Challenges Surround Automobile and Smartphone Business

For automobile and smartphone businesses, the situation has not improved even after the lifting of import restrictions as they face new challenges stemming from the economic downturn and government policies.

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After eight long months, the government in December lifted the restrictions placed on the import of ‘luxury goods’. However, this easing has come as a mixed bag of emotions for the people involved in the business of automobiles and smartphones, only to be faced with new challenges in the current economic situation of the country.

The road ahead for these businesses remains uncertain with many hurdles to overcome in order to regain their footing in the market.

The crisis in the automobile market
The automobile business is currently facing an existential crisis after failing to rebound due to high interest rates and a big slump in demand. Banks and financial institutions are charging up to 17 percent interest rates on auto loans. In Nepal, auto financing of BFIs accounts for 85 percent of the vehicle trade.

Currently, the loan-to-value (LTV) ratio for internal combustion engine (ICE) vehicles is 50 percent, whereas it is 80 percent for electric vehicles (EVs). Besides the higher interest rates, the LTV ratio set by the central bank has discouraged people from buying vehicles by getting auto financing from BFIs. According to automobile distributors, the sales of EVs have provided them some respite in the current precarious market situation.

Sandeep Sharma, Manager of Marketing and Communications at Laxmi Intercontinental, the authorized distributor of Hyundai in Nepal, says the market of electric vehicles is growing as the financing is easier for the segment. “It is good that the EV segment is growing, but we must not ignore the fact that the market of ICE vehicles still has a future. Nepal has rough roads. Almost 30 percent of roads connect to rural parts of the nation and building the infrastructure of EVs is a tough job at the moment,” he said, adding that the infrastructure for EVs is also in a nascent stage in the country. “There are a few charging stations along the highways, and during major festivals when people travel outside the capital valley, there is a long queue of cars for charging in stations.”

As the demand is low, importers are bringing new market offers to lure customers. According to Sharma, Laxmi Hyundai is bringing an offer on the occasion of the Nepali New Year 2080.

Declining purchasing power
The economic slowdown has affected the purchasing capacity of ordinary citizens as the high inflation rate and halt in income growth have compelled them to be cautious when it comes to spending. At a time when many people are struggling to make ends meet, mobile phones and cars are regarded as non-essential goods, and people are prioritizing their expenditures accordingly.

“The decline of the real estate transactions and the stock market is one of the reasons behind the weakening of purchasing capacity of many Nepalis. During the peak of the real estate and stock market boom, many people bought vehicles from the profits. However, with the current economic uncertainty, individuals are adopting a more conservative approach to their spending habits,” said Sharma.

According to Dhruba Thapa, President of NADA Automobiles Association of Nepal, there is probably no sector that has not borne the brunt of the current economic crisis. “As the business is down, people do not have enough money to buy cars. This situation will not improve unless the government steps in to take the derailed economy back on track,” he said.

Vehicles pile up for customs clearance
As the market demand has slumped drastically, vehicles have piled up at the yards of customs offices. As of writing this report, a total of 2,380 imported automobiles and trucks loaded with imported goods have remained stranded at the Birgunj Dry Port as importers are reluctant for customs clearance, citing the low demand.
NADA President Thapa says most automobile dealers are not ready to pay the customs duty until they see a notable demand in the market. According to the Department of Customs, over 4,000 imported automobiles and loaded trucks have been waiting for customs clearance at various entry points across the country.

A tumultuous time in the smartphone market
The demand for smartphones increased after the government restricted imports of handsets costing over USD 300. However, expensive smartphones were available in the market with ease. Importers say it is because the high-end market segment of smartphones is dominated by illegally-imported handsets.

Despite several attempts by the government to curb imports of illegal handsets in the last few years, the grey market continues to thrive with illegal phones accounting for 60 percent of the market share. According to a recent report published by the Nepal Telecommunications Authority (NTA), an estimated three million devices worth Rs 1.2 billion were smuggled into the country from September last year to March this year.

According to Sanjay Agrawal, Vice President of Mobile Phone Importers’ Association (MPIA), importers are very concerned about the growing size of the ‘grey’ market of mobile phones. According to him, the market of illicit handsets may have expanded by as much as 50 percent or remained at the same level prior to the soft launch of the Mobile Device Management System (MDMS) at the beginning of the current fiscal year. “The grey market had almost disappeared after the soft launch of MDMS by NTA as indicated by the surge in official sales of mobile phones,” he said.

But when it became clear that MDMS will not be implemented anytime soon, unscrupulous traders took advantage of the situation, leading to a resurgence of the ‘grey’ market. As a result, individuals and illegal importers are now bringing large quantities of mobile phones into the country via illegal channels.

“The grey market of mobile devices has become huge. People involved in such trade can sell a flagship smartphone model of a reputed brand worth Rs 150,000 at just Rs 120,000. The customers buying such products feel that they have a very good deal. However, those are refurbished phones with a reduced quality. And on top of that, the government is losing millions of rupees in revenue,” said Agrawal.

Before the Covid-19 pandemic, the market share of illegal phones used to be 30-40 percent. But after Prime Minister Pushpa Kamal Dahal instructed authorities concerned not to stop Nepalis from bringing two units of phones with them while returning from abroad, the market of illegal handsets has grown.

According to Agrawal, mobile phones worth Rs 40 billion and Rs 35 billion were imported into the country in 2021 and 2022, respectively. “But the total market size of smartphones in Nepal exceeds more than Rs 80 billion. This means the government is losing a huge sum of revenue every year,” he mentioned.

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