PAKISTAN’S small automotive market saw months of robust growth recently as the market size of locally assembled cars, jeeps, commercial vehicles and vans increased to 260,000 units in 2017-18; but all that is about to change.
Coming after months of robust growth in sales, the big drop in August automobile purchases could be a sign of a looming collapse paralleling that of 2008-09 when automakers saw the market size shrink to 82,844 units from 164,650 units a year earlier.
The new industry report shows a sharp decline of 17 per cent in the sale of cars, LCVs, vans and SUVs across all three Japanese auto assemblers — Toyota, Honda and Suzuki — with low-priced, economy vehicles (below 1000cc) experiencing the steepest fall of 20pc in August from a month ago. Overall, industry car sales plunged 18.5pc as the economy segment witnessed an above 20pc decline. The 4x4 market increased by almost 18pc but pick-up truck sales dipped around 16pc.
Suzuki Motor Company that virtually monopolises the economy market saw its sales sink by 23.4pc followed by Honda Atlas Cars (Civic, City and BR-V) by a fifth. Indus Motor Company, which assembles Toyota cars and jeeps in Pakistan, suffered eight per cent loss in its sales.
Both Toyota and Honda make 1300cc and above vehicles. Suzuki, only a few hundred cars with engine capacity of 1300cc as it has focused on the smaller cars since its inception. Suzuki experienced the highest sales losses of 26pc in the car segment below 1000cc (Mehran and Bolan) followed by a 20pc decline in the market of its pick-up, Ravi. The company’s 1000cc segment, Cultus and WagonR took a hit of 13.6pc.
‘The government policy of banning sales to non-filers will hurt existing car makers. It is also going to hit new brands like Kia, Hyundai, Reno and others that are making substantial investments in their assembly plants,’ underlines Mr Hashmi
Similar trends were observed in the imported used cars market as small car sales dipped significantly in July on a year-on-year basis, according to available import numbers.
“Several factors have led to low auto sales last month despite a robust domestic demand,” insists a prominent Lahore-based auto parts producer and exporter, Syed Nabeel Hashmi. “The industry was expecting this because of the government ban on sale of new cars, including the used imported cars not registered in Pakistan before, to non-tax filers.”
Others agree that the government restriction that prevents first-time registration of new local and used or new imported vehicles to a non-filer was the most significant factor resulting in the contraction of the market.
The ban came into effect from July 1 this year. Consequently, car makers had to cancel several thousand orders from non-filers who can buy a local or imported car only through banks.
“Other factors like (economic and financial) policy uncertainty in the wake of a change in government, price hikes by local assemblers to absorb the impact of rupee depreciation since December last year, consumer expectation of new models and variants, seasonal factors like Eid, end of Kharif season and so on also played a role but the non-filer sales ban has proven to be the proverbial straw that broke the camel’s back,” argues an auto industry analyst at the AKD Securities, Ali Asghar Poonawala.
Amir Allahwala, a leading Karachi-based auto parts producer, says the sharpest decline in the sale of vehicles with 1000cc and below engine capacity underscores the impact of the tax non-filer sales ban on the car market, a segment dominated by people who do not pay taxes or file returns.
“This restriction is going to have a very significant effect on the size of the car market in Pakistan with tax filers constituting less than one per cent of the total population. The market size could halve as the impact of the ban spreads over the cars above 1000cc engine capacity over the next few months once non-filers are thrown out of it.”
Rising prices of new locally produced low-priced vehicles could be another reason, albeit less significant than the non-filer sales ban, for the August decline.
No exact data is available on how many locally assembled or imported vehicles are sold through lease or on cash. But the industry estimates that only a fifth buy their cars on lease because of higher interest rates. Some contend that the government restriction could force non-filers to purchase cars from the used car market, allowing investors make huge profits.
There are reports, according to Mr Poonawala, that point to additional levies on imported vehicles and reduction in maximum allowed years of depreciation for used cars as the government takes measures to reduce the bulging trade deficit. “But the non-filer sales ban will be the key to determining the size of the market for domestic assemblers.
“The government policy of banning sales to non-filers will not only hurt existing car makers. It is also going to hit new brands like Kia, Hyundai, Reno and others who are making substantial investments in their assembly plants,” underlines Mr Hashmi.
“If the demand shrinks, as we expect it to going forward, on the back of government curbs, the new players are likely to feel the heat as well. There will be blood when existing and new car makers try to maintain or capture a share for themselves in the shrunken market. The dream of producing half a million cars in the country by 2023 will be over soon.”
Published in Dawn, The Business and Finance Weekly, September 17th, 2018