- Sector gains from foreign investment, needs stable policies; rising costs, financing cuts stall auto demand
Interview with Mr. Khalid Tawab — Former Senior Vice President, FPCCI
PAGE: Tell me about yourself, please:
Khalid Tawab:Â I am Chairman of Tawab Group of Companies, a renowned name in the manufacturing of paper, board, and steel. I have served as the Senior Vice President and Vice President of FPCCI (Federation of Pakistan Chambers of Commerce and Industry) and the Karachi Chamber. I have been the honorary Consul General of Mozambique since 1989.
In recognition of my outstanding public services, I was awarded the Sitara-e-Imtiaz by the President of Pakistan in 2009. My company has received the FPCCI Exports Awards twice and the International Asia Award once for the highest exports. I am also a philanthropist and a trustee of the Aiwan-e-Tijarat-o-Sanat hospital. I have had the privilege of serving as a Minister in the caretaker government. Presently, I am chairman of Audit and Finance Committee of FPCCI – the most important committee of FPCCI.
PAGE: Do you presume the cut in interest rate from 22 per cent to 15 per cent will boost auto industry?
Khalid Tawab: My observation is as follows. The reduction in the interest rate from 22 per cent to 15 per cent could have a positive impact on Pakistan’s auto industry, but the overall effect depends on several factors. First, lower interest rates generally reduce the cost of borrowing for both consumers and businesses. This means that auto loans will become more affordable for individual buyers, potentially increasing demand for cars, particularly in a market where many people rely on financing to make such purchases. For the auto manufacturers and dealers, this reduction can also ease financial pressure, allowing for more investment in production capacity, marketing, or innovation. However, the auto industry in Pakistan faces a range of challenges beyond just interest rates. Currency devaluation, high inflation, supply chain issues, and import restrictions on raw materials or CKD (completely knocked down) kits significantly affect production costs. Even with lower borrowing costs, if inflationary pressures continue to push up car prices, consumer purchasing power might remain constrained.
In a nutshell the cut in the interest rate will likely provide a boost to the auto industry by encouraging more consumer lending and reducing financial pressure on businesses, it is not a silver bullet. It needs to be accompanied by broader economic stability and policy measures that address supply-side challenges for the industry to see sustained growth.
PAGE: Are the prices of locally assembled vehicles still unaffordable?
Khalid Tawab:Â My observation is as follows. The prices of locally assembled vehicles in Pakistan are still largely unaffordable for a large significant portion of the population as there are several factors contributing to the high prices of vehicles, despite local assembly. The main reason is inflation and currency devaluation. As a matter of fact many components for locally assembled cars are imported as CKD (completely knocked down) kits, the costs are directly impacted by exchange rates. Even if a vehicle is assembled locally, the fluctuation in the rupee drives up prices. The other fact is the automotive sector in Pakistan is subject to various taxes, including excise duties, sales taxes, and customs duties on imports of parts which fluctuate frequently. These taxes add to the final cost of vehicles, making them more expensive for consumers. In some cases, taxes account for a significant percentage of the vehicle’s retail price. Although these vehicles are assembled locally, yet a large proportion of
their components, especially key technological parts, are imported. The lack of a fully localized supply chain limits the ability of manufacturers to reduce production costs, keeping prices high. Ongoing global supply chain disruptions, such as semiconductor shortages, have also affected the auto industry. Delays and increased costs of importing necessary parts further raise the price of locally assembled cars. High financial cost is another factor though there has been a recent cut in interest rates, yet the overall cost of financing still has been high, making auto loans expensive for the average consumers who are mostly confronted with their household budgets. The situation is unlikely to change in the short term.
PAGE: Do you agree with the perception that industries that typically support auto sales have halted new vehicles purchase for employees, and several banks have closed their car financing departments during the last two years?
Khalid Tawab:Â My observation is as follows. Though I have given above the comprehensive reasons which cover the answer to this questions yet I would further say that the perception that industries supporting auto sales have halted new vehicle purchases for employees, and that several banks have scaled back or closed their car financing departments in Pakistan over the past two years, is largely accurate. There are several reasons behind this trend which include the major reason of economic uncertainty and inflation. The economic environment in Pakistan has been challenging in recent years, with high inflation, currency devaluation, and rising costs of living. Many industries are tightening their budgets to deal with financial uncertainty, and one of the first areas where companies cut costs is employee benefits, including vehicle purchases.
As a result, several companies that traditionally offered vehicles to their employees have halted new purchases or delayed replacement cycles. It has been observed that due to the rising costs of locally assembled vehicles, many companies have found it difficult to justify the purchase of new vehicles for their employees. Even businesses that had the capacity to offer vehicles in the past are now reconsidering, given the sharp increase in car prices driven by a devaluing rupee and the high cost of imports and raw materials. The other major reason is reduction in car financing by the banks. several banks have either scaled back their car financing operations or temporarily closed them. The main reasons for this are definitely rising interest rates which Pakistan is experiencing historically high, making auto loans prohibitively expensive for consumers and increasing the risk of non-performing loans for banks and the other reason in my opinion is increasing credit risk. Banks are increasingly cautious about lending, especially in a period of economic instability and rising inflation. Consumers are facing shrinking disposable incomes, making it riskier for banks to issue car loans. In the present situation the banks do not want to run risk of investment on car financing and the main reason of it is fluctuation in rupees. It has been also observed that many multinational companies and corporate sectors, in the present economic volatility, have halted or change their vehicle policy, to control their financial challenges, resulting slowing the demand of new cars. Yes, the perception is accurate.
Several industries have cut back on new vehicle purchases for their employees due to economic challenges, and many banks have scaled back or halted their car financing departments because of high risks and reduced demand. This has compounded the difficulties facing the auto industry in Pakistan over the last two years.
PAGE: What is your perspective about foreign investment in auto sector?
Khalid Tawab:Â My observation is as follows. Foreign investment in Pakistan’s auto sector has the potential to play a transformative role in the industry, but its success depends on a combination of favorable government policies, economic stability, and a conducive business environment. I must say that that despite many challenges in recent years, several international automakers have entered the Pakistani market, either through joint ventures or direct investments. Brands like Kia, Hyundai,
Changan, and MG have made significant investments, launching new models that have diversified consumer options. Foreign investment from these new players has helped boost competition, increase localization efforts, and bring modern technology into the market. This influx also supports job creation and can lead to skill development in the local workforce.
The most import element in front of me is to make long stable economic policies, stable ease of doing business policies, stability in currency, conduce infrastructure and stable law and order.