Aurora Magazine

Promoting excellence in advertising

Published in Jan-Feb 2019

Chasing cars

The Automotive Industry Development Policy has set the scene for an exciting 2019 for car buyers.

In 2018, Pakistani consumers were more discerning and globally-aware and therefore, more mindful of issues such as monopolistic practices, obsolete models, lagging technology, exorbitant prices and extended delivery times; issues which seemed to characterise Pakistan’s automotive industry. In fact, the three Japanese car brands in Pakistan (Honda, Suzuki and Toyota) have been persistently berated for dumping obsolete technology into the local industry and have often been accused of looking the other way as far as passenger safety is concerned, with the customer resigned to accept defective deliveries at exorbitant price tags. As a result of this, the government in their Automotive Industry Development Policy (AIDP) 2016-21 have moved towards finding solutions to these growing complaints, thereby compelling current manufacturers to introduce frills, trim and tech upgrades to their product portfolios.

The impact of AIDP

The new policy has laid out the direction of the future of the automotive industry. It envisages more than what the industry currently offers and rocks the boat in favour of consumers and new automotive entrants. The first issue the policy addresses is to make it mandatory for manufacturers to enforce built-in safety regulations including compulsory installation of immobilisers (electronic security devices that prevent the engine from running unless the correct key is used). Furthermore, in line with global practices, more effective manufacturer product recall systems have been instituted in case of safety snares. The AIDP also unveiled attractive terms specific to reduced duty structures and tax holidays for foreign investors.

Another major issue was the extended delivery time periods for booked vehicles. In the current scenario, buyers have to book vehicles by paying a substantial sum in advance (which can sometimes amount to 100% of the total cost), despite the fact that the vehicles are delivered after an extended waiting time. Furthermore, if prices go up during this time, buyers are required to pay the extra amount on the date of delivery. This has led to the practice whereby buyers looking for a quick delivery are forced to pay a premium of up to Rs 150,000. Now, according to the AIDP, cars can be booked at not more than 50% advance payment system and delivery must be made within the approved timeline and not exceeding two months. In case of delay, buyers will receive interest payments – Kibor (Karachi Inter Bank Offer Rate) plus two percent on their advance for the time the vehicle is not delivered. This is being implemented; a friend known to this writer was over the moon after receiving a compensatory cheque of Rs 26,000 from Honda for his delayed Civic 2018.

A further problem the AIDP tackles is the demand-supply gap, which according to industry analysts is in the order of 90,000-100,000 units, in a projected annual market size of 260,000 units. The only viable solution is to encourage new players to enter the market and encourage existing ones to expand their production without compromising on quality. Another key element has been the reduction in interest rates which have skyrocketed the cost of car financing and which, according to the Economic Survey, peaked at an all-time high of Rs 127 billion at the end of 2017 (data for 2018 is not yet available, although the numbers are thought to have declined).


The key to a booming market remains the small segment cars. The introduction of competitively-priced, under-800 cc vehicles are critical to ensure profitable results, which is why a key constituent in boosting the economy is expanding the middle-class by converting existing motorcycle users into buyers within the 600-800cc segment.


Factors attracting foreign automakers to Pakistan

Projects related to the China-Pakistan Economic Corridor (CPEC) aimed at connecting large swathes of Western China and Central Asia to the Arabian Sea are likely to encourage European and other manufacturers to set up plants to meet an anticipated increase in small cars. The Romanian car manufacturer Dacia has expressed interest in this regard, with Chinese companies like JAC also considering introducing small cars for the Pakistani consumer. Another factor likely to boost demand for cars is the impact of ride-hailing services such as Careem and Uber, which are encouraging people to invest in cars and take advantage of the opportunities these services offer as income generators. Since the announcement of the AIDP, by June 2017, nine companies had applied to set up manufacturing plants, with Kia, Hyundai and a so far unnamed Chinese manufacturer reportedly on board. As per the Engineering Development Board and the Ministry of Industry and Production, these three companies have brought in foreign investment worth $372 million; $190 million by Kia-Lucky, followed by $164 million by the Nishat Group and $18.1 million by United Motors. Hyundai, KIA, Volkswagen and Renault too are set to build manufacturing plants in Pakistan with a combined investment of $800 million.

The key to a booming market remains the small segment cars. The introduction of competitively-priced, under-800 cc vehicles are critical to ensure profitable results, which is why a key constituent in boosting the economy is expanding the middle-class by converting existing motorcycle users into buyers within the 600-800cc segment. There is also speculation about other players entering the market. Al-Haj Automotive Private Limited are said to have signed an agreement with Malaysian automaker Proton Holdings to assemble and distribute an affordable variant of Proton’s popular electric and eco-friendly Iriz car in Pakistan. United Auto’s Bravo hatchback have already made an appearance and are hastening the demise of Mehran as a comparatively-efficient, modern 800cc car with a spacious interiors, electric windows, rear-window defrosting, remote central lock, reverse camera, electric power steering (in some variants), a touchscreen infotainment system, USB ports and a comparable price tag. Nissan are also making their way into the market via a manufacturing, licensing and distribution agreement with Ghandhara Nissan and are reportedly set to produce locally assembled Datsun models with their Redi Go hatchback high on the cards. China-based JAC Motors is also planning to bring electric vehicles to Pakistan, with JAC iEV7S and iEV6S possibly making their debuts in Pakistan.

According to analysts, these incentives may result in foreign direct investment in excess of five billion dollars within the next five years. The entry of multiple industry players will also make prices competitive, with a clear benefit to the consumer, not to mention the automotive parts industry, which is expected to expand from the current 2,000 vendors and result directly in transfer of parts technology.

What is attracting local business groups to sign up for JVCs?

Simply put, it is the incentives offered by the AIDP which allow the one-time, duty-free import of a plant and the machinery required to set up a manufacturing facility. Also allowed is the import of 100 vehicles of the proposed model in the form of completely built units (CBUs) at 50% of the prevailing duty once the project commences. Added to this are the substantial tax incentives, with new entrants only paying 10% customs duty for five years on the import of non-localised parts and 25% for localised ones. Current players, however, will continue to pay 30% duty for local and 50% for imported parts, thereby providing a competitive advantage to new JVCs.

The stage is now set for an exciting 2019, with more market players, greater variety on offer, latest technology with state-of-the-art safety and comfort features – and finally, a hopefully content consumer.

Mazhar M. Chinoy has led the marketing services function for a leading multinational automobile company and is currently a Director at LUMS. mazharmchinoy@yahoo.com