Will the economic slowdown process affect the new entrants?

The Auto Policy 2016-21 was a considerable development in the auto industry of Pakistan as it encouraged the investment opportunities with several new entrants in the market, but will it benefit the investors? There is a probability of getting over 300,000 units in the auto market in addition to those being already produced in the local industry in the next couple of years. How will it result in distributing the market share among the old and the new entrants? Will the new entrants be able to break through the three Japanese auto giants in the local industry? There are certainly many questions arising from the current economic situation of the country.

The economic slowdown process in Pakistan could make a huge negative impact on the automobile industry as the prices of cars tend to take the steep road upwards. The buying power in the country is dropping drastically hence resulting in less automotive sales and eventually decreasing the profit margins of the auto manufacturers. All this in an interesting phase where as many as 17 new entrants in the greenfield and brownfield segment are gearing up to grab the market share in the next two to three years. It is hugely considered that the market itself will decide the fate of the new entrants; however, the working environment is already turning its back on them. With an investment of over 1 billion dollars, the monopoly of decades-old Japanese auto giants is also hanging in the hands of fate.

In a bid to materialize the competitive market approach, adding 17 new entrants in the auto industry at a stretch is way too much. It becomes an uphill task for the new players to succeed in the localization of parts which is the utmost need for growing auto sector of Pakistan. The high localization demands high volumes of production and with just a slice of market share; it’s next to impossible to achieve the goal. Eventually, it creates less number of job opportunities instead of promising large scale jobs. The process of localization of locally assembled vehicles takes time and solely depends on the consumer’s response in the competitive market. However, the desire to localize parts exists among all the new players who are a positive aspect of the story but remains a challenge as this sort of launch of multiple models has never been experienced in the local market before.

As a potential buyer, one should not expect low prices of upcoming vehicles under the current economic situation in the country. It’s certainly disappointing for the consumers yet appreciating as we know that for the first time even the entry-level cars in the local industry will be equipped with more attractive features and much better build quality on offer.

For an underdeveloped country like Pakistan, the sales volume of 330,000 units including as many as 70,000 completely built units (CBUs) in 2018 shows there is a lot more room to grow. The population of Pakistan has crossed 20 million however the ratio of the number of units sold per 1000 population stands at 1.65 which is way less than the global ratio which is almost 10 times at 12.8 units. The growth in the automobile industry has also been particularly limited over the years. For instance, the number of units sold in 2006 was 236,000, and if we assume a 6% annual growth, the country should have been standing at more than 500,000 units. The recent entry of these new players is encouraging for the auto sector; however, dealing with the launch of simultaneous models remains a worry on a short-term basis. Looking at the price breakdown of a car in the country, nearly 30-38% of the value is consumed by different taxes and duties. Rather than decreasing the duties on CKD kits, the government can reduce them on the components used in the manufacturing of these units. On the other hand, the reduction in sales tax and Federal excise duty could also lead to a significant drop in car prices.

The new players still find themselves in a vulnerable situation due to the exchange rate impact on the production of vehicles. The continuously growing pressure of the devaluation of Pakistani Rupee against the US dollar means the new entrants would not find it easy with small volumes and low level of localization. Therefore, the government can also relate the localization with modern technology based vehicles having low volumes so that the auto manufacturers may find it easy to introduce them in the market at competitive prices. For instance, Changan plans to export its vehicles to other right-hand drive countries which could only be achieved by cutting down the current manufacturing costs and increasing parts localization.

The story looks completely different now as it was at the start of the investment cycle under the auto policy 2016-21. At this moment, the market will itself decide the fate of the new players and how much of the market share they will be able to snatch from the old ones. Nonetheless, it would benefit consumers more than anyone else. All the auto manufacturers would be fighting for a higher market share and leaving a foot-mark by offering new and improved features in their vehicles. The consumers will get high-quality products at competitive prices in the market. The demand would only increase gradually under the prevailing economic and political situation in the country. The government policies regarding the automobile industry will also play a significant role in defining the future of the new players as there is no consistency at the moment which holds back the sector growth.

On the other hand, the depreciation of rupee remains a concern for the auto manufacturers in keeping competitive prices of their products. It results in a continuous rise in prices since the raw material used in the manufacturing of parts is also imported from other countries. Nonetheless, it will be a similar challenge for both new and old players to face in the local industry. Moreover, with several new models making their way on the roads, the ON or premium money charging mafia will end soon.

What are your thoughts regarding the fate of the automobile industry of Pakistan? Drop your valuable opinions in the comment space below. Stay with PakWheels for more relevant updates.