In a survey spanning 10,000 respondents from across Pakistan, Pakwheels.com, the online car classifieds site, found that when Pakistanis buy a car, they consider the following (in order of importance): drive quality, fuel efficiency, comfort, value for money and safety. Lower on the list of considerations are features and accessories, car design, resale value, cost of ownership and after sales service (Automobile Industry Survey 2014, Pakwheels.com).

However, a glance through the website’s forums and discussion pages shows that when it comes to locally assembled cars, people do not necessarily get what they want and many car enthusiasts are very cynical about the quality of local cars, believing them to be grossly overpriced while having low fuel economy and occasionally, substandard parts.

These views were echoed in a consumer survey in 2011. The survey, part of a report prepared by the Japanese International Cooperation Agency (JICA) for the Engineering Development Board (EDB) showed that car buyers wanted more durable vehicles with better interior components and electrical parts, a reduction in price, better and cheaper after sales service from authorised dealers and more choice in locally assembled cars. However, the general perception among consumers was that “used cars imported from Japan [are of a] better quality than new [locally assembled] cars, together with [a] price advantage.”

Despite these perceptions and demands, there is little evidence to suggest that auto manufacturers are taking consumer feedback on board (see Mazhar Chinoy’s article on page 8) and new car launches generally offer more style and less substance. Even as car sales plummet and stagnate (depending on which model you are talking about), auto makers choose to ignore legitimate consumer concerns and instead blame the import of used cars for low sales of locally assembled cars.

Yet according to freelance auto dealer, Khalid Rashid, “Used cars are not a threat; the problem is that manufacturers do not listen to customers, they are not willing to face reality.”

The implication here is that if auto makers refuse to listen to customer demands, they will simply have to live with the fact that many people prefer to buy a Japanese assembled used car. But there are problems in this context too as the government has recently given in to pressure from the auto manufacturers and lowered the age limit of used cars that can be imported into Pakistan from five to three-year-old cars, thereby making them far more expensive.

Therefore even as the local auto industry is unwilling or unable to produce cars that are in keeping with customer needs and demands, the same industry is making it more expensive for Pakistanis to buy imported used cars that meet their demands. The result is that the consumer is the ultimate loser.

Let’s get local

To gain an insight into how the current situation arose, it is necessary to first take a closer look at the auto industry and the context in which it operates.

According to Ali Jamali, COO, Indus Motor Company, the local industry has “huge potential for growth given the low motorisation index, with 14 cars per 1000 persons.” The JICA report states that most countries experience a rapid increase in car ownership when GDP per capita exceeds $3000. However, with Pakistan’s GDP per capita at $1380, this is still a long way off.

The local industry produced just over 116,000 passenger cars (800cc to 3000cc) in FY 2013-14 and sold just over 118,000 cars in the same period (a mere 0.6% increase over last year).

Of the three major assemblers, Pak Suzuki with its range of six models (Bolan, Cultus, Liana, Mehran, Swift and Wagon R) accounted for 55% of sales, followed by Indus Motors (Toyota Corolla) at 25% and Honda Atlas (Honda City and Civic) at 20%. In terms of engine size, 49% of the cars sold were between 1300cc to 3000cc, 37% were between 800cc to 1000cc and 1000cc cars accounted for a mere 14% of sales.

The fact is that local car sales are not indicative of local demand. However what is surprising is that local auto manufacturers have failed to capitalise on the potential offered by this category and the only local cars available in the 1000cc and below category are the Mehran, the Cultus and more recently the Wagon R.

Despite having room for growth, auto sales have declined by 25% since FY 2011-12 and by 58% since FY 2005-06, when cheap and abundant car financing made it possible for many middle class Pakistanis to afford a vehicle. A number of macroeconomic factors are responsible for the sales dip, including low GDP growth, higher car prices due to the depreciation of the rupee, wealth disparities (reflected in the fact that 49% cars sold in 2013-14 were priced from Rs 1.2 million upward) and a lack of affordable car financing schemes as a result of high interest rates. Other factors have also played a role, including the lack of choices in every engine size and customer perception that locally assembled cars (particularly those with smaller engines) are not good value for money. As a result, some consumers turned towards buying imported used cars which are more affordable and therefore offer better value for money.

Why import at all?

It is worth remembering that the used car imports that are currently seen as a threat to the auto industry were initiated in order to give auto manufacturers relief from overwhelming customer demand.

The import of used cars is generally only permitted for Pakistanis who work or stay abroad under the transfer of residence, personal baggage or gift scheme. Between 2000 and 2003, only 3,000 to 4,000 cars were imported every year, then in FY 2005-06, when the economy was flush with consumer financing (and local auto sales stood at over 165,000 units), demand for popular car models grew so significantly that auto makers were unable to keep up and customers often had to wait for six to eight months for delivery. In an attempt to reduce the gap between supply and demand, the government deregulated used car imports and allowed three-year-old cars to be imported (previously only two-year old cars could be imported). As a result, the import of used cars went up ten-fold in the same year. In

FY 2006-07, the government further eased the import restriction to five-year-old vehicles, making these cars much cheaper than their local counterparts. However, because domestic production had increased and consumer financing was still available, people opted for new cars over used ones. The local industry managed an all-time high of over 180,000 units in that year and used car imports declined from about 43,000 units in FY 2005-06 to just over 11,000 units in FY 2007-08.

Then as consumer financing became more expensive, demand for local cars also began to dry up (about 83,000 cars were sold in FY 2008-09) and the government once again imposed a three-year limit on used cars. As local auto sales began to recover in FY 2011-12 (over 157,000 units were sold), the Government once again relaxed the limit on used car imports to five years and this time, because of inflation and the significantly higher prices of local automobiles (especially those with a small engine), imports surged at 54,000 units. However in December 2012, the three-year age restriction was re-imposed and used car imports have been declining ever since.

So while the auto industry would like to blame the used car imports as one of the main reasons for the sales dip, the fact is that car imports have showed steady decline and plummeted by 50% in FY 2013-14 (from 44,767 units in FY 2012-13 to 22,185 units FY 2013-14).

Who is to blame?

Clearly, inconsistent government policy over used car imports has not helped the automobile industry but an analysis of the import figures could have taught the manufacturers a few important lessons – if they had looked and wished to learn.

Historical used car data shows that imports have always been highest in the 1000cc and below category (accounting for between 45 to 50% of used car imports annually), where buyers are generally most price conscious. Rashid confirms this by saying that most of the used cars currently coming into Pakistan are between 660cc and 1000cc (including the Alto, the Mira, the Passo, the Vitz and the Wagon R). So is it merely coincidental that the 1000cc category accounted for just 14% of local sales?

The fact is that local car sales are not indicative of local demand. However what is surprising is that local auto manufacturers have failed to capitalise on the potential offered by this category and the only local cars available in the 1000cc and below category are the Mehran, the Cultus and more recently the Wagon R.

So why aren’t there more cars available in this category? And why aren’t the cars that are currently available significantly cheaper considering the level of demand (as demonstrated by the sale of used cars) and the price sensitivity of customers, especially since similar vehicles are 30 to 50% cheaper in India, Thailand and Vietnam? The answer lies in the manufacturing process and in the fact that the local auto industry functions like a cartel.

An analysis of the cost structure of the locally assembled car in the JICA report shows that raw material (mostly CKD, imported at a very high rate) is the biggest component and accounts for 53% of the total cost. The government’s 20 year protection policy of the auto industry and a deletion process aimed at ensuring a shift from foreign to local auto parts did not yield results and the industry is still unable to produce any electrical or mechanical components locally. Even the local parts (tyres and other rubber parts) are often substandard because the local parts industry is not well developed due to lack of transfer of technology and poor quality control. The auto manufacturers are not very keen to change the status quo in terms of manufacturing because regardless of the costs incurred, they are able to charge significant margins on the finished product due to a lack of competition.

One auto expert explained the situation saying that auto manufacturers “continue to pocket high margins without actually expanding or innovating to become competitive. In the entire process, the only loser [is] the consumer.”

Acknowledge and grow

Raza Saeed, CEO, Pakwheels.com says that the greatest challenge and opportunity for the local auto industry lies in the “differential between the number of cars owned per capita in Pakistan compared to other countries. There is lots of room to grow [but] customers need more choice.”

However, to grow the auto industry must acknowledge that along with a more consistent government policy (which is desperately needed), certain other factors also need to change.

The middle class (a not-insignificant group of about 30 million people) needs more cost-effective options in the below 1000cc category. Instead of focusing on the larger engine cars (where the margins are higher), the auto industry must cater to the customer segment most likely to have an impact on overall sales. Secondly, customer perceptions about the substandard quality of local cars have to be managed instead of simply being denied (which is what most auto manufacturers currently do).

Both these ends can be achieved with increased investment, improved manufacturing and a shift in focus from mere profit-making to creating a win-win situation for both manufacturer and consumer. In the age of the empowered customer, ignoring genuine needs and demands is not an option.