Karachi, December 28, 2021 (PPI-OT): AIDP 2021-2026: An extension to budgetary measures
The newly approved auto-policy 2021-26 is an extension of budgetary measures that were proposed in Budget FY22; incentivizing indigenization of EV assembling in Pakistan while finalizing extension of tax and duty concessions to existing OEMs.
The policy incentivizes launch of new models, encourages EVs/HEVs with the goal of reducing import bill and limit carbon emissions and aims to capture export markets earning valuable foreign exchange for the economy.
PSMC stands as the prime beneficiary of incentives regarding less-than-1000cc cars but recent price hikes from higher exchange rate and raw material costs may likely offset the volumetric impact of policy changes.
Focus on affordability and reduction in carbon footprint
The Engineering Development Board (EDB) had submitted a draft for the AIDP 2021-2026 which was approved by the Federal Cabinet last week. The approved policy incorporates all measures announced in the Budget FY22 along with some additional incentives, which is a bid to improve industry volumes, consumer choice and also offers reduction in duties on localized and non-localized parts on the launch of new vehicles. Currently, the localisation for at least the three listed OEMs ranges in between 40%-65%.
The Policy incentivizes auto companies (including tractors and 2/3wheelers) to launch new models. While the preceding auto policy (AIDP 2016-2021) was aimed at providing incentives to facilitate entry of new players; the new policy shifts focus to ramping up volumes in the 1,000cc and below segments along with incentives for Electric Vehicles (EVs), Hybrid Electric Vehicle (HEVs) and Plug-in Hybrid Electric Vehicles (PHEVs) in an attempt to reduce import bill and reduce carbon emissions.
Incentives for EVs/HEVs
Though the incentives announced for EVs, HEVs and PHEVs are a direct competition to the listed space, one may not rule out these fresh enticements to lead to new announcements from the listed OEMs. At present, neither of the listed auto companies is in the EVs/HEVs segment. Indus Motors (INDU), however, has recently announced its plans to invest US$100mn to setup local production facilities for HEVs and expects the project to achieve COD in 3 years, making it well positioned to gain the first-mover advantage and benefit from the policy incentives.
PSMC stands as the prime beneficiary
PSMC is likely to benefit the most as majority of its product offerings lie in the 1,000cc category followed by private players such as KIA, United and Bravo who also operate in the same segment. As a result of lower sales tax and FED in the last budget, the company has fully passed on the benefit to the consumers through reduction in prices by 7%. Consequently, due to lower prices, sales volume for PSMC during 5MFY22 increased by 89% YoY to 57,200units as compared to increase of 44% for INDU and 25% for HCAR during the same period. Total industry volumes (cars+SUVs+LCVs), as reported by PAMA, have grown by 65% YoY during 5MFY22 as a result of these measures.
Inflationary pressures may kill the mood
Due to rising raw material cost, Rupee devaluation and high freight rates, auto companies have increased their prices in Nov-2021 (PSMC has increased its prices by 12%-15%), which is way more than the price cuts witnessed after favourable budgetary measures implemented in Jul-2021. Given the sector being price elastic, the recent increase in prices may not only partially dent the demand in coming months but also nullify the on-going measures taken by the government to make cars more affordable in Pakistan. Furthermore, with rising interest rates, demand for auto financing is also likely to put pressure on industry volumes.