Pakistan's auto industry is faced with a bleak future in view of the declining sales and production volumes. The situation is so alarming that unless the government announces immediate remedial measures, several companies may face bankruptcy and closure in not too distant future.
A spokesman of Pakistan Automotive Manufacturers' Association (Pama) told Business Recorder here on Monday that the challenges faced by the industry today are too big, and may cripple the once booming industry, which had attracted huge foreign investment in establishing one of the most organised sectors in the country.
The reasons relate to the current macro economic situation and government policies vis-à-vis levies and taxes, which have been mainly responsible for the steep decline the auto industry is faced with. Pama comprises of 21 companies, heavily dominated by locals who are working in association with multinational companies for the assembly and manufacture of vehicles.
THE CHALLENGES INCLUDE:
-- Macro Economic and Global situation: increasing raw material/commodity prices, ie rising input cost, currency rates, strengthening of dollar/yen versus Pak rupee, rising inflation, trade deficit, declining forex reserves, rising interest rates, and rising fuel prices.
-- Inconsistent government policies and increased levies and taxes: Non-implementation of Auto Industry Development Plan (AIDP) and inconsistent policies. Imposition of 5 percent FED on cars above 850 cc, increased withholding tax at registration stage, increase in sales tax, and used car imports which is continuing to hurt local automobile sales.
-- Strict policies on auto financing, which is leading to a decline in car financing: Auto financing is an integral part and one of the main drivers for auto sales, making vehicle ownership affordable for many people and enhancing motorisation and mobility. Restrictions by leasing/financing companies in loan disbursement and higher interest rates have had a negative impact on sales of vehicles. The number of auto loans per bank has gone down considerably over the past one year or so.
This has had a direct impact on the consumers whose purchasing powers have decreased and confidence shaken in the local economy and put purchase decisions on hold.
The Pama spokesman said that cars and light commercial vehicles (LCVs) sales drastically declined by 44 percent in the first quarter of FY 2009 (27,159 units) compared to first quarter FY 2008 (48,559). On annual comparison, the sales of locally produced cars and LCVs, that had previously recorded sustained growth over the last five years, declined by 8 percent, from 204,121 units in FY 2007 to 187,412 units in FY 2008. This has resulted in corresponding decline in profits of the auto manufacturers.
When confronted with the question that at the end of the day, the consumer pays for the increase in costs, then why this negative impact on local manufacturers? he said that not all of the costs are passed on to the end consumer. The manufacturers are absorbing some of them. The recent price increases have been mainly on account of the depreciating rupee against the dollar and yen and the rising commodity prices, ie steel, etc.
The manufacturers have utilised all available resources to bear the increasing costs as far as possible. However, these resources have been exhausted and the situation for the future seems very bleak. A number of other factors highlighted in Q1 have also had an impact on declining sales numbers ie the current economic downturn which has affected the buying mood and ultimately the negative impact on local manufacturers. When asked in case the current situation were to worsen, which areas--consumers or employers--would be the first to be impacted, he said that both would be affected if the conditions further worsened: employees on account of job losses and layoffs and consumers in terms of the cost of purchase of an automobile or spare parts.
The spokesman said that recent estimates put job losses in vendor industry at about 17,500 in the last six months on account of declining demand. If the situation did not improve then more could be expected. Being a corporate organisation the bottom line is monetary viability, and the situation could be effectively managed only if there is an improvement in the economic and financial situation of the country. Therefore, it is necessary for the regulators and the government to also to understand the needs of the auto sector to ensure that this vital cog of the engineering and LSM industry could remain active and growth oriented as in the past.
In reply to a question, the spokesman said that the government needs to intervene immediately, with relief possible in following areas: abolish federal excise duty @ 5 percent imposed on cars above 850 cc; ban import of used auto parts and vehicles; withdraw 35 percent L/C margin on imports, and withdraw 2.5 percent WHT at registration. There is need to focus on long-term measures, which include dialogue for revisions and renewed implementation of AIDP.
Asked whether the current situation had any impact on the confidence of international investors to cut back investment in the country, he said the current situation is being watched very carefully by the parent companies of OEMs and if there is limited or no government support to the local auto industry, it may have an adverse impact on future investments and technology transfer. "Having said that, there is still a lot of potential in Pakistan auto market and we are hopeful that with the right government policies things would improve in the future."
When asked whether the local companies have decided to cut back targets of sales, production and expansion for the future, the Pama spokesman said that sale and production targets for 2008-09 have been scaled down due to reasons highlighted above. "However, if timely government intervention is not available in the form reversal of duties and taxes then we could see more drastic measures by companies ie, job cuts, bankruptcy, and closures, etc, The vendor industry has already cut nearly 17,500 jobs in the last six months," he added.
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