A Bumpy Drive to Recovery?

It is common knowledge that the onset of the pandemic caught the world unawares and as it peaked, the economic engine powering the global industry was literally brought to its knees. In Pakistan, although the onslaught was less fearsome, the measures taken to control the virus screeched the local automobile industry to a halt.

The rhythm of the automobile industry was erratic even before Covid-19 hit. As 2020 began, car sales declined in January 2020 to 11,787 units from 12,069 units in December 2019 – an unprecedented two percent drop, and the first time this happened in 14 years. In fact, in the period July 2019 to February 2020, automobile sales had already plummeted by a huge 44% to 90,834 units compared to 162,240 units sold in the same period the previous fiscal year. The causes were the usual suspects; the weakening Pakistani rupee, delayed economic growth and high interest rates. Moreover, last July, the government had increased customs duty by seven to 11% and the federal excise duty went up to 7.5%, further hiking up prices.

When the lockdown was set in motion in March 2020, the majority of automobile manufacturing plants halted production. With inventories building up, plants shut down progressively. All the big producers – Atlas Honda, Pak Suzuki Motor Company Toyota Indus Motor Company – closed shop. What resulted had never happened before in the six decade old history of the automobile industry of Pakistan – not a single unit of any vehicle was sold during the month of April 2020. A far cry from the approximately 21,000 units that were once sold a month on average at its peak. This dire situation was not limited to severe manufacturer losses. With nearly a million estimated people appended, directly or indirectly, to the automobile industry, the ravage was much greater and more ingrained, impacting livelihoods and leading to social and economic deprivation. The industry demanded a bailout from a government barely managing to keep the national boat afloat.

This was hardly the welcome the new entrants were expecting or deserved, although they were still considered better off, with lesser resources as well as stakes in the market. Local industry still went ahead with their slew of demands to the government, which included the elimination of the turnover tax, halving of utility bills, reduction of import duty to 10%, slashing of the sales tax by 50% and a 75% reduction in withholding and income tax for manufacturers and vendors. Unsurprisingly, except for a Rs 15 reduction in fuel prices and a slash of the interest rate by 100 basis points to 11%, nothing else was forthcoming. The government estimated its tax collection losses from the industry to be between Rs 150 and 200 billion and was hardly in a position to expand this enormous deficit.

Given that Pakistan’s automobile industry pays the third highest tax of any industry, after the oil and gas and telecommunication industries, the lack of enthusiasm shown by the government’s side was disappointing. So it was no small wonder that for the fiscal year ending June 30, 2020, car sales registered their lowest numbers since 2009. The industry sold 110,583 vehicles in 2019-20 compared to 235,229 units in 2018-19, a decline of 53%. At this time, inexplicably given that the automobile industry is one of the most well-documented industries in Pakistan, the Federal Board of Revenue (FBR) asked both the Pakistan Automotive Manufacturers Association (PAMA) as well as the Pakistan Association of Automotive Parts and Accessories Manufacturers (PAAPAM) to submit data that was ostensibly already in possession of the FBR. This triggered a war of words from an already frustrated industry which refused to submit the data, stating that the industry was already under strict regulation as exercised by the Engineering Development Board (EDB), the Ministry of Industries and Web Based One Customs (WeBOC).

As the new fiscal year began, lower interest rates adjusted by the State Bank of Pakistan (SPB) incentivised consumers to go for car financing. With the lockdown eased and the economic situation progressing towards stability, sales found some traction and July 2020 yielded 11,501 units in July 2020 compared to 12,482 units in the same month of the previous year. The decline was eight percent but it still provided a much-needed shot in the arm for a beleaguered industry. Buoyed by growth in sales from Indus Motors, Honda and a healthy estimated 1,500 cars sold by new entrant Kia Lucky Motors, the trend for August 2020 was even better, with an increase of 16% as in August 2020, 11,678 units were sold compared to 10,102 units in August 2019.

Industry experts believe the lower interest rates and an improved macroeconomic environment (or the perception of it) will continue to attract consumers to auto financing, increasing sales progressively. As per the SPB, auto financing grew by 1.5% in June and is likely to rise further, triggering car sales. Also, with the easing of some of the uncertainty behind Covid-19, consumers are now also well disposed towards releasing funds saved to meet with any emergencies triggered by the virus.

Among new entrants, along with Kia Lucky Motors, Hyundai Nishat Motor is also said to be contributing satisfactorily to overall industry sales numbers. The company recently launched their premium Tucson model, which proved to be very popular, garnering no less than 2,700 orders for the vehicle, so much so that Hyundai had to put further bookings on hold. While this may be considered a good sign, one needs to consider the other end of the spectrum, where even the buyer of the supposedly low end Alto 600cc (priced at an enormous Rs 1.2 million) has to be a high income earner due to its persistently rising price tag.

There is a silver lining here. Most industry analysts are of the consensus that with the impact of Covid-19 whittled down, greater traction in the economy and depressed interest rates as the government fights inflation, the automobile industry is likely to register a growth of 17% during 2021 and slated to go up even further up to 24%.

With a greenfield new entrant automobile policy, advancing CPEC activity, stable exchange rates, single digit interest rates – to name just a few positive factors – the industry has set its eyes on achieving an annual 500,000 units sold by 2022. Although this target may appear extravagant at this time, in the volatile Pakistani socio-economic environment, the industry may yet come close to this aspiration.

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