The PML-N government’s auto development policy is one of its more successful endeavors, which chalked out a five-year plan to boost investment in the country. And it actually worked. Where it failed was bringing reforms into the sector to tackle the range of issues that threaten competition in the market. One oft mentioned is the illegal practice of dealers charging “own” or premium to deliver cars without 4-6 month of delays. There are indications now that the PTI government may want to shut this operation down by cancelling registration of dealers who may be involved. Sounds rather unpromising.
Automakers need bookings for cars to assemble them. The manufacturing is mostly driven by demand. Customers book the vehicles with authorised dealers on partial payment, dealers forward request to assemblers, assemblers produce that number of vehicles and vehicles are then delivered to customers. The showroom itself does not have any inventories.
This causes delays, not only because of the demand driven nature, but also because demand is often higher than existing capacity. And in turn, as well explained by a CCP policy note published in 2018, it “opens up opportunity for investors seeking to make quick money by booking several vehicles and then selling them to customers for a premium by offering an immediate sale”. Moreover, since automakers have to make no effort in pushing their vehicles into the market, they don’t have to make extra efforts to provide better quality, variety and competitive prices.
The premiums can go between Rs100,000 and 250,000 and in some cases, up to Rs600,000. Customers get their cars on time without long delays, investors earn a profit, and car manufacturers are none the wiser- sounds like organised chaos, except that it is nothing to celebrate. It not only adds disruption into the market, but also unfairly charges consumers extra money for already expensive cars, and it makes it fairly difficult to ascertain the true demand of the market for different vehicles. This is because sales number do not represent all direct sales to consumers, hence, one cannot tell what the demand is in the market at one point in time.
Recommended solutions by stakeholders such as putting a hefty tax on the transfer of vehicle that is done within three months of purchase or refusing multiple sale on one NIC will have limited results. At the CCP hearing after which the commission came out with the policy note, automakers suggested that they could require payment from the customer’s own account in form of a pay order for car purchases. To its credit, Indus Motors has been cancelling orders by dealers that are suspected of selling cars on premium while others have been encouraging customers to go to their authorised dealers. But while many of these problems could produce short term positive results, ultimately the only way to meet delivery times and thereby curb investor element is to considerably raise production levels.
Alternatively, the CCP recommends that the demand pull system could be flipped to a wholesale model in which OEMs assemble stock vehicles, sell them to their authorised dealers who in turn can sell these stocks to customers whenever they demand. The automakers are also on board given that there are necessary changes in the taxation regime. This is because, in the existing system, a whole sale model would lead to double taxation—WHT would be charged once when manufacturers sell cars to dealers and again when dealers sell cars to consumers. There is also an additional WHT on sale to corporates, and a turnover tax, which all make this model more expensive for stakeholders involved.
The CCP argues that if the government can make necessary tax tweaks (which will require considerable effort), this model would persuade OEMs to ramp up production by spreading financial risk on assemblers and dealers. It would allow consumers to choose their cars whenever they like, and not have to pay under the table fees to get these cars on time. Moreover, it adds the chance for multi-brand dealerships, which can only be positive for competition.
Needless to say, if the new administration wants to eliminate this illegal activity, cancelling registration of dealers one by one will prove to be not only inefficient but also ineffective.
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