Ever since the launch of Auto Policy 2016-21, the number of automobile manufacturers in the country has doubled. However, with the policy’s expiry due in 2021, the government is drafting Auto Policy, 2021-26 with incentives for new players, especially in the below 800cc variants.
The 2016 policy spurred a flurry of investments in the auto sector, practically ending the oligopoly of the three Japanese players i.e. Honda, Suzuki, and Toyota. However, new investments in the space came almost exclusively in the variants above the 800cc engine capacity. None of the new entrants were interested in tapping into the below 800cc market despite the incentives on offer and huge demographic potential.
Although, the 2016 policy was successful in bringing new investments into the auto sector i.e. Kia, Hyundai, MG, etc, almost all of the newer models were in the SUV category thereby carving out a new market for themselves.
Pak Suzuki Motor, the only company manufacturing cars below 800cc, the infamous Mehran, also discontinued the variant in 2019 replacing it with the pricier 660cc Alto – the cheapest car produced by any local manufacturers. Suzuki’s Alto is selling at Rs1.19 million to Rs1.63m depending upon the variant. The car’s build is absolutely pathetic and uses obsolete technology.
Beyond increasing the annual auto production capacity in the country, the 2016 policy also envisaged a more competitive auto market that would eventually lead to a decrease in prices. However, the case has been the opposite. (An argument can be made here for the impact of Rupee’s depreciation and record-high raw material prices around the world on car prices but localization was meant to insulate manufacturers from such risks).
All of the auto manufacturers (almost acting as a cartel) have increased prices of all of their variants with some even increasing prices by more than Rs300,000 in a single day.
Beyond attracting investment and a marginal increase in the overall pie of the auto sector, the auto policy’s incentives did not trickle down to the low- and middle-income consumers. In fact, low- and middle-income consumers have been cornered by exorbitant prices of locally-made variants on one side and almost double import duties on completely-built, imported units on the other.
A direct outcome of increased duties has been seen in the exorbitant rise in prices of imported models which were earlier preferred by local consumers who were looking for models worth their money. However, imported Japan-made ten-year-old cars such as the 600cc Diahatsu Move 2007 variant is currently selling for Rs1.1 million. The same model was selling for Rs0.7m before the ban on CBU imports. Meanwhile, new models such as Mira 2018 X are currently selling for Rs20.5 lacs.
Imported built units were preferred by local buyers as they were selling at a discount to their relative counterparts produced by local manufacturers, however, with the increase in duties, the prices are skyrocketed putting a huge dent on consumers’ pockets.
Buyers are practically being coerced into paying high prices for local cars which are at times inferior to their Japan-made counterparts in terms of quality, efficiency and technology.
All in all, the government’s 2016 policy may have been a success if measured by the quantum of investment is brought into space, however, based on consumer satisfaction and pricing competition, the policy failed to deliver the desired results.
But as the government prepares the 2021 draft, it should put end-users priorities at the forefront and incentivize competitive pricing in the auto space through tax cuts tied to localization instead of investment. It should learn from the 2016 policy and come up with ways to ensure manufacturers achieve at least 90% localization before extending benefits to them.
The government should also shake up the Competition Commission of Pakistan (CCP) to discourage cartelization in the sector through harsh penalties and strict actions. The commission has failed to deliver on its mandate to protect consumers and has ignored consumers’ woes. A reinvigorated CCP can help avoid cartelization in the sector and allow consumers to reap the benefits of investments.
Meanwhile, claims in news reports about a tentative import duty on cars below 800cc is also a welcome sign as it will not result in any impact on local manufacturers as they do not have models below 800cc. Moreover, allowing imports of such models will also reduce the strain on low- and middle-income consumers who are already reeling from high inflationary pressures.
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