On the Brink – Automobile Market Facing Big Economic Headwinds

The import ban, according to NADA, has resulted in the closure of 58 dealers across the country, resulting in over 1,000 job losses, with many in the process to shut down the doors of their businesses.

the HRM
The once booming Nepali automobile sector is facing an existential crisis as the NADA Automobiles Association of Nepal warns that the four-wheeler business will collapse if the government rejects importers’ appeal to lift the ban on import of vehicles.

The import ban, according to NADA, has resulted in the closure of 58 dealers across the country, resulting in over 1,000 job losses, with many in the process to shut down the doors of their businesses.

Following a sharp decline in the country’s forex reserves, the government in April imposed a blanket ban on imports of 10 items that it termed as ‘luxurious’. While the ban has been lifted for importing a few types of goods in recent months, the ban on imports of four-wheeler passenger vehicles, mobile phones costing over USD 300 per unit, liquor and motorcycles with over 150cc engine capacity is still in place. In October, the government extended the import ban on these goods till December

The Ministry of Industry, Commerce and Supplies has only permitted importing automobiles to importers who had opened the Letters of Credit (LC) before April 26.
The automobile industry with investment totaling Rs 100 billion is on the brink, say stakeholders. They have warned to stage protests against the government for not lifting the ban for months.

Mounting Problems for Automobile Dealers
“At least 58 dealers are already closed, and many are in the process to shut down their business,” said Dhruba Thapa, President of NADA, the umbrella organization of automobile dealers in the country.

According to the data provided by NADA, nine dealers have closed their business in Province 1, 11 in Madhesh Province, 18 in Bagmati Province, seven in Gandaki Province, three in Lumbini Province, seven in Karnali Province and three in Sudur Paschim Province.

“It has already been eight months since the government imposed the ban on vehicle import. Due to this, the market is left with new models of four-wheelers and two-wheelers. Automobile buyers prefer vehicles with advanced technologies and new models, but ironically dealers aren’t able to offer new products. In such a situation, how long could dealers survive their business?” questions Thapa, adding that more than 100 dealers are in the process to shut down their businesses.

Pooja International, the authorized distributor of the German car brand Volkswagen in Nepal, has already closed its dealer showroom in Thapathali. “If the ban is extended again, at least 50 percent of our dealer units will be closed,” said Bibek Bijukchhe, CEO of Pooja International.

Growing Jobs Losses
According to NADA, the automobile industry has provided direct employment to 100,000 people. With the market facing whirlwinds due to the import ban and liquidity crisis, 30 percent workforce has already been laid off in recent months.

According to Anup Baral, Executive Member of NADA, even if one dealer had five employees, the closure of 58 dealers resulted in a job loss of 300 people. “But the number is more. Apart from dealers; distributors and showrooms have also slashed the number of employees,” adding, “The sector, which is considered as employment powerhouse in Nepal, is on the verge of collapse.”

According to dealers, they have landed in a situation to seek loans to even clear the salaries of employees. Thapa said that the interest rate on bank loans has doubled in the past one year, and in such a condition, dealers are left with no choice but to shut down their businesses.

“The ongoing liquidity crisis and excessively high interest rate on borrowing have further added salt in the wound of auto businesses that have been impacted by the automobile import ban. The interest rate, which used to be at 7-8 percent, has now reached up to 18 percent. When there is no business, how can we just repay at such exorbitant interest rates? Shouldn’t the Nepal Rastra Bank needs come forward to put a brake on the worsening of the crisis?” questioned Baral.

According to Bijukchhe, at least 50 percent of those employed in the automobile sector are looking to either change their profession or fly abroad if the situation prolongs.

Is Automobile Market Behind Forex Depletion?
Earlier this year, the government banned the imports of automobiles at a time when the country’s foreign currency reserve was depleting drastically. However, a recent report published by the central bank shows the forex reserve has not increased despite the continuation of the blanket import ban on various types of goods. As per official data, the gross forex reserves decreased 2.2 percent to Rs 1,189 billion in mid-September from Rs 1,215 billion in mid-July.

“The auto sector is not behind the rapid depletion of forex reserves of Nepal. In the last fiscal year, Nepal imported vehicles worth Rs 70 billion. In the same year, the import bill of playing cards was recorded at Rs 28 billion. Looking at the figures, how can the government and the central bank blame the automobile sector for forex depletion?” said Baral. “The government thinks that the automobile sector is the main culprit behind the depletion of foreign currency reserves, but the fact is passenger vehicle segment has just one percent contribution in the total imports of Nepal.”

Liquidity Crisis
Over the past decade, the Nepali economy has faced liquidity crunches on different occasions. However, the shortage of investment-grade liquidity in the financial system this time is the most severe in living memory. So much so that banks and financial institutions are currently reluctant in lending money to their clients for purchasing vehicles that used to be a lucrative business for bankers until a year ago. “The situation has become such that even if the government lifts the ban on the import of vehicles, BFIs are not in the situation to lend money to their clients,” said Bijukchhe.

With the central bank increasing the policy rate, bankers have abandoned their ‘gentlemen agreement’, which had helped to maintain interest rate stability in the market for the last three years and have resorted to increasing interest rates on deposits to attract more money. However, this has also not worked rather putting more pressure on businesses as the lending interest rate has gone up to 18 percent.

Recently, members of the business community across the country took to the streets to protest the interest rate hike charged by banks and financial institutions.

According to Thapa, NADA is also preparing to come to the streets to protest against the government’s incompetency.

“The import restriction coupled with a liquidity crunch in the market has pushed the automobile sector to the brink. As 90 percent of consumers purchase vehicles through BFI financing, the liquidity crunch is badly hurting our sales. Only a few banks are disbursing automobile loans, but the process is too lengthy, and it takes up to 45 days to get the loans sanctioned. This has significantly delayed the decision-making process of buyers,” said Sandeep Sharma, Manager-Marketing and Communications at Laxmi Intercontinental Pvt Ltd, the authorized distributor of Hyundai four-wheelers in Nepal.

‘EVs are Not the Solution’
The sales of electronic vehicles (EVs) is increasing by eight times every year. Even the government has been levying lower taxes on the import of EVs to promote the consumption of renewable energy in Nepal. However, automobile dealers say that it will take time for EVs to replace ICE (internal combustion engine) vehicles.
Even though there is a restriction on the import of fossil fuel-powered vehicles, the import of EVs is open.

“The growth of the EV market is almost 800 percent every year. With the import ban in place, the demand for EVs has increased further. Compared to other countries in South Asia, the demand for EVs is massive in Nepal. However, EVs are not an alternative to IEC vehicles for the time being,” said Thapa, adding that the infrastructure needed for EVs is still in the nascent stage.

The overall market share of EVs was 3-4 percent in the fiscal year 2019/2020. It dropped significantly to one percent in FY2020/2021, due to the Covid-19 pandemic and revision in the taxation by the government. In FY2021/2022, the market share of EVs bounced to 7-8 percent. Automobile dealers predict that the overall market share of EVs by the end of the current fiscal year would be 20 percent.

“The future of ICE vehicles is still good as Nepal has rough roads. Almost 30 percent of roads connect to rural parts of the nation and building infrastructure for electric vehicles is a tough job, at least for now,” said Sharma. “Even the consumers still opt for ICE vehicles if they have to travel long distances regularly. There are a few charging stations along the highways and EVs have to queue up for charging. In the recent Dashain festival, many EV owners experienced the same.”

Sharma sees some hurdles for electric vehicles to become mainstream in Nepal. “There is no clarity whether people can open charging stations just like fuel stations. Currently, only the private sector is installing charging stations on highways,” he said.

Breaking the Ecosystem
According to Baral, the import ban has broken the entire automotive ecosystem. “Import of a vehicle has a direct impact on the business of spare parts, batteries, and workshops. As no new vehicles are coming into the market, their business has also declined by almost 30 percent,” he explained.

“In Nepal, at least 90 percent of consumers purchase vehicles through financing services from the banking industry. So, the banking industry has also lost business. The insurance industry has also lost business as non-life insurers collect 40 percent of its premium from the automobile sector. Likewise, the advertisement agencies and media are also deprived of advertisements from the auto industry. So, it’s a chain and once there is an import ban of vehicles, the entire ecosystem is hampered,” said Baral.

According to auto stakeholders, the government is losing a huge amount of money in revenue not only from automobile imports and sales but also from sales of auto parts, lubricants, batteries and tires; the government levies 30-50 percent in taxes on spare parts, lubricants, batteries, and tires.

Even the recent festive season, which is the busiest season for the automobile business, brought no joy to the sector. There were not enough vehicles in stock and consumers did not get their desired variants of the vehicles. The tightening of auto loans also discouraged people from buying vehicles.

Of the total annual sales, one-third is recorded in the two months of the festive season. This year, the entire ecosystem of the automobile market has been hampered,” said Sharma.

Leave a Comment

Scroll to Top