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Auto industry in shambles due to dull consumer demand

Auto industry was the highest tax-paying industry during the last government’s tenure followed by cigarette, tobacco, telecom sectors. Presently, the automobile industry is going through worst crisis amid rising prices due to imposition of new, higher taxes in the budget and steep currency devaluation in the recent months and now the government is expected to receive less tax by Rs150 to Rs200 billion from the industry due to the emerging situation. In the current situation of economic crisis, the auto manufacturing giants in the country are halting their vehicle production, thus leading to a direct impact on the auto vendors industry which supplies parts for assembling.

It is pertinent to mention here that the auto industry was expecting to increase its sales to half a million units by 2022. But now the situation is that Suzuki company has shown deficit and Honda and Toyota may also show deficit if the situation did not improve. Sale of vehicles has dropped by 50 to 60 percent till June 2019 as compared to sales till June 2018. As a result, Honda and Toyota have laid off hundreds of employees due to closure of plants.

The leading Japanese auto manufacturers in Pakistan, including Suzuki, Honda, and Toyota are struggling due to a massive decline in their car sales. As a result of the reduced demand in the market, the supplies have exceeded considerably hence forcing them to reduce their production days. It will be a massive blow for the industry as the auto vendors get a serious hit on their businesses as well. The overall situation has left thousands of employees jobless in Pakistan.

 

The sales have been on the decrease for the last three months as total car and light commercial vehicles (LCV) volume contracted by 5 percent to 17,561 units in June from a year ago. Overall, the car and LCV sales plunged by 7 percent during the last fiscal year to 240,335 units from the previous year. The impact of implementation of 5 percent Advance Customs Duty (ACD) on all raw materials and parts used by the local assemblers and imposition of 2.5-7.5 percent FED from July 1 has started resulting in further decline in sales. Industry expects a significantly large dip in sales at the end of the year.

The costs of all the additional taxes and duties imposed by the government are being borne by the vendors of small and medium-sized categories. The vendors have not even received any price increase from the auto assemblers, which means that the auto vendors industry is facing the majority of crisis. The raw material used for the production of auto parts is also imported, and due to the devaluation of rupee against the US dollar, the costs have increased. The advance customs duty (ACD) was increased from 4% to 11%, and the 3% value-added sales tax further mounts pressure on the vendor industry. The current situation is affecting the cash flows of the vendors, and if the similar circumstances prevailed, it might lead to the closure of the auto vendors industry. It is worthy to mention here that Pak Suzuki, Honda Atlas, and Toyota Indus have all recorded a plunge of approximately 71%, 68% and 57% in car sales respectively during the first two months of FY 2019-20 as compared to its corresponding period last year.

The government needs to respond to this crisis-situation faced by the local auto sector as soon as possible. There are several small and medium-sized businesses linked to the auto sector, and as a result of the economic slowdown process, unemployment is increasing day by day. The new entrants are also entering the local market, and the government should provide a safe environment for their investments. The government needs to bring consistency in its policies and shall withdraw the additional taxes such as Federal Excise Duty (FED) to revive the local sector once again.

The writer is a Karachi based freelance columnist and is a banker by profession. He could be reached on Twitter @ReluctantAhsan

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