ISLAMABAD, Pakistan – New excise taxes on automobiles sold in Pakistan have further depressed an already struggling market, but there are signs of a brighter future.
Pakistan Automotive Manufacturers Assn. data shows key local manufacturers owned by Suzuki, Toyota and Honda sold 10,968 cars in July, down 58.1% from 18,875 a year earlier.
It was a similar story for light-commercial-vehicle sales from the same manufacturers, who sold 1,626 units in July, down 34.2% from year-ago.
This follows the government’s July 1 imposition of a 2.5% tax on vehicles with engines up to 1.0L; 5% on engines from 1.0L to 2.0L; and 7.5% on engines larger than 2.0L.
The tax undermined a market that already was soft, with PAMA reporting earlier that car sales had fallen 4.1% to 192,863 vehicles in July 2018-May 2019 from 201,134 in the same months during 2017-2018.
Ali Asghar Jamali, PAMA vice chairman and CEO of Pakistan’s Indus Motors (a Toyota joint venture), says assembly costs already had risen because of the depreciation of the Pakistan rupee PKR, ($1 bought PKR132 in November and bought PKR156 in September). “This has resulted in a price hike for imported parts,” he notes.
The government’s October decision to ban the sale of vehicles to drivers who do not file Pakistan tax returns – an anti-tax evasion measure – has hurt the market as well. “The industry’s growth momentum has vanished and now it is facing a downward trend in sales,” Jamali says, adding the country’s three leading assembly groups have scaled back production as a result.
Indus, which makes Corolla models, shut down for eight days in July, 12 in August and 15 in September; with 15 expected this month. The Honda Atlas JV was down for 20 days in July, 13 in August and 11 in September, with 18 anticipated this month. The third major local assembler, Pak Suzuki, has yet to suspend work – although its sales also have been falling.
Pakistan’s existing automakers could face more competition under the government’s 5-year automotive policy, which offers tax incentives for new manufacturers – outside the dominant Japanese trio – to establish operations in the country. Renault, Volkswagen and Audi have said they are interested in setting up plants.
A senior official in Pakistan’s Ministry of Industries and Production tells Wards Volkswagen plans to invest $135 million to establish a manufacturing plant in Baluchistan province “for which the land has already been acquired.” The official says Pakistan already has awarded “greenfield” tax breaks to VW, adding the automaker “will begin construction work on the site soon.”
The official predicts auto production will launch in 2021, initially the T6 commercial van and the Amarok pickup (below, left).
Munir Karim Bana, CEO of Loads, a Pakistan auto-parts manufacturing company, says such expansion would help meet the government and industry goal of producing 415,000 units annually by 2021.
If rivals to the three established automakers do set up shop in Pakistan, they may struggle at first. A University of Karachi paper, “Impact of New 5-Year Automobile Policy (2016-21) on the Profitability of Major Players in the Automobile Industry of Pakistan,” notes sales by the three Japanese incumbents rose continuously from 2012 to 2017. It concludes “the share of profit of the major players…is not expected to decline” even if the sector diversifies, perhaps because of the Pakistani consumers’ trust in established marques and because their vehicles may be easier to maintain because parts are readily available.
For the automakers sticking it out, there is a big long-term prize in Pakistan. Industry officials estimate only 18 of 1,000 people are vehicle owners in Pakistan, a country with a population exceeding 197 million. And the used-car import market is important; government figures show the country imported 38,670 used cars in 2016 and 65,723 cars and minivans in 2017.
This market, however, is vulnerable to government action – with the Ministry of Commerce restricting sales by insisting duties and taxes on car imports be made in foreign exchange. The Pakistan Bureau of Statistics says imports of completely built-up cars (90% of them used) fell to $156 million in the first half of fiscal 2019, down 43% from $277 million a year earlier.
Despite the current malaise, there is much to play for. And what kind of cars should assemblers make to prosper in Pakistan? Build big, maybe: Imports of SUVs rose 59% to 7,758 units in 2017, while imports of pickups and vans were up 9% to 3,154 units.
– with Keith Nuthall in Ottawa