The Automobile Industry in Pakistan

The automobile industry in Pakistan started to achieve the objectives of fulfilling the requirements of the country, creating manufacturing base, import substitution, foreign exchange saving and employment generation, human resource development along with foreign and local investment.
Over the years the automobile industry world-wide has become a true reflection of the economy, similarly Pakistan's economic indicators are improving with the present peak of the automobile industry.
Presently there are 22 assemblers including multinationals with their equity participation (Toyota, Honda, Suzuki, Hino, Nissan, Hyundai/ Kia) engaged in progressive manufacturing/assembling of different automobiles under the approved deletion program of the MOI&P, Government of Pakistan.
As per the approved deletion program they are required to use specific local contents on an annual basis.
The auto industry in Pakistan is currently entering a new phase in its development. From a virtual stagnation for nearly 10 years, the automotive industry is finally coming of age, with volumes growing exponentially and demand for quality, price and prompt deliveries being the order of the day.
This unprecedented growth in the industry is attributed to enabling and consistent policies of the government and the new consumer financing policy.
INSTALLED CAPACITY AND PRODUCTION OF VEHICLES/AUTOMOBILES: The production of cars has exceeded all expectations in the last two years, to achieve about 100,000 units in the year 2003-04. This has created a challenge for the assemblers, as well as the local vendor industry which is facing a tough task in meeting the existing demands of the industry.
DESCRIPTION OF MAIN INDUSTRIAL PROCESSES: A typical transport vehicle comprises of 2,200 various components apart from Hardware.
Material and processes involved to produce a typical auto part component
-- Designing
-- Mould and Die manufacturing
-- Forging, Casting and Machining
-- Sheet metal, fabrication and Press work
-- Plastic & Rubber Mouldings
-- Electrical or Electronic components
-- Assembly
-- Sub Assembly
-- Testing
-- Raw Materials 1. Iron & Steel; 2. Copper & Aluminum; 3. High & Low Density Polypropylene
FUNCTIONAL/NON FUNCTIONAL/COSMETIC COMPONENTS:
-- Trims - Plastic / Seats and allied
-- Engine Components including oil, Water Pumps and Gears
-- Suspension & Axles
-- Electrical, electronic and Allied
-- Brake and Allied Mechanisms
-- Radiators including cooling and Heating Mechanisms
-- Air conditioning
-- Add-on and accessories
-- Navigation Devices including Radar detection
Majority of the above stated components are manufactured in Pakistan and used by OEMs (Original equipment Manufacturers).
The after sales market is catered by local as well as imported parts and components. The requisite parts and components are being imported quantities from China, Korea, Japan, USA, Germany, Belgium, Saudi Arabia etc.
MAIN MACHINERY AND EQUIPMENT AND THEIR ORIGIN:
-- Mould and die manufacturing machines
-- Forging and casting machines
-- Metal fabrication machines
-- Plastic injection machines
-- Rubber moulding machines
-- Lathe machines
-- Electronic or electrical assembly and sub assembly
The machinery and equipment is mostly imported from USA, Germany, Belgium, France, Korea, Japan, China, and Thailand. Many a machines such as injection moulding and lathe machines etc are being manufactured locally.
AUTO PARTS: The entire philosophy behind developing the Automotive Industry is to promote auto parts manufacturing.
In majority of the developed countries the Automotive Industry play an important role in the economic and technological development as it is a major organ of Engineering Sector involving many technologies like metal working and use of plastics.
The production of a vehicle incorporates all industrial activities and this cycle gives a strategic advantage and continuity to the local parts manufacturing industries who in turn develop their capabilities in their respective fields.
The automotive sector is well known to have brought with it, revolutionary changes in the steel, rubber, plastics, glass and textile area and introduction of good Management practices such as Total Quality Management.
MAIN PARTS MANUFACTURED LOCALLY: The problems confronted by the industry in Pakistan, among others stem from the low quality of the steel produced locally which implies that most of the steel required has to be imported to meet the demand of the industry.
The plastic based industry is more advanced, while it depends on moulds being fabricated outside the country. In the electrical engineering side, the industry is still primitive with a lack of satisfactory production of generators, starters or distributors.
The parts most often mentioned as worth of development in partnership with a foreign partner are the metal and plastic components which lack in quality and reliability.
Alloys wheel rims as well as rubber components seem to present good opportunities for development.
The "engine" behind the growth of the vendor industry in Pakistan is the vehicles' assembly plants which consist of three Japanese car assemblers: Suzuki, Honda and Toyota, the Korean JV Hyundai Kia as well as the two trucks assembly plants JV Nissan and Hino.
It seems that Volvo is also involved in truck assembly through a technical agreement. Ford and Massey Ferguson are also present through technical agreement for the manufacturing of farm tractors.
ANALYSIS OF IMPORT FLOWS: Imports of Auto parts are mostly sourced from Japan which is understandable in view of the quasi exclusive set up of the car assembly plants through Japanese joint ventures.
The other main suppliers are other Asian countries. European countries are not represented in a big way, but there are limited imports from Europe which could serve as a base for further development for European countries.
ANALYSIS OF EXPORTS FLOWS: Exports are limited in amount (about US $31 Millions 2002-03) but have been growing fast over the last few years. Main destinations of exports are the USA, Europe and the Middle East.
It is therefore confirmed that the main reason for any investment in Pakistan would be to serve the domestic industry with a view, to export auto parts from Pakistan once the quality standards are achieved.
Also, statistics confirm that one of the main draw back for investment in this sector might the difficulty to achieve economies of scale.
ANALYSIS OF THE MAIN TRENDS
LOCATION: Most of the auto vendors are located around Karachi and Lahore due to its proximity to assemblers, urban commercial markets, seaport and raw material skilled manpower sourcing centres.
ROLE OF LOCAL IMPORTERS: Apart from supplying parts to assemblers a large after sales market for existing and discontinued vehicles offers a huge potential to auto vendor industry.
The size of the after sales market is estimated at over Rs 36 billion mostly catered by imports and smuggled auto parts.
Many authorised dealers and distributors operate in big urban markets in Karachi, Lahore, Faisalabad, Multan, Rawalpindi and Gujranwala. Manufacturers like Honda, Toyota, Nippon, NGK etc have their presence in the market through these representatives. The network of these auto part vendors is fairly organised.
The assemblers too are involved in the sale of imported spare parts through their 3S service centres.
COMPETITION FROM IMPORTS: The auto parts industry faces a tough competition from imports, but there are examples where a few locally manufactured products are successfully competing with imported parts both in terms of quality and price.
However, the auto parts industry faces a serious threat from smuggled and mis-declared imports. The estimated amount of these parts is around Rs 18 billion.
The concerned government authorities are doing their best to curb such practices but still a lot has to be done in this regard.
The following parts are being currently imported:
-- Fuel injection Equipment including pumps and injectors
-- Gear Box
-- Crankshafts
-- Piston & Rings
-- Ball, roller and plain bearings
-- Miscellaneous hardware items including Springs especially for engine use.
AUTO-PART PAKISTAN AFTER SALES MARKET: The market is estimated by the industry at a total of Rs 36 billion.
Total Documented Imports represented Rs 10 billion as per the Federal Bureau of Statistics (FBS) and the locally manufactured portion of around Rs 4 billion.
As Pakistani auto parts exporters are up against exporters from developed countries which have far more advanced technological resources, they are able to compete in basic and low-end parts.
The local vendors desperately need technological know-how to improve upon their quality and hence penetrate into higher-end markets. However, it appears that a small number among them manage to achieve exports, which should reach nearly Euro 60 million in 2003 according to Indus Motor.
The summarised list of auto parts exported from Pakistan during the last five years
-- Part of the Auto Vehicle, Rubber
-- Tractors
-- Gear Box Shafts
-- Timing Gears/Transmission
-- Tractors Wheel Rims
-- Silencer and Exhaust Pipes
-- Wheel Rims and Spokes
-- Piston Cylinder Liners
-- Radiators Cop Assy
-- Hand Brakes
-- Hub and Fire Wheel
-- Saddles
-- Seat of Motorcycles
-- Filters
-- Forged Machined Parts
-- Heat Treated Steel Components
-- Axle, Brake Discs
-- Molds (Steels)
-- Expansion Tanks
-- Engine Valves
-- Hand Brakes
COMPETITION IN DOMESTIC MARKET: As our auto parts sector is not organised therefore the technological know-how and expertise is available to only a few large exporting vendors.
Due to this reason, most of the vendors are engaged in basic and low-end products. This weakness offers a huge potential for new entrants with technological know-how and modern production facilities.
COST FACTOR ANALYSIS OF AUTOMOBILE INDUSTRY: A price comparison established by the Japanese car manufacturers for India and Pakistan is attached hereafter.
It shows that Pakistan has a slight cost advantage in the manufacturing of similar cars.
RESEARCH & DEVELOPMENT: The research and development is mostly restricted to OEMs as they have to achieve high quality targets. The vendor industry is feeling a dire need of research and development facilities as they also have to successfully achieve the quality targets set by the OEMs, these quality standards are essential in order to be competitive with the imports.
Due to technological advancement in the automobile industry the absence for skilled and educated workforce is really felt, though the Government has introduced automobile engineering in the major universities but there is still a long way to go to fulfil the demand of the rapidly growing auto industry.
Among the various measures taken by the Government to support the local automobile industry to face the future challenges, the revival & up-gradation of Automotive Testing & Training Centre Limited at Karachi is one of them.
The Government of Japan has been gracious enough to provide technical assistance /grant worth Rs 378 million in form of machinery, equipment & technical experts. Japan External Trade Organisation (JETRO), is also actively participating in, financing and managing the reorganised Automotive Testing & Training Center (AT&TC) at Karachi.
REGULATORY FRAMEWORK/GOVERNMENT POLICIES: Up to the year 1995, the Deletion Cell of the Ministry of Industries was formulating and monitoring the Deletion Programs. These deletion programs were products specific that is one deletion program for each make and model.
It is important to note that the CBU rate of duties have been kept extremely high ranging from 100 to 350% till 2002. Only recently in the financial bill 2002-03, the CBU rates have been brought down to 75% for up to 1000cc to 200% for above 1800cc.
The import duty on CKD has been retained at 35%. Thus since its inception the automotive industry has enjoyed heavy protection.
This protection was granted to the assemblers in return for the commitment to indigence to a 75% level in five years from the inception of each product. Unfortunately this undertaking has not been fulfilled.
In 1995, the government constituted the Engineering Development Board (EDB) under the Ministry of Industries, to form a long-term Engineering policy leading to transfer of technology, human resource development and management of transparent deletion programs. EDB performed the task of monitoring the deletion program very successfully and was able to achieve the desired targets. The following tables highlight the achievements of EDB related to the deletion program:
WTO ISSUES: Conformity to the WTO rules and regulations in term of protective tariffs and local components requirements are the main issues facing the industry.
The ensuing competition which would affect the domestic market further to the potential reduction of the tariffs increases the needs for improved technology, know how and productivity, for the industry to remain competitive.
This is the main draw back of this sector as far as a foreign investor is concerned.
The post WTO regime is a major threat for the automotive industry as the industry / assemblers and the auto vendors enjoys government protection (Tariff and Deletion) since its inception.
At present the deadline for elimination of TRIMs is December 31st, 2003. The Automobile Industry is unanimous in asking this date to be extended to December 31st, 2005.
The Government of Pakistan is seeking this extension from WTO. Whereas it may be important whether it is December 2003 or 2005 but even more important is what measures should Pakistan take to continue to protect much needed and Strategic Automobile Manufacturing Industry.

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Table 1: Pakistan / India Japanese cars price comparison

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Car India (Annual Car Production: 750,000)   Pakistan (Annual Car Production: 100,000)

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Model in On   Rd.        NOGL       Equivalent   On Rd.     NOGL

India         Price      Price US$  Model        in         Price            Price US$

              Indian Rs             Pakistan     Pakistan

                                                 Rs

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Honda                            Honda Atlas

City          1.3        727,000    10,414       City EXI     729,000            9,033

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LXI

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City          1.3        732,000    10,486                 City EXI-S-  779,000  9,652

EXI                                              MT

Maruti (Suzuki)                     Pak Suzuki

800 Euro-     237,000      3,395    Mehran 800   297,000   3,585

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II

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Toyota                              Indus Motor

Corolla J     1,065,200   15,259    Corolla GLI  939,000  11,635

Corolla G     1,241,433   17,783    Corolla      SE     1,169,000       14,484

Auto        Auto

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