Zamir Sheikh shares the facts about emerging trend of importing luxury cars from abroad
One in every 200 person owns a car in Pakistan as compared to 40 persons in Asia, 4 persons in Europe and 3 persons in North America.
The ratio of those who can afford to buy a new car is much lower one person in 2,900. The demand for imported luxury cars has been growing at a substantial rate.
Some factors affecting this trend are: reduction in customs duties, especially on 1800cc vehicles and competition between leasing companies and banks.
Import of new and used cars has risen sharply after the budget, thus giving an impression of buyers’ shifting focus but the booming production and sales figures and the advance booking orders for next few months indicate the existing preference of locally made cars among the prospective buyers.
The Pakistan Automotive Manufacturers’ Association has released its auto sales figures for August 2007. These sales were in anticipation of a 2.5 per cent withholding tax effective from September 2007. Purchasing decisions were moved up to August to avoid paying this tax in September.
After a negative growth of 13 per cent in July 2007, car sales have shown a considerable improvement by increasing from 26.7k units in Jul-Aug FY07 to 28.2k units in Jul-Aug FY08, a growth of 5.8 per cent.
The combined sales of cars and LCVs showed a growth of 7.6 per cent as total units sold have increased from 31.5k units in Jul-Aug FY07 to 33.9k units in Jul-Aug FY08. However, car production was only 2.4 per cent higher at 27.7k units in July-Aug FY08 versus 27.1k units in Jul-Aug FY07.
Car sales showed a significant improvement by rising 21 per cent; unit sales stood at 17.7k in August 2007 as compared to 14.6k in August 2006. On a month on month basis as well, car sales showed a massive rise of 69 per cent (10.5k units in Jul 2007). This rise was caused by the reopening of Pak Suzuki’s plant which was shut down last month for maintenance purposes; greatly improving sales of Honda Atlas and Deewan Farooq.
Honda Atlas and Deewan Farooq have shown a stellar performance on a month on month basis. Honda Atlas sales have increased by 108 per cent as it posted sales of 2,136 units in August 2007 (1,029 units in July 2007).
Car sales up by 5.75% during Jul-Aug FY08
Contrary to the government’s expectations of a positive impact through duty reduction on import of reconditioned cars, Pakistan has already begun to face the aftermath of the government’s inconsistent policies. As one industry expert said, it is for the government to choose if they want Pakistan to develop a strong industrial base and make cars locally, or convert the Pakistani market into an international dumping ground for used and reconditioned vehicles.
Market experts fear that reduction in duties could result in a situation similar to the one created by the Taxi Scheme of the early nineties that allowed zero rated import of taxis resulting in massive decline in sales of locally manufactured vehicles and complete cessation of investment.
Before the announcement of the Taxi scheme, the industry had reached production figures of 65,000 units/year. After the taxi scheme, production reduced to 45,000 units/year and remained at around that level for more than seven years.
They said that car sales would continue to show decent growth on the back of positive economic indicators and rising per capita income. While the duty liberalization on imported cars has not had any major dampening impact on demand for local cars, profitability of the sector is heading towards mass improvement.
It has to be understood that increase in production capacity requires heavy investment, transfer of technology, hiring and training of additional manpower, product development and trials etc. In order to reduce the demand-supply gap in the short term, the Government of Pakistan substantially reduced duties on imported cars, with a view to counter the issue of late deliveries of booked cars and premiums that were being charged by the investors and resellers plaguing the auto market. Government’s policy of reduction in duties of imported cars is bound to have an adverse effect on the local auto manufacturing. The resale value of cars in the local market is plunging causing panic among the buyers who buy new and imported cars at a big price and resell the cargo at a low price when they need money.
According to motor dealers, the import of used cars has adversely and severely affected the local assembled four wheelers and has created instability in the automobile sector in the country.
The shocking impact of imported used cars is sudden slump in the re-sale value of automobiles. Though the local assembled cars are in great demand but when they are resold in the market, the sellers get extremely low prices. For example, the new imported Vitz car cost around Rs775, 000 and when resold in the market after some time it hardly fetches around Rs500, 000/- causing a loss of around 100,000 rupees to the seller.
They said that government’s announcement in reducing the period from five years to three years as qualifying time for importing car has set into motion a fierce competition in Pakistan to import Japanese reconditioned car as these kinds of cars are available in large numbers in the land of rising sun.
They are of the view that the import of reconditioned cars has created imbalance in the local market. They said the import of used cars had cast impact in 2004-05 at the local assembled automobile sector, which subsided with the passage of time.
Market experts said to bridge the demand and supply gap the government in 2005-2006 budget has reduced the import duties on cars by 50 per cent for new vehicles up to 1,500cc and under transfer of residence scheme, gift and baggage.
Besides, the depreciation allowance for 24-month old small car has gone up to two per cent from one per cent per month. Buyers become crazy for used cars because of attractive designs, quality, durability and colours, which the local assemblers could not provide, to some extent.
However, the import of used cars is picking up after the 2005-06 budget and the trade policy incentives, thus easing out the demand for locally assembled cars and bringing down premiums on these vehicles.
It was thought that the budgetary measures would help the people in shifting towards the used and new cars from the locally assembled cars in order to control the demand and supply gap besides tackling premiums and late delivery issues. The budgetary steps have so far failed to make any negative impact on the sale pattern of auto assemblers.
