Automotive industry is large enough and auto OEMs are making enough profits for analysts to talk about it endlessly. Except truthfully, it serves few. Most newly assembled cars in Pakistan are beyond the reach of an average Pakistani household. The market is small. There are about 4.6 million cars (including jeeps) running on Pakistani roads. That’s 2 percent of the population and 12 percent of the households—assuming an average household size of 6 members. Comparatively, there are 27 million motorcycles on the roads of Pakistan which based on household size is 71 percent of the households. The car penetration is simply too low, and would be even lower if one considers multiple ownership of cars at the higher-income level.

For the first time in FY22, sales in passenger cars, SUVs and LCVs crossed the 300,000-mark in a span of a single year. By the end of that year, the writing was already on the wall. Interest rates were rising, government’s commitment to support automotive volumes was shaking, rupee was depreciation and inflation had already reared its ugly little head coaxing manufacturers to pass on the impact of costs onto consumers. Historically, automotive volumes have remained below 200,000 annually. Last year, they fell below 150,000 units. In fact, in FY23, volumes shrank 55 percent—a dramatic decline by any standards. But during this disastrous year, the share of SUVs grew to 19 percent of all cars sold (versus 10% in FY22).While passenger cars dropped 59 percent year on year, SUVs and LCV sales declined only about 12 percent or a difference of 3400 units.

It is clear that the market is too small for the population the size of Pakistan and it also apparent that it requires a large amount of effort from policymakers to push-start volumes in an industry that has been heavily protected from imports and been assembling vehicles for over three decades without, ironically, much motion. Assemblers have done little to nothing to reach a wider market and perhaps restricted volumes serve their purpose. Every time there is a price increase, the rupee depreciation is to blame. This year too, rupee depreciation has been followed closely by price increases. Since June-22, rupee depreciated by 40 percent on a monthly average basis, during which time, prices rose on average by 55 percent—various models have seen different level of price hikes (see graph). Numbers reflect poorly on whatever localization or import substitution has occurred as dependence on imported content has not wavered. During the year, CKD kit imports (by value) dropped 61 percent. Accounting for the rupee depreciation which made the same quantum of parts more expensive, the resulting 55 percent drop in vehicle volumes could be entirely explained by the import restrictions and the subsequent decline in imports. Demand probably never came to play.

But what really is demand. Demand and desire are two different things. Actual demand implies that a buyer is willing and able to pay the price of a good. While there may be many car buyers willing to buy vehicles in Pakistan, they are unlikely to be able to arrange funds to make that purchase. Cars are too expensive! They have always been too expensive. Today, the more desired quintessential middle-class car that gives a sweet fuel average, Alto is priced at Rs22 lakhs for the lower end model. At the prevailing interest rate—granted a bank is willing to extend an auto loan—a car buyer would have to pay Rs40,000 per month over a 5-year payback period, given also that the car buyer gave 20 percent of the price up-front to the bank. That’s steep for a middle-class household—steeper yet if we consider the income distribution data recorded in the Household Integrated Economic Survey (HIES) 2018-19. The HIES puts an average Pakistani household income to Rs41,545. Laughable, right? Wrong, even a household earning upwards of Rs150,000 would find it hard to make this purchase given current inflation levels.

So, who is buying these Altos? Seeing auto financing numbers, fresh loans have exited the market which implies whatever is being sold in the market is on cash! And on cash, SUVs and LCVs are selling enough. In fact, their share in the total market has expanded this year. Recall that a Hilux double-cabin this year costs upwards of Rs13 million and a Fortuner about Rs18 million. If there is still appetite in the market for these vehicles—ability and willingness—month after month for vehicles sold in Pakistan, despite no financing available in the market, what does that tell us about the economy?