The people have spoken?

Back in May, when no major media outlet was reporting it, some news blogs were reporting about a social media campaign picking up steam on consumers rallying to boycott the three car manufacturers. But not just that, the campaign aimed to take a few matters to court. The campaigners alleged that the locally manufactured cars were poor quality, were unsafe along with being highly priced. They argued that the three players maintained a monopoly in the industry through government protection at the expense of consumers and potential car buyers. The campaign garnered support from consumers across Pakistan who have themselves been making similar complaints.

A recent example comes from an open hearing held by the Competition Commission of Pakistan (CCP) where consumers spoke about the consistent price hikes, and sub-standard quality of cars being locally manufactured in the country, among other issues (read: “Autos’ many moving parts”, June 8, 2018). Between December-17 and August-18, the three automakers have raised prices between 5 percent and 15 percent across different variants because of rupee depreciation. However, it is argued that with more than 50 percent localization—where some cars are said to be upwards of 70 percent localized, the price hike is not justified. Others have argued that prices were raised even when rupee was strong.

In a short order received by BR Research on a petition filed by this campaign, the Supreme Court has directed the Ministry of Finance and Federal Board of Revenue to reduce the incumbent taxes on locally assembled motor vehicles to 25 percent from an estimated 33 percent which constitutes sales, customs and income tax. Even with this decision, the campaign is currently filing an appeal for a 15 percent reduction, rather than the 25.

All this should be said with the caveat that the order is not yet available online, and local carmakers like Indus Motors have refused any knowledge of such an order. But supposing this decision goes through once government forms, it will come down on local automakers and whether they would pass on the benefit to consumers or not. However, from BR Research past discussions, it seems they would. Reduction in taxes has been a recurrent demand of local automakers as well as auto parts makers who contend that prices are considered high because of the accumulated 33 percent taxes which they have had no choice but to pass onto the consumers (read BR Research interviews with Indus Motors and Loads Limited).

In a telephonic conversation with the campaign’s lawyer, Barrister Farhan, the demands of the group seem legitimate. The group is targeting four areas under this campaign. The first demand is the safety of cars. The campaign has put together a small team that has prepared a draft proposal for the formation of a national transportation authority that would enforce safety standards in the cars that are being locally assembled, second, the quality of vehicles. The petitioners emphasize that the current auto development policy is for opening the sector to new entrants when there in fact should be a motor vehicle policy that would set globally recognized quality standards for local assemblers.

Thirdly, the high incidence of taxes on cars is part of the reason why local prices are so high, and they blame the government for this. They contend that these should be reduced down to 15 percent to have any meaningful impact on the cost of the car. Lastly, the group is preparing arguments to get import duties on new cars to be reduced—currently they go upto 300 percent. They contend that local assemblers are getting undue protection by making imported vehicles so much more expensive.

It has been a public consensus that over the years, local automakers have only brought in meaningless cosmetic changes to cars without introducing any technological up-gradation, or safety features, let alone drive pleasure. Compared to new imported vehicles, used imported cars, or cars assembled in peer countries, Pakistani cars do not compare. Perhaps consumers would respond better to price hikes if they actually enjoyed the cars they were resigned to buy, given a lack of choice.

Now that the industry is opening to new players, it would be beneficial to keep the consumer perspective in mind as well, who after all, provide these companies the business they require to flourish. If safety and quality standards are not imposed, and anti-competitive practices are not curbed, new players could easily exploit the market as well.