The present economic scenario for automobile car manufacturers does not seem very encouraging and bright. According to Pakistan Automobile Manufacturer Association (PAMA), since the local automobile manufacturing plants are a key source of employment generation, the loss of financial viability in automobile manufacturing could result in job losses of more than 50,000 working personnel besides crippling suppliers of component and accessories.
Surely PAMA believes, the fallout of this economic disaster will not be just limited to workers, but also hurt vendors as each car roughly requires at least 52 additional components/accessories from different local vendors from out side the plants. This outsourcing for accessories will also cease, causing businesses to windup.
Following are the main reasons, both relating to the macro economic situation and government polices (levies arid taxes), behind the declining sales and production volumes of the auto industry: Increasing raw material/commodity prices ie rising input cost, currency rates (strengthening of S/Yen vs PKR), rising inflation, trade deficit, declining forex reserves, rising interest rates, and rising fuel prices.
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 the registration stage, increase in sales tax, and used car imports continue to hurt local automobile sales, a PAMA spokesman said.
Strict policies an auto financing are leading to a decline in car financing numbers as auto financing is an integral part and one of the main drivers for auto sales, making vehicle ownership affordable for many people and enhancing motorization and mobility. Similarly 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 which has had a direct impact on the consumers whose purchasing power has decreased, as well as shaken their confidence in the local economy and putting purchase decisions on hold.
In 2008-09 the global automotive industry witnessed its worst slowdown amidst dramatic financial crises world-wide. The ongoing global economic crisis, negative security developments and continued power shortages stowed Pakistan's real GDP growth to 2 percent for 2008-09 compared to 5.8 percent achieved in the prior year.
The overall economic activity weakened despite growth in agriculture, while declining imports and slowing domestic demand resulted in lower tax revenue. The Large scale-manufacturing sector recorded a dismal performance in FY09 with a decline of -8.2 percent compared to 5.4 percent growth for the previous year.
In the automotive sector, sales of totally assembled passenger cars (PC) and light commercial vehicles (LCV) which had earlier between 2001/07 posted sustained annualised growth of 33 percent plunged by a record 47 percent to 99,307 units compared to 187,412 units sold in 2007-08.
Explaining as to why there is a recent price increase by local OEMs (Original Equipment Manufacturers, he said the recent price increases have been mainly on account of the depreciating PKR against the Japanese Yen and US Dollar. Manufacturers have utilised all available resources to bear increasing costs as long as possible and not all of the costs have been passed on to the end consumer. Some of them have been absorbed by the manufacturers as well.
There has been a perception that local auto industry continuously and unjustifiably increases its prices causing resentment to car buyers. Since February 2009, there has been a gradual depreciation of PKR against major currencies eg Yen (7 percent) and USD (10 percent) and since June 2008 PKR has depreciated by an overall 40percent against Yen and 70 percent against USD.
Increase in gas price (13 percent), electricity price (34percent), domestic fuel price (25 percent), and international steel price (77percent); other basic metal price (over 80 percent) and increase in overhead cost per unit have further aggravated the situation. All these factors have forced the OEMs to marginally increase car prices while absorbing most of the costs. Hence with constant increase in input costs it is very difficult for OEMs to maintain automobile prices. There is a misperception that our vehicle prices are higher than those in neighbouring countries. In fact the prices of vehicles produced by local OEMs are generally lower as compared to those in India.
In the coming months it is expected that the international commodity prices of steel and basic metals will firm up even more from the present levels. Domestic energy shortfall coupled with planned hike in power tariff, inflationary and interest rate will exert pressures on the margins and profitability of local OEMs, he said.
On the future import of new automobiles, used automobiles and parts, the spokesman said that government should prepare long term consistent policies to encourage other manufacturers to invest in the country. New cars are currently freely importable in Pakistan. There is need that duties on cars with higher engine capacities (above 1800 cc) should be rationalised so that consumers have a choice to import these vehicles.
Pakistan has got the lowest tariff rate on used vehicle compared to India and Thailand. Even today used vehicles up-to 3 years old are allowed into the country with a depreciation allowance of 25percent. There is no product support for such vehicles and ultimately the customer suffers. Government should have policies, which assist local industry as it creates jobs, technology transfer and increase investment, etc.
Although used parts are banned in the country they get cleared by paying some penalties. There is no value, which can be ascertained for such imports. New parts, under the guise of old parts are imported. Used parts ban should be strictly implemented, as they are a drain on foreign exchange, heavy loss of government revenue due to under invoicing and counterfeit parts.
To a question whether with low cost manufacturing in neighbouring countries, is the import of parts and accessories a realistic option? He said: Imports of accessories and parts are not feasible as it affects the burgeoning auto vendors industry that has mushroomed with the growth of local manufacturing. The local vendor industry via Technology transfer has improved local parts manufacturing, design drawings, process, quality assurance, management systems, inventory control, sourcing of raw materials at competitive prices, and of course, human capital development and training, etc.
When asked if manufacturers have considered making their processes more efficient to produce more cost effective products. The spokesman replied: the processes and production techniques used by the local auto and parts manufacturers are in line with global best practices of parent companies ie Toyota Production System etc. Over the years there has been transfer of technology to Pakistan which has enabled our manufacturing set-up to be inline with international standards and equivalent to those being used by global auto and parts makers.
The issue is not the processes being used, but the rising cost of inputs and the increase in regulator levies and tariffs. Localisation efforts have been undertaken in the past to produce parts locally to reduce costs and this effort still continues. The auto industry is taking all possible measures to make our operations more and leaner and continuously look at ways to reduce cost, improve productivity and efficiency, without compromising quality, of course.
Replying to a question whether the current situation had an impact on the confidence of international investors to cut back investment into the country? The spokesman said that 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 then it may have an adverse impact on future investments and technology transfer. Having said that there is still a lot of potential in the Pakistan auto market and we are hopeful that with the right government policies things would improve in the future.
When confronted with another question ie with global fuel prices having such an impact on local auto sector, why is there no local production of alternative energy compatible vehicles? He said production decision on alternative energy compatible vehicles is determined by the market size of such vehicles due to the need for economies of scale. These vehicles are becoming popular in North America and their market is growing but in Pakistan, since the demand is low at present, the cost of these vehicles would be high. Thus there is no local production at present.
About the production of hybrid cars and electric cars in developed countries, he said that Hybrid and electric vehicles have gained success in the developed countries, based largely on environmental reasons. In Pakistan currently there is limited scope for such vehicles, as it requires not only major investment in production but also in product support. Additionally these vehicles are fairly expensive, and our major customer base does not currently have the buying power for such vehicles.
About the standing of Pakistani automobile industry in the South Asian region in terms of product specification, he said that the product specifications in Pakistan are comparable to any South Asian country. However, specifications of these vehicles are dependant on the customers' requirements. All manufacturers have a range of lower spec to higher spec vehicles, offering the variety to meet customer's demand. The auto industry is overall considered as the mother of all industries and an engine of economic growth, technology transfer and job creation.
If the government policies remain unstable then this vital sector of engineering and large scale manufacturer (LSM) industry will remain inactive and there will be no contribution to national exchequer, technological advancements, any employment generation and affordable mobility to people in the country. If the current situation were to worsen, both consumers and employees will be affected. Employees on account of job losses, layoffs and consumers in terms of the cost of purchase of automobile or spare parts, he said.
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