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Auto sector of Pakistan in tight spot

The automobile industry, along with the auto components industry, is one of the core industries in Pakistan. A well developed transportation system plays a key role in the development of an economy, and Pakistan is no exception to it. Automobile is one of the largest industries in the global market as well. Owing to its strong forward and backward linkages with several key segments of the economy. Automobile sector occupies a prominent place in the fabric of Pakistan’s economy. As a matter of fact, automobile sector is leader in product and process technologies in the manufacturing sector. It has been recognized as one of the drivers of economic growth and the domestic automobile industry is believed to be the barometer of the economy as well. Such a belief is in line with international trends since in most mature economies the automobile industry’s performance is viewed as a reflection of the economy’s health. In every growing country, this sector has emerged as a sunrise sector of an economy.

In Pakistan, most of the motor makers have started shutdown of their manufacturing plants in most of a month, following a fall in the sale of vehicles as car prices skyrocketed, due to rupee depreciation and taxation measures. Car makers have reduced their shifts, cut down their working hours and are sending workers on compulsory holidays. Sales are down 60-70 percent. A similar slump has been recorded in the production of motorcycles, tractors, trucks and buses.

Pakistan’s federal cabinet has approved the first-ever national Electric Vehicles (EV) policy in a bid to tackle effects of climate change and offer affordable transport in last 2019. In the first phase, the government will focus on converting 30 percent of total number of vehicles, mainly cars and rickshaws, into EVs. Local car manufacturers are completing most of the preliminary work where plan is to target set for next four years is to convert 100,000 cars and 500,000 two and three wheeler vehicles to EVs. One of the key objectives of the policy is to offer affordable transportation to the people as the cost of electric vehicles is much lower compared to petrol, diesel, compressed natural gas (CNG) or other fuels. Another major purpose of introducing EVs is to reduce greenhouse gas emissions.

The global and Pakistani manufacturers are focusing their efforts to develop innovative products, technologies and supply chains. The automobiles sector is divided into four segments — two-wheelers, passenger vehicles, commercial vehicles and three wheelers. The growth for automotive industry is important for the growth of economy, particularly because the automotive industry has strong multiplier effect. It is capable of being the driver of economic growth. High direct to indirect employment ratio of about 1:10 is estimated for the automobile industry, because automobile industry has potential to generate more employment both directly and indirectly. These indirect employments includes employments in ancillary and component industries, automobile service stations mechanics, loaders and cleaners of commercial vehicles, institutions financing purchase of vehicles and people who drive commercial vehicles and hired vehicles. There is a symbiotic relationship between the growth of economy and the demand for vehicles. The fast growth of automobiles industry will be due to the convergence of a lot of positive factors.

Infrastructure development in Pakistan has contributed majorly in the country’s economic development and growth during the last few years. Development of road network is one of key segment of infrastructure development in Pakistan. With a total length of over 1 million kms, today Pakistan road network is one of the largest in the world. Moreover, there has been continuous development of road infrastructure in terms of quality and connectivity. The vast development of road infrastructure has made road transport both in the case of passenger traffic and goods transport a viable, cost effective and speedy option of transportation. Due to availability of skilled and qualified engineers, Pakistan has a competitive edge over the developing countries in terms of labor cost.

 

The economic slowdown is highly visible in automotive industry; the big players are shutting down their plants for around half of a month, as sales are nose-diving. According to industry sources, around 3,000-4.000 layoffs are directly by OEMs, and around 15,000-20,000 workers have lost their jobs in the value chain – mainly auto parts manufacturers. For tractor industry and two wheelers, sales dip is proportionately less, 29 percent and 16 percent respectively in first two months of financial year 2020 versus 41 percent fall in passenger cars and 52 percent in SUVs. New taxes, impact of currency depreciation on imported parts and imported raw material to be used in manufacturing the localized parts are the other reasons along with the increase in interest rates.

In last few years, overall Pakistan’s gross national income per capita has increased where banks also started giving auto/car loans to individuals. This car loan facility was used by millions and people had moved from bike to car. This has pushed up the demand for passenger vehicles directly and commercial vehicles indirectly due to retail boom and industrial boom for consumer durables. Rising incomes among population leads to increase affordability, increasing domestic demand for vehicles, especially in the small car segment. The rapid urbanization due to migration of the younger generation to cities for higher education and in search of better opportunities have helped flourishing the automobile industry in Pakistan. Joint families in towns and village have given a way to migration of the younger generation to cities in search of better opportunities. With increase in per capita income, growing employment opportunities with opening up of private sector, there is transition from lower class to middle class. The growing middle class population has resulted in increase in demand of two wheelers and four wheelers in Pakistan. Today, among the middle class families, car has become need rather than luxury.

All scheduled banks should offer loans for purchase of passenger and commercial vehicles on installment basis to consumers. The small-car market, which already account for two-thirds of domestic sales, can offer promising prospects for sales growth as increasing affluence enables more Pakistani to trade up from motorcycles. Sales of commercial vehicles depending upon the growth of the economy can expand.

Growth of economy, easy availability of finance, level of vehicle penetration, the demographic profile of the country, increasing in average annual income, huge investments is already made by the private sector in the infrastructure sector, positive government policies for development of automobile sector, etc are some of favorable factors that can be responsible for rapid growth of this sector.

Only 40,586 units of passenger cars were sold in July-Oct 2019, as compared to 72,563 units in same period last year. The automotive industry is in deep trouble these days. New players have even a greater challenge on their hands. They have to introduce completely new vehicles in the market where customers would be taking a chance to use an untested vehicle. As a significantly large portion of value addition and job creation cab be captured in auto component manufacturing, the increasing trend of import of auto components is not a desirable situation. The focus of the government should be to ensure inclusive and equitable growth. To achieve this goal, large employment generation, especially from the rural and semi urban areas, should be necessitated.

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