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Business environment in Nepal: Automobile Industry

Introduction

More than hundred years ago, the first car was introduced in the time of King
Surendra (1881-1911). Before the road linking of Kathmandu to the Indian
border, cars used to be carried by hand. Catering mainly to the Rana or Shah
families, cars brought from India would be driven up to Bhimphedi and then
carried by a group of porters along the Bhimphedi-Chitlang-Thankot route.

Post 1950s, even with increased usage, automobiles were hardly a mass-
adopted item for several decades as they were regarded as quintessentially
luxurious goods in Nepal. But today, they are consumed by a sizable section of
the population; the notion of luxury in regards to vehicles has shifted from
generic ownership to ownership of particularly expensive automobiles.

According to the Department of Transport Management in Minbhavan,
Kathmandu 21,292 cars were registered in FY 2016/17. Likewise, in the past 15
years, 150,303 cars have been registered.

The population of Nepal, according to Central Bureau of Statistics, was
projected to be 28.7 million for 2016/2017 as benchmarked by its 2011 census.
That translates into every six per 1,000 people being car owners. This is quite
a jump compared to the statistics in 1989/90, where there were 21,350 cars
and the population was approximately 18.5 million, which translates as one
car per 1,000 people.

Automobile industry is a sole industry that has posted a consistently
aggressive growth rate in the past one decade. Automobile dealers say that the
sector is witnessing an annual growth of 15-20 percent. Except in fiscal years
2010-11 and 2011-12, the bubble burst in the real estate sector; the devastating
earthquake in April 2015, followed by the blockade, the auto sector witnessed significant
downfall in sales. Some traders also say that with stability in the growth rate and
business, the auto sector has gained maturity.

However, According to Golchha, the penetration of personal cars amounts to a
mere 0.6 percent of the country’s population and the penetration of two-
wheelers stands at just 6 percent. Thus, he beliefs that auto sector is an
important sector for the development of the country and Nepal need more
vehicles to propel growth.
The whole auto sector in Nepal is incorporated under company act Motor
Vehicle and transportation Act, 2049 B.S. With that NADA Automobiles
Association of Nepal is a national level organization of automobile dealers that
represents automobile sector and is involved in promotion of socio-economic
development of the country through automobile sector.

Business Environment of Automobiles

Automobile industry is the top contributor to the government revenue
contributing around NRS 80 billion during fiscal year 2017. In terms of
employment, the automobile industry currently employees an approximate 17
lakh workforce throughout Nepal.

There are a number of factors that have helped to propel sales of automobiles
in the country. Increased affordability, easy financial access, growth in the
inflow of remittance and a rise in the number of people earning middle-class
incomes are among the major factors helping the auto market to swell.

Anjan Raj Shrestha, president of NADA said “The economy witnessed a high
inflow of remittance after the blockade which led to an increase in the people’s
purchasing power. Low interest rates on auto loans also prompted people to
buy automobiles,”

However, despite the aggressive growth and contribution of auto sector in
Nepalese economy, government declared this industry as unproductive sector.
Following the declaration, in the year 2016, February, Nepal Rastra Bank’s placed
a cap on the loan-to-value (LTV) ratio of automobile loans. Nepal Rastra Bank
barred banks and financial institutions from financing more than 50 percent
of the value of the vehicle. Before the introduction of this regulation, banking
institutions were extending up to 90 percent of the value of the vehicle as loan
to vehicle buyers. The new regulation meant auto loan seekers had to make a
down payment equivalent to 50 percent of the value of the vehicle at the time
of purchase. This directive dealt a big blow to the auto sector, as around 90
percent of the vehicles plying on the streets are bank financed. “This was the
main reason that caused sales of cars, pickup trucks, vans, SUVs and multi-
purpose vehicles to drop in the fiscal year 2016.
As per Member of NADA, if the government were to revise the LTV ratio to at least 75
per cent in its monetary policy, it would benefit both the country and the auto
industry. Thus, distributers are expecting increase in LTV through NADA efforts to
the ministry and Nepal Rasta Bank.

Sudeep Acharya
Sr. Manager: Sales & Operations
IMS Motors (SsangYong)

Automobile and transportation sector is the base for development of other sectors as
it is directly related to mobility of people and goods. Halting loan disbursement will
not only make this fiscal’s economic growth target of 6.5 % unachievable but also
adversely affect the overall economy. We keep on hearing about government
initiatives to make the transportation service efficient. However, nothing much has
been done yet. The amount is utilized in other sectors but the development of
infrastructure is poor. The road network in city areas has increased by just 10-15 % in
the past two decades. Therefore, instead of terming the top revenue contributor as
‘unproductive’ sector, the government must be able to utilize the revenue fully in a
systematic manner.

The main driver of the auto sector till date has been the banking sector. In other
words, Nepal’s auto market is growing in tandem with the banking sector. And since
the banking sector is expected to continue growing in the coming days, the future of
the auto sector looks promising.

http://kathmandupost.ekantipur.com/news/2017-08-30/auto-market-zooms-ahead.html

However, the major factor contributing to the rise of automobiles is the
unavailability of abundant public transportation services. Be it in the country’s
capital city Kathmandu or remote villages, public transportation is poor. While
people in Kathmandu are compelled to buy a vehicle due to the hassles of travelling
on public transportation, in remote Nepal, the unavailability and inconsistency of
public vehicles forces people to arrange their own transportation.

http://kathmandupost.ekantipur.com/printedition/news/2015-09-16/automobile-sector-
gaining-maturity.html

Another development which shows that Nepal’s automobile market is moving
towards maturity is the fact that auto sales have started witnessing good growth
outside Kathmandu too. According to Shrestha, while Kathmandu used to make up
60-70 percent of the total market for two-wheelers, the situation now is the other
way around. “In the four-wheeler segment too, growth has been significant outside
Kathmandu,” Shrestha said.

http://kathmandupost.ekantipur.com/printedition/news/2015-09-16/automobile-sector-
gaining-maturity.html

In 2016, the overall domestic automobile industry expanded by 70 per cent as
compared to 2014,” informed Rupesh Sharma Bhatta, Assistant General Manager of
Laxmi InterContinental, authorised distributor of Hyundai Motors. “The major
reason behind the massive growth in sales was due to the pending sales of the 2015,
which was largely affected by the April earthquake and economic blockade,” he
shared, adding that flexible auto loans and aggressive new launches were other
factors that helped boost the industry.

He further added that 30 per cent of the government’s revenue comes from the
automobile sector and thus its success is directly related to economic growth of the
country. If the government were to revise the LTV ratio to at least 75 per cent in its
monetary policy, it would benefit both the country and the auto industry. However
Pandeya said that if the current cap on financial support for automobiles continues
then the auto industry may not witness any growth next year, since the interest rate
is a big factor influencing purchases.

Sudeep Pandeya, Head of Marketing at Sipradi, sole authorised distributors of Tata
Motors in Nepal

“The growth in the number of automobiles in the past few years has been
impressive,” said Shekhar Golchha, president of the Nepal Automobile Dealers’
Association (Nada). “In the absence of abundant means of public transportation, the
tendency of buying a personal vehicle has increased.”

However, the major factor contributing to the rise of automobiles is the
unavailability of abundant public transportation services. Be it in the country’s
capital city Kathmandu or remote villages, public transportation is poor. While
people in Kathmandu are compelled to buy a vehicle due to the hassles of travelling
on public transportation, in remote Nepal, the unavailability and inconsistency
of public vehicles forces people to arrange their own transportation.
http://kathmandupost.ekantipur.com/printedition/news/2015-09-16/automobile-
sector-gaining-maturity.html

Why purchase automobiles?

A typical individual can have many conflicting motivations to purchase
commodities such as automobiles to address genuine everyday needs. They
might wish to flaunt their possessions, yet they may also wish to save time to
commute to various places. Or perhaps they want to perform many
responsibilities without any of the hassles attendant to travelling in a public
buses. But bereft of a straightforward answer, we have to concede that
increasing purchasing power generally implies increasing prosperity.
Assuming that an increase in wealth commands better amenities and higher
standards of living, higher purchasing power demonstrated in automobiles can
be a rough gauge of national prosperity. But it could be reasonably assumed
that when automobiles are more a necessity aligned with urban lifestyle than
an extraneous purchase of surplus savings, no consistent inference can be
drawn from increased access of automobiles.

Impact of automobiles

Automobile owners in Kathmandu regularly brave traffic congestion. The
main culprits of congestion here, even with relatively low ownership of
vehicles compared to cities around the world, are the architects of urban
planning. The congestion problem underscores not just high traffic volume but
also high density, given the paltry width of roads that cause bottlenecks.
Traffic congestion can also be compounded by the failure of city authorities to
find space for street markets, squatters occupying space, a remarkable number
of stray dogs, cows, and other animals. Many houses in urban areas in Nepal
have to take parking space for vehicles into consideration while building their
houses. Government entities must implement urban planning policies. At the
very least, they must leave aside enough space for roads, drainage, water
pipes, electricity poles, vehicle parking, bus stops, and other important
amenities.