the government implemented the Federal Excise Duty (FED) on all categories of cars which was previously only collected at 10% from the new locally assembled cars of 1700 cc and above engine capacity. This particular step has especially affected the new entrants who presently have only high-end cars in their lineup over 2000cc engine capacity in which 7.5% FED is collected. Moreover, bank interest rates have also been revised from 11% to more than 17%. As many as 30%-35% cars were leased, which is not the case anymore, hence affecting the sales. The consumers are more interested in waiting for a drop in the interest rates before they lease a vehicle. According to the experts and analysts, the buying power of consumers has dropped considerably, and buying a car is no more a top priority for the people.
The entry of new players in the industry was highly anticipated as they were expected to end the monopoly of the existing few auto manufacturers. However, things did not go the way one would have expected. One of its examples is KIA’s Sportage which was initially announced at a price tag of Rs.3.5 million but revised to Rs.4.9 million at the time of its official launch. KIA is also the first company to enter the local auto sector ever since the government announced ADP 2016-21. The company invested $175 million to establish its new auto plant with a capacity of producing 50,000 units per annum. Some experts believe that car sales might drop even further during the month of August and could continue for the next few months. During the last year, car prices have gone up by almost 30%, which has dented the hopes of the new entrants. However, the US dollar has now stabilized, which is a good sign for the auto industry. All the new players are also facing a tough situation because they have come up with mid-range or high-end vehicles above 1800cc. The buying power of the consumers is already low and hence draws very little attention towards their expensive vehicles. Most of these new entrants are waiting for the customer confidence to build up in the market before they announce any further models.
The Chairman of PAAPAM, Muhammad Ashraf Sheikh says that the car prices have gone beyond the purchasing level of the consumers due to which the new automakers are struggling to get the sales going. Even the existing ones are facing trouble with such a considerable drop in sales. The prices of newly launched vehicles are also being increased by more than 20% immediately after their launch, which shows the state of the market. He further said that new investments have either stopped or slowed down. Currently, it’s all about surviving for the new auto manufacturers in the country. Another Korean auto giant Hyundai is also facing tough times in terms of selling its vehicles in the local market. Nissan and Renault are yet to make an announcement regarding their plans. With that little sales numbers, new entrants will be unable to gain any profits and would eventually look to wind up their investment. No improvement is visible in the short term, while things might improve after a few months. The government needs to play a role here in providing a secure environment to foreign investment from global market players. The local sector can only flourish when there is a sense of security in investing the money. Else, all the hard work that was put in for the growth of the auto sector would go in vain soon.
The decline in sales has also put the existing auto manufacturers in a spot of bother. Toyota Indus, Honda Atlas, and Pak Suzuki, all of them have reduced their operations from two and a half shifts and two shifts respectively to only one shift. With this, there will be a massive cut down in the employment. The auto industry has never seen such a slump in the past decade or so. Nonetheless, the government needs to step in and provide a level playing field to all the auto companies in the country, especially the new entrants. Their presence in the sector would boost up the competition and result in the production of high-quality products. There is a need for consistent policies from the government to counter the prevailing economic contraction situation in the country. We hope that the auto industry blooms once again with several auto manufacturers competing in the local market.
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nicely written.