Should we subsidise car moguls?

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Time for a change

For the past twenty years successive governments in Pakistan have succumbed to pressure from the car lobby to protect car manufacturers at the expense of the general public. One of the first steps the present government took, in its first ninety days, was to endorse the car policy of the previous government.

The car policy of the government is to not allow citizens of the country to import popular cars on their own by imposing severe restrictions and constraints on them. Why? Simply, because such import restrictions allow local car manufacturers (or assemblers, to be more accurate) to charge higher prices from unsuspecting consumers.

Do the local car assemblers need such financial support from the general car buying public? Should the general public be subsidizing the local car assemblers by paying premiums to them? The fair answer is an emphatic NO!

There are three main car assemblers in Pakistan, namely, Pak Suzuki, Atlas Honda and Indus Motors (Toyota). The owners of these three companies are billionaires many times over. The evidence is published and summarised below.

In 2017 Pak Suzuki sold vehicles worth Rs.102 Billion on which it earned a net profit after tax of Rs.4 Billion (to put the size of this figure in perspective that is Rs.4, 000,000,000). The EPS (earnings per share) for the shareholders/owners of Pak Suzuki was Rs.46 per share. The total paid up capital of Pak Suzuki is Rs.823 million. On this investment it has so far accumulated profits of Rs.28.7 billion (that is Rs.28, 700,000,000).

If the super profits of these three companies are removed, that would translate into an average price reduction of Rs.100, 000 per car for every car buying consumer.

In the same year Toyota sold cars worth Rs.112 billion on which the owners of Toyota earned a Net Profit of Rs.13 billion. The shareholders received a dividend of Rs.115 per share. On an investment of Rs.786 million (Rs.786, 000, 000) Toyota’s owners have accumulated profits of Rs.30 billion (Rs.30, 000,000,000) which means they have received their investment back thirty times over.

Atlas Honda is doing just as well (and why not, they are equal beneficiaries of government protection and subsidy from the public). In 2017 on sales of Rs.77.5 billion it earned a Net Profit of Rs.4.7 billion. Their cash dividend to their shareholders was 270% of paid up capital. Honda’s owners also have accumulated profits of Rs.15 billion from an investment of Rs.1 billion.

If the net profits of these three companies were reduced by 50%, they would still be giving very high returns to their investors, certainly well above average by any standard. Every year around 250,000 cars are sold in Pakistan of which 90% are made by these three companies. If the super profits of these three companies are removed, that would translate into an average price reduction of Rs.100, 000 per car for every car buying consumer. It is worth noting that this does not include the premiums charged by these companies and their dealers/distributors on cars every time there is a delay in delivery periods. This premium can often be as much as Rs.200, 000 per car and reflects the inability of these companies to meet consumer demand on time.

One consumer booked a Suzuki Vitara from Pak Suzuki in Lahore last year. He had to pay the full price at the time of booking and was promised the car after six weeks (it is imported by Pak Suzuki from Suzuki Hungary). Eight months have passed and the car has still not been delivered. His money is still blocked with Pak Suzuki. If he had been allowed to import the Vitara himself, the same amount of foreign exchange would have been used and the government would have collected the same amount in duties and taxes. And he would have got the car sooner and at a much lower price.

Why are the people of Pakistan being taken for a ride and that too by their own government?

The explanation often given is that this policy is necessary to protect jobs in the automotive industry. How many jobs are being protected and at what cost? Maybe as many as 50,000 people work in this industry. If the government was to allow every citizen who wants to buy a car to import one, the existing car assemblers would simply have to reduce their prices and forego the super profits. As can be seen from their financial performance they would definitely not go out of business, and 250,000 consumers every year will be the beneficiaries, while the government will continue to earn the same amount of revenue.

It is time for this government to rethink its car policy, or rather change the car policy of the previous governments.