Auto manufacturing ‘Mother of All Industries’

One of the most important sector which contributes to the economy in terms of revenue generation,
foreign exchange, employment creation, and technology transfer is the automotive sector. The sector
accounts for 4 percent of Pakistan's GDP and employs a workforce of over 1,800,000 people. The
automobile industry in Pakistan includes companies involved in the production/assembling of passenger
cars, light commercial vehicles, trucks, buses, tractors and motorcycles.

The Quintessential Oligopoly and the Efforts to Break it

When it comes to car sales, Toyota, Honda, and Suzuki have been successful in establishing their mark as
leading players in the automobile industry of Pakistan. However, ​Pakistan's automobile policy 2016-21
offers tax incentives to new entrants in order to help them establish manufacturing units in Pakistan.
Many international auto manufacturers have taken advantage of this policy and brands such as Renault,
Hyundai, KIA and Volkswagen are entering the Pakistan market. There are also a number of Chinese
automakers who are now showing interest to set up manufacturing units in Pakistan such as Changan, Ka
Hanteng Motors, FAW (already started operations), JAC Motors, LIFAN and JW Forland, etc.(Business
Recorder, 21 November, 2019)
Another important aspect in the automobile sector was the import of Japanese cars. Japanese cars became
very popular and started to dominate the auto-industry in Pakistan. ​According to All Pakistan Motor
Dealers Association (APMDA), almost 70,000 cars are being imported into the country annually. This
huge Japanese cars import segment generates around $1 Billion for the government in the shape of
income tax, levies, and import duties. However, t​he government has now decided to restrict and regulate
the import of new and used cars in the country. The decision has been made to curtail the dollar flow out
of the country and to make sure that no one misuse the mechanism of personal baggage and gift scheme
for the purpose of commercial imports of cars and other vehicles. Moreover, it will also end the menace
of Hundi/Hawala currently prevalent in Japanese cars import business. According to the new policy, now
it is mandatory to pay the customs duty and other taxes through the foreign exchange which will be
endorsed by Bank encashment certificate (showing the conversion of foreign remittance into local
currency). It means that the tax amount paid for the said cars will be paid from external sources and not
from within the country.

Nosedive in Car Sales

Furthermore 2016 onwards the prices of vehicles started to increase gradually. The prices further faced a
drastic increase in FY 18-19. This resulted in ​sales taking a nosedive with a 42% plunge in units sold in
July 2019 when compared to July 2018 as only 12,482 units were sold in the former compared to 21,344.
The downward trend was across the board with all three companies; Honda, Suzuki and Toyota
performing poorly. Honda Atlas Cars saw a staggering 66% plunge on a year-on-year basis. Indus motor
saw the biggest year-on-year fall in sales in the past five years according to a Topline Securities’ report.
The increase in interest rate added to woes of the industry and the depreciation of Pak Rupees was like
fuel to the fire.
Auto Linkages

The automotive sector has deep forward and backward linkages: backward linkages in the form of
reliance on a number of vendors for the supply of various components. It has forward linkages in the
form of dealership networks and agents for the provision of after sales services. According to the
Automotive Industry Development Programme (AIDP) the auto industry economic and job multiplier in
the Pakistani context is 1:3 and 1:8 respectively.

Auto sector stands out among all manufacturing sectors of Pakistan and it has developed a world class
vendor base capable of making precision cars and engineering components at globally competitive rates.
The vendors are currently contributing to over 60 percent localisation in domestically manufactured
vehicles. Most existing car manufacturers now realise that localisation is beneficial for the auto industry,
consumers, and the government as well since the impact of devaluation and global crisis is minimised
through indigenous engineering base. Through research and quality conformation by these companies,
the import of parts was substituted that eventually helped original equipment manufacturers in getting
quality parts locally to save shipping time, foreign exchange for the country, and to create huge
employment base. Currently, 400 vendors from all over Pakistan are providing parts worth more than
Rs90 billion every year and this reflects the level of localisation achieved in the last 29 years of its
journey.

Nabeel Hashmi, owner of one of the leading export-quality auto parts industry, has expressed
apprehension on the decline of sales in 1300cc. His concern alone is upsetting enough for the whole
industry. However, he acknowledges that lower CC vehicles have not shown such a drop yet. He further
expresses concerns on the constant rate of prices of auto parts, while the prices of cars have been
increasing. This unparalleled appreciation in prices may result in bank defaults for auto-industry. This
poses great threat to the employment opportunities in the auto parts industry.

Where We Stand Now

The prices of locally manufactured cars as well as imported cars have increased. Most of the damage has
been done by the depreciation of the rupee; roughly 27% against the greenback since August of 2018 to
date. Two of the most important and expensive components of automobiles in here, the engine and
transmission, are imported. That right there is a significant jump in cost. Add to it the increase in Federal
Excise Duty on cars and their registration cost, and all vehicles become unaffordable. The net effect has
meant that a 1.8L new Civic costing Rs 3.0 million on-road a year ago is now costing upwards of Rs 4.5
million. A similar proportionate increase can be seen across the range being offered by Indus Motors and
Suzuki.
Factory lots where previously cars right off the belt would not stay for longer than a day, due to the high
demand, are now full. Indus Motors even tried to absorb some of the price hike by offering to pay for the
registration of its lower-end, lower displacement vehicles. With car inventories piling up, Honda and
Indus have reduced their manufacturing by observing no-production days. New entrants such as Hyundai
and KIA have also been compelled to revise their introductory prices upwards as they are importing
CBUs (completely built units). Hyundai’s IONIQ for example has been launched at an eye-watering
Rs6.4 million- a hybrid 1600cc hatchback.
On the consumer side disposable incomes have decreased, so even the cheapest cars are now a luxury
now ill afforded. Leasing cars is also no longer a financially viable option with the discount rate at
 13.25%- add to that bank premium and you’re paying at least 15% mark-up, not to mention the higher
down payment at a minimum rate of 33% of full price.

Questions

1. Does 60% localization of domestically produced cars mean that the auto parts industry is developed.
What measures can the car manufacturers take to develop the industry and would it have made any
difference in the situation of the sector today.
2. Do you think an increase in car prices is justified and who is responsible for such price hike?
3. Being an auto expert, what strategic measures you would suggest to the main players to restore the
industry? Highlight the previous mistakes of the manufacturers.
4. What could be the impact of the new manufacturers/entrants on buyers and sellers of current auto
industry?
5. The major risks faced by the automotive sector in Pakistan includes high rate of duties and tariffs, lower
production in spite of higher production capacity, and dependence on international suppliers. Comparing
these factors with India and Indonesia, what advice would you give to the government for nurturing of
the industry until the threshold volumes are achieved to gain competitiveness.

​Considerations

1. Shifting trend in overall sales, purchase and manufacturing of locally manufactured and imported cars in
Pakistan.
2. Changing policies of purchase and sale of locally manufactured and imported cars in Pakistan.
3. Trends in tariffs, customs and registration of all the cars available to Pakistani customers.
4. Change in tastes and preferences of consumers of cars in Pakistan
5. Arrival of new auto manufacturers in Pakistan.
Appendix A:
http://www.pama.org.pk/statistical-information/historical-information/annual-sales-production
Appendix B:
http://www.pama.org.pk/statistical-information/sales-production/monthly-sales-production