WHEREAS more than two million motorcycles, most of them 70cc (an indication of the engine size), are sold in Pakistan every year, only around 150,000 cars are built and sold here. Despite a recent increase in sales, the three car manufacturers are still producing below capacity.

Going back to a little more than a decade ago, the motorcycle market at the time was also relatively small. And the level of localisation, ie manufacture of parts within the country, was also low. But then a few changes took place. The Chinese produced the 70cc engine and parts cheaply, Pakistani importers started bringing in and assembling the Chinese motorcycles here, the increased supply at lower cost put downward pressure on market prices causing the lower cost to stimulate local demand, and the market, as a result, started to expand.

With expansion came the impetus for the local manufacturing of various parts. Today, with a market size of more than two million a year, almost all parts are made locally and, more importantly, the market is large enough to ensure that the economies of scale are available to local parts/motorcycle manufacturers.

The motorcycle market has expanded rapidly, even in the peri-urban and rural areas.

Another very important innovation, in the motorcycle market, was the introduction of buying on instalments. A 70cc bike priced at about Rs38,000 is available at a minimal or zero down payment of as low as Rs3,000 per month. This implies that, apart from the petrol and maintenance cost, for about Rs100 a day a person can have their own motorised vehicle. If a person has to drop or pick up their children from school, go to their place of business, do their groceries and other household chores, Rs 100 per day might be much cheaper than using public transport.

The result is not surprising: the motorcycle market has expanded rapidly, even in the peri-urban and rural areas, and is set to continue to expand over the next few years. Even with two million sales, it will be a long while before the potential demand for a 200 million-strong market will be met. And then there is the replacement market as well.

The 70cc market is, almost entirely, a domestic market. The 70cc bike is not popular in other countries and there is no country that produces 70cc bikes in the numbers that we do — 100cc and bigger bikes are more the norm in other countries. So, there is little or no export potential in the 70cc segment. But, the Pakistani market is also changing, and the 100cc and 125cc/150cc market are starting to expand and a significant degree of indigenisation has already taken place for the 100cc motorcycles.

Local 100cc brands are available for less than Rs50,000. Honda 100cc is about Rs85,000. Sales for 100cc are increasing quite rapidly and the industry expectation is that over the next few years 100cc and bigger motorcycles will constitute a much larger percentage of the market. Another impetus for the shift towards 100cc is its better second-hand market. Older 100cc motorcycles can be converted to Qingqis and there seems to be a market for second-hand 100cc motorcycles in rural areas for this very reason.

It is worth noting that the developments in the motorcycle market have, more or less, happened without any involvement of the government. In fact, these developments have happened despite the government, and industry players are very happy that the government was not there to mess things up.

The initial imports of 70cc motorcycles from China happened through private players, the assembly operations, by local players, started mostly with owner finance and through entrepreneurial initiative, localisation of parts started as market size increased and this too happened through local initiative. Some players started local production and have created Pakistani brands and now the biggest producers, amongst the local brands, are quite large themselves. They are now gearing up for 100cc production and for other innovations in the motorcycle market. All of these initiatives have been market-driven.

Even the opening up of the finance market happened without any input from formal sector financial institutions or government. It was producers, assemblers and dealers who started to sell motorcycles on instalments. The motorcycle transactions are too small to give any profit to formal-sector financial institutions. Given the poor contract enforcement/property rights environment, credit providers need to have good screening and local enforcement mechanisms (personal guarantees etc.). This could only be done through the informal market. Entrepreneurs took the risk and it has paid good dividends. It has benefited not only individual dealers and producers; the entire motorcycle market has been opened up. It has allowed local players to become established and has also helped the local engineering industry with all the expected employment and production benefits that go with that.

We need a similar impetus and opening up in the car market — 150,000 cars a year, for a population base of 200 million, is a sign of a very restricted market. We are a very young nation where 60pc or so of Pakistan can be classified as youth, and three to four million people are entering the job market every year. Even if a small percentage of these people buy cars, the numbers should be 500,000 a year or so. But currently, with only three car manufacturers, limited competition, high prices for even small cars, and no availability of finance, the market is way below par.

Cars are expensive and so opening up of the market might require intervention by formal-sector players and government. But the benefits of having a 500,000 local market would be significant — for the consumers, for producers, for the engineering industry, for vendors and for society at large in terms of contribution to growth, GDP, and employment. A new automobile sector development policy is about to be announced. Let us see if the government will be able to exploit the potential that is clearly there.

The writer is a senior research fellow at the Institute of Development and Economic Alternatives and an associate professor of economics at LUMS, Lahore.

Published in Dawn, March 13th, 2015

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