Necessity is the mother of invention. Take, for instance, the Ford Model T. It is acclaimed as the first widely affordable automobile in history, and anyone who dared to compete with it would essentially have been confronting the car that revolutionised mobility. Yet, Alfred P. Sloan did precisely that. He forged ahead, and pioneered automotive credit and thereby enabled car buyers to circumvent the need to save for years to purchase the Ford. He had his eureka moment.
Pakistan’s automotive industry may be on the verge of its own eureka moment — albeit only for perhaps a few months.
In a bid to attract customers, Lucky Motors and Honda have launched their own indigenous financing plans with no interest. Zero. These plans for the KIA Sorento, Peugeot 2008 Allure, Honda BR-V, and Honda HR-V respectively, are unprecedented. This is the first of its kind in the automotive industry. Thus, in an attempt to make sense of the chaos across the industry, the companies have offered customers a bargain. But more importantly, they may have inadvertently created a test case for whether banks can be circumvented from the lending process altogether to go directly to the customers.
A page from the two wheeler market
Direct customer financing for vehicles is by no means a novelty in the automotive sector. However, it’s a concept that’s relatively alien to the four-wheeler market. This strategy is, in fact, a cornerstone of the two-wheeler industry — a catalyst for its initial growth and a continuing emblem of its success. It appears that Lucky and Honda have taken note of this trend, seemingly drawing upon it to make sense of the chaos in their respective industries.
“The automotive market finds itself in a precarious predicament, grappling with a profound affordability crisis. In response to this, we endeavoured to adopt an innovative and empathetic approach, viewing the situation through the lens of the customer,” explains Muhammad Faisal, the President of Automotive at Lucky Motors. “Our exploration led us to devise strategies that could offer affordability to prospective customers in a manner that would alleviate their financial burden, shielding them from the exorbitant costs of finance, all whilst requiring minimal equity commitment. Thus, our scheme was born,” Faisal further elaborates.
In a similar vein, “The market turbulence has left customers feeling unnerved. Their financial resources have dwindled, prompting us to formulate this scheme with dual objectives — to not only bolster our market presence but also to provide them with tangible benefits,” articulates Amir Nazir, the General Manager of Sales and Marketing at Honda.
The underlying rationale for both companies remains consistent. Automotive prices have ventured into uncharted territory at a time when the State Bank of Pakistan (SBP) has clamped down on automotive lending in an effort to stem foreign exchange outflows. Those who dare to venture beyond these factors and contemplate partaking in vehicle financing are confronted with the harsh reality that Pakistan’s policy rate and subsequently the Karachi Interbank Offered Rate (KIBOR) are at an all-time high. This presents a rather sombre image. However, it’s not just customers who are grappling with the harsh reality of being priced out of the market. The media, including this publication, have been relentless in reporting the record lows automotive companies are hitting each month in terms of sales.
Our duo of protagonists have ventured beyond what the two-wheeler industry ever dared to do. “I don’t recall the two-wheeler industry ever offering zero-markup plans. In fact, markups skyrocketing to 40%-50% were far from rare,” explains Fahad Iqbal, Managing Director of Ravi Automobile. “The markups were indeed steep, but the long tenures effectively reduced the instalments to a pittance, which was a major draw for customers,” Iqbal adds.
This is precisely what sets this approach apart in the market — its unparalleled singularity.
The savings from the lack of a cost of borrowing
What do these financing plans offer? Lucky Motors has devised a 12-month and 18-month repayment scheme for the Peugeot 2008 Allure and KIA Sorento respectively. Honda, meanwhile, has settled for a consistent 24-month repayment scheme for both its BR-V and HR-V models. The Sorento demands a 30% down payment, whereas all other vehicles necessitate a 50% down payment.
You might be curious as to why these particular models were selected by both companies. This is a valid question, as both have deliberately excluded their most popular models — Lucky with its Sportage and Honda with its Civic — from this scheme.
“The Sorento was chosen because we thought customers would need financial assistance due to the vehicle’s price point, and the higher withholding tax as part of this year’s budget. As for the 2008 Allure, we expected it to generate more volume through the scheme,” Faisal elaborates. Likewise, Nazir remarks, “We had formulated this scheme for a certain number of vehicles as the backorders for both were comparatively fewer than our other models.”
Upon closer examination, it seems likely that both companies have surplus inventory that they want to dispose of. There is potential conjecture that these vehicles are lagging behind in sales and perhaps selling at discounted rates in the secondary market — but then again, that is the case for the entire industry. The existing stock of inventory seems to be the most convincing explanation for our protagonists’ choice.
However, this article is not about their sales. It is about their savings.
The savings from this scheme are straightforward: the cost of financing. It’s imperative to explicate this term first, because anyone unfamiliar with car financing might presume that it’s merely the KIBOR you are paying. This is a misconception. The cost of financing for any vehicle encompasses the KIBOR and a rate of profit, known as the margin, levied by the bank. The current minimum is KIBOR+3.5%. This implies that you will incur 25.5% in interest payments for financing any vehicle.
So what savings can you anticipate? At the bare minimum, you can expect to save Rs 7.9 lakh, while at the maximum, the savings could reach Rs 17.9 lakh. Lucky’s vehicles command both ends of this spectrum, with the 2008 Allure offering you the smallest savings, and the Sorento 3.5 FWD providing you with the largest. Naturally, your savings could vary depending on the alternative bank financing you are contemplating.
