Government mulls fixing car prices in Pakistan

Threatens to invoke law against profiteering

The government isn't amused having learnt that car companies plan to jack up prices once again especially after it cut taxes to aid price reduction. The government has already made one auto company withdraw the hike and threatened to fix car prices for all manufacturers, SAMAA Money has learnt.

In a letter, the Ministry of Industries and Production has told companies to provide justification for raising car prices. It said the government reduced duties and taxes to enable the general public to buy cheaper cars and companies to sell higher volumes.

"The government has very recently given significant tax concessions to automobile manufacturers in order to make cars affordable for the public," read a letter written to the Engineering Development Board (EDB) undersigned by Controller General of Prices and Secretary Ministry of Industries and Production Kamran Ali Afzal.

The EDB regulates auto and cell phone industries and it comes under the Ministry of Industries and Production. 

"While the car manufacturers reduced their prices following the grant of these concessions, it now appears that they intend to increase prices even though it has been only a few weeks since the concessions were granted, and despite the fact that there has been no increase in costs of production," the letter read.

Related: Looking to buy a car? Pakistan companies have reduced prices 

"This situation is clearly unacceptable, and the government may have no recourse but to initiate regulatory measures, which may include fixation of prices under the Price Control and Prevention of Profiteering and Hoarding Act, 1977."

Related: Toyota Fortuner may become cheaper by Rs224,000

"You are, therefore, directed to instruct automobile manufacturers to provide their costing structures failing which, price fixation proceedings would need to be carried out unilaterally," the letter read.

“The Ministry of Industries and Production has asked the car companies to share their costing structure and justify any price hike,” said Engineering Development Board (EDB) General Manager (Policy) Asim Ayaz. “We have met with car companies and they have asked us to provide a standard format to supply that data. It will be easier that way.”       

“The government reduced duties and taxes to help consumers buy cheaper cars and car companies to increase their sales volumes. Companies understand higher sales volumes will increase their profits too,” he said.

Also read: Toyota and Suzuki register record sales in Pakistan

“But the government can do anything. It has recently amended an act, the Price Control and Prevention of Profiteering and Hoarding Act 1977, and has brought the auto industry under it,” he said.

“I think healthy competition and a vigilant eye of the government can keep car prices in check,” he said.                

However, he added that it will be a difficult task for the government to control car prices since each company has a unique cost of production.

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What do auto assemblers say?

Shipping cost and prices of steel, a key raw material for the auto industry, have gone up during the pandemic, putting car companies under pressure to pass on the impact of the rising production cost, industry sources claim.

Changan Pakistan jacked up prices across the board by Rs120,000 but was told by the government not to increase car prices. The company had cited the increasing costs of steel and shipping as the reason for the price hike.

“Around 70% to 80% of a typical passenger car is made up of some grade of imported steel,” said Syed Shabbiruddin, the director for sales and marketing at Changan Pakistan. “A car's price is, therefore, highly sensitive to the price of steel and the exchange rate.”

If steel prices go up, car prices will inevitably increase, he said. In fact, even motorcycle producers recently passed on the burden to their consumers. Soon car companies will also have to raise vehicle prices because of rising steel prices and the increased cost of shipping, Shabbiruddin said.

“An unprecedented increase in shipping costs due to the recent wave of Delta variant in South Asian countries is also putting pressure, especially on new car assemblers, to pass on the impact by raising prices,” he added.

Research analyst Waqas Ghani says steel prices may remain at the current level for the next few months.

“However, steel is a commodity and its price might even go down after some time. I don’t think the steel price will remain high permanently,” he said.

At least three independent sources in the auto industry confirmed to SAMAA Money that the shipping cost has gone up from $800 for a container to up to $4,000.

“The containers are also not available because ports have choked amid the pandemic,” said Shaukat Qureshi, the Chief Operating Officer at SZS’s auto division, which is planning to launch electric cars in Pakistan.

“Moreover, countries such as China have reduced their number of workers at the ports -- a situation that has created additional hurdles.”

Commenting on the recent announcement of Pak Suzuki, auto sector analyst Arsalan Hanif said that the company's profits have been below expectations despite selling more cars. Pak Suzuki is a volume leader in the passenger cars segment and has declared its six-month financial results.

“According to what we are hearing, auto companies were in negotiations with the government to let them increase car prices,” he said.

Related: Suzuki reports profit but still below market expectations

However, analysts pointed out that these two factors were caused by a spill-over effect of the coronavirus pandemic.

Talking about recent car price reduction due to reduced taxes, senior research analyst Ahmed Lakhani said that it was the first time that all car companies reduced prices this year and the impetus actually came from the government and not the private sector.

“Before this, I have not seen car prices go down in Pakistan except for a couple of instances when companies reduced a single model’s price because of low demand,” he said. It happened only in the case of Suzuki Wagon-R and United Bravo. Other than that, prices have always been irreversible technically."

Why is the government unhappy over price-hike?

The government reduced the Federal Excise Duty on all vehicles even above 1,000cc by 2.5%. Sales tax has been reduced on vehicles below 1000cc from 17% to 12.5%.

Meanwhile, 7% additional customs duty has been removed on cars below 1000cc and reduced on cars above 1000cc to 2%.

A 2.5% FED was applied on cars below 1000cc; 5% was imposed on cars below 2000cc and above 1000cc; and 7.5% on cars above 2000cc. Almost all cars saw a price cut with few exceptions.

The government plans to provide cheaper cars to the public while expecting growth in the automobile sector.

auto sector

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