Assemblers of 660-1,000cc cars are lucky in the sense that the market is now getting wide open for them to take advantage of shrinking used car imports.
The government’s decision to curb used car imports from January 2019 onwards led to a plunge of 51 per cent in overall imports of motor cars to $222 million in 2018-19. The share of used car imports in this category is over 90pc.
Pak Suzuki Motor Company (PSMC), which holds a share of 54pc in the domestic auto market, has so far remained unhurt by thriving used car imports of 660-1,000cc.
Iconic Suzuki Mehran (800cc) continued to sail smoothly in the presence of imported 660cc used cars like Daihatsu Mira, Daihatsu Move, Nissan Dayz, Nissan Moco, Suzuki Alto, Suzuki Hustler and commercial picks of Daihatsu, Suzuki and Nissan.
The 30-year journey of the two Mehran models came to an end in November 2018 and April 2019. Low maintenance and a high resale value helped Mehran maintain its status as the top option for first-time buyers. However, one cannot be sure as to how price competitive the car was: it did not exist in any other part of the world. PSMC did not ever bother to make an overall model change in the last 30 years probably because the car already enjoyed robust demand.
Analysts believe the policy shift will only strengthen local assemblers that jack up car prices multiple times a year citing the exchange rate movement
The practice also went unchecked by the ministries concerned as the company introduced only cosmetic changes. Prices were raised frequently based on the changing exchange rate in spite of over 70pc localisation. In the last three decades, Japan should have ideally transferred its technology for future local assembly in Pakistan, but that did not happen.
As new entrants like Kia, Hyundai and some Chinese car assemblers enter the Pakistani market, PSMC has rolled out Alto (660cc) in place of Mehran (800cc) keeping in view the consumers’ tilt towards imported used cars of 660cc.
Used car imports are already heading towards a dead end. Being the only small-car maker so far, PSMC enjoys the edge in 660cc segment (Alto) as well as 1,000cc segment (Cultus and WagonR). PSMC has already introduced automatic Cultus. It plans to launch automatic WagonR by the end of this year.
According to the Pakistan Automotive Manufacturers Association, Cultus and WagonR sales rose to 22,763 and 32,614 units in 2018-19 from 20,483 and 29,206 units in 2017-18, respectively.
Speaking on the condition of anonymity, the official of a new entrant in the greenfield category said competition would intensify after Kia and Chinese players entered this segment.
The small-car segment is expected to grow because the imports in this category have virtually stopped. New entrants will also help this segment expand as many used car buyers will opt for new local models, he said.
“I think market growth will be driven by new products brought by new entrants. Prices have gone up for all makers. Competition will be based on choice and options,” he added.
He said curbing the imports of used cars would not curb competition because of the new entrants. New entrants will ensure strong dealer networks, spare-part availability, technical service and attractive warranties — none of which is provided by the importers of used cars, he said.
Some analysts fear that controlling used car imports will strengthen the monopoly of local assemblers that jack up prices multiple times every year citing the exchange rate movement. The official said the new entrants would actually break “any existing monopoly or oligopoly”.
“New entrants are from Korea and China. Competition will impose self-control on existing players. The check-and-balance through used car imports will no longer be required,” he noted.
He said new tax measures like the imposition of the federal excise duty (FED) and additional customs duty were creating uncertainty and instability. “FED should be removed immediately to stimulate the market,” he said.
Consumers have welcomed commercial vehicles from Chinese assemblers, but their cars have so far failed to lure buyers. Chinese FAW is still struggling as its sales figures are unattractive.
Auto-sector analysts believe that locally assembled Suzuki Alto (660cc) may not match the quality of the imported model.
Imported used vehicles are first taken for denting and painting jobs upon their import in the country. Market sources say local car mechanics also tamper with their odometers. They add that most imported used cars have damaged bodies so that importers can avail some duty benefit.
Regal Automobile Industries Ltd is a new entrant that intends to launch a Chinese car namely Prince Pearl (800cc) in September this year. It plans to start the local assembly of the 800cc car in the current month at its Lahore plant under a technical collaboration agreement with a Chinese manufacturer.
In addition, KIA is bringing locally assembled Picanto (1,000cc) in coming months.
Used car dealers are in a quandary as the government’s decision to discourage imports has proved to be the last nail in their coffin.
“The government has literally closed the door on the option or choice for consumers by tightening used car imports,” All Pakistan Motor Dealers Association Chairman H.M. Shahzad said.
He said around 34,000 used cars — 95pc of them being in the 660-1,000cc category — had landed in Pakistan from July 2018 to January 2019. However, only 1,800 used cars arrived in Pakistan from Jan 15 to date. Importers cleared about 900 of these cars after meeting the new rules and regulations.
The increase in the price of Suzuki Alto (660cc) by Rs136,000-138,000 on Aug 1 — i.e. soon after its launch — is also going unnoticed, he said. “This has so far been a record price jump by PSMC on a small car,” he added.
The government wants to control foreign exchange outflows by restricting car imports. But it should also do something about $818m that local assemblers spent on importing completely and semi-knocked down kits in 2018-19, he said.
Falling imports of used cars will also hit tax collection, he said. The government collected duties and taxes of around Rs100bn in 2017-18 on account of used car imports, he claimed.
Mr Shahzad said the government should allow commercial imports of used cars if it believes that baggage, transfer of residence and gift schemes were being misused.
Another way is to allow imports of five-year-old cars instead of three-year-old cars, he said. “Under the new policy introduced in January, it is impossible for used car dealers to import three-year-old vehicles,” he said.
The government has announced that for the imports under different schemes for vehicles in new/used conditions, all duties and taxes should be paid out of foreign exchange arranged by Pakistani nationals or the local recipient, supported by bank encashment certificates showing the conversion of remittances into the local currency. The remittance for the payment of duties and taxes should originate from the account of the Pakistani national sending the vehicle from abroad.
Published in Dawn, The Business and Finance Weekly, August 5th, 2019