Vendor industry successfully meeting the demand

July 18 - 24, 2005

One does get a chance to read a lot about the automobile assemblers but usually does not come across the vendor industry which produces auto parts and accessories manufacturers. In fact the vendor industry is the backbone of automobile industry. Its importance in Pakistan can be gauged from the fact that it has been successfully meeting the demand despite nearly three fold increase in number of cars assembled over the years. This has become possible because of close interaction between assemblers and vendor units. It is also a fact that quality and diversity of items produced locally has also improved substantially.

It is often said that the vendor industry has flourished and grown in Pakistan mainly due to the deletion program followed by the government. However, it is a debatable point. There are two opinions: 1) sector has flourished due to deletion program and 2) the sector has established its credibility with the gradual improvement in quality and diversification of the product range. However, some of the analysts have a different point of view. They say, "The sector may have flourished due to the deletion program but it is also a fact that this program was hardly followed to by any assembler. They were able to get extension on any pretext".

The fact which establishes the credibility of vendor units is that they have been successfully meeting the requirement of the assemblers. They were meeting the demand when annual production of cars was 40,000 units. They also successfully managed to support production of more than 127,000 units during 2004-05. The assemblers produced a little less than 97,000 units during 2003-04. Achieving these levels of production was just not possible had the parts manufacturers not increased their production capacities.

To achieve the present production level these units have invested huge amount not only to meet the enhanced demand but also to improve the quality. In this regard no one can undermine the role of local assemblers. Local assemblers have been working very closely with the parts and accessories manufacturers to expand the capacity and to improve the quality standards.

With the reduction in tariff and permission to allow import of CBUs, at reduced duties, one has to look at the fate of the vendor industry. The propagators of present policy say, "If the country is adopting market-based policies there should not be any requirement of following the deletion program. Assemblers should be free to make the decision of buying locally produced parts or importing these." However, the supporters of protection policy say, "The prime concern should be to provide safeguards to the local industry. It becomes all the more important because often the prices of basic but imported raw materials are beyond the control of local industry." They cite the example of recent hike in steel prices. With the substantial rise in steel prices local vendors had no option but to increase the prices of components. The same is also true about others petroleum-based raw materials.

However, some of the sector analysts are of the view that the smuggling of components/parts in huge quantities is the main impediment affecting the profitability of the local vendor industry. These units could have achieved economies of scale and greater synergy had there been no such influx of parts. The local markets are flooded with smuggled parts and accessories. There would have been no incentive for smuggling had the prices of locally manufactured components and accessories were not high.

These analysts say that while reducing the tariff the government ignored the basic principal of cascading. According to this policy there should have been sufficient difference between the tariff applicable on finished components and the rates applicable on raw materials. The difference in rates should always be there to facilitate the local manufacturers.

Before talking further on the merit and demerit of shift in government policy it is necessary to understand the importance of vendor units. According to industry estimates there are about 1,000 units operating in the organized and unorganized sector. The total investment made in the sector is around Rs 90 billion rupees. Fresh investment of more than Rs 170 billion, up to year 2010, was planned before the recent announcement of the new government policy. The sector provides direct employment to about 200,000 people. Its contribution to GDP is estimated at around Rs 60 billion. And the contribution to national exchequer is about Rs 19 billion annually. As stated earlier vendor units are the backbone of automotive industry in the country. Any disruption in their activities could lead to massive unemployment, which no government can afford.

The prime objective should be to ensure economic sustainability of these units and if certain protection is required it must be ensured. The economic viability of local units has to be maintained. The factors responsible for higher cost of production must be addressed because allowing import cannot help in containing cost of automobiles in the country.

Interestingly the government has not been able to overcome on money issue but seems to be ready to implement a policy which can kill the budding industry. It is a question of saving billions of rupees invested in the sector and continuity of employment of thousands of people. If the governments of developed countries are not ready to abolish subsides being extended to the agriculture, why should Pakistan be ready to forego its right of protecting the local industry. Vendors have not built the facility by borrowing funds from the financial institutions. They have invested their own hard earned money. In most of the units owners also work for long hours.