There was an interesting development recently in Pakistan’s automotive industry. The Korean company KIA, run in Pakistan by the Lucky Group, announced that they would be decreasing the price of one of their cars by a staggering 15 lakhs.
The decrease in the price of the KIA Stonic came as the result of a new tax imposed by the government of Pakistan. The tax held that any cars that had a factory price of over 40 lakhs (which the KIA Stonic did) would be charged 25% sales tax. Despite an after price tax of Rs 62 lakhs, to take advantage of the 18% tax on cars less than 40 lakhs, the company announced a fall in the price.
The story of the Stonic has been covered in quite some detail by this paper’s business publication Profit. The exact dynamics of the lobbying and regulatory capture paint a fascinating picture of the inner workings of the industry. But perhaps the biggest takeaway from the entire episode is how high the industry’s margins are. The fall in price was one of 24%, and the company is not selling the car at a loss as many initially speculated. This means the Stonic was selling at a higher margin than 24%.
At the same time, one must look at the fact that KIA has a production capacity of around 60,000 cars a year. Last year, they only assembled around 10,000 cars. The reason has been the insistence of car companies to charge high margins that consumers are clearly not willing to pay for. But the drop in price immediately resulted in more than 700 of these cars being sold in one day.
If companies can rely on volumes rather than margins, the wheels of industry will continue to turn. There will be more diversity in the market and employment will also increase. The move by KIA was clearly a risky one, but one that has to be appreciated.
One must remember that it has only been in the past five or so years that Pakistan’s auto industry has seen some fresh blood coming in. Before this, the market was ruled by Toyota, Suzuki, and Honda. The entry of KIA and players such as MG, Hyundai, Changhan, and other brands has changed long-standing notions within the industry. More such decisions will be good not just for the auto sector but also for industry and the economy as a whole.
