TAPERING AUTO SECTOR
SHAMIM AHMED RIZVI
Oct 20 - 26, 2008
The down ward trend in auto and LCV sales (cars and light commercial vehicles) continued as production dropped to 27,034 units for July-September, 2008 as compared to 48,559 units during the corresponding period last year showing a sharp fall of over 44%. If only cars sales are taken into account it dropped by 51% with only 19,066 units in the first 3 months of the current fiscal from 39,297 units last year.
The situation is no different in case of motorcycle industry. After a phenomenal growth in sales during the last 5 years from 371000 units to 10,54,000 units, the local motorcycle industry is now all set to feel the burnt of increasing cost of production and economic melt down during the current year. There has been a sharp decline in the sale of motorcycles during the last few months. The falling trend is continuing threatening the industry. A leading dealer in cars and motorcycles told this correspondent that people are now more concerned about meeting their food requirements in time of high inflationary trend in food prices rather than purchasing new cars and motorcycles.
The Auto industry is expecting sales to decline further due to interest rate hike that will discourage the already slowed down auto financing. Auto financing was a major source of sales and resultant growth of automobile industry and its vendors. Banks put the brakes on auto financing in last fiscal after colossal losses owing to recurrent defaults on part of borrowers. The recent rise in interest rate has made auto financing more expensive and less attractive for borrowers. Bankers say that rise in SBP interest rate will be added up with the banks margin, which will further take the rates high. The market is already down and this increase will further push down the auto finance product. If previously banks were offering auto financing at 18 percent now this will be available at more than 20 percent and this increase is out of the reach of the customers. In May this year the rate was increased by 1.5 percent in two months; this was the second time increase in the interest rate. He said that the previous customer's periodical payments will also increase this leading to more defaulters. This will automatically discourage the customers to go for auto financing.
Auto analysts say that the growth of the auto sector has been hampered in the fiscal ended June 2008 as a result of political uncertainty, economic instability, deviations from the agreed auto policy, rising interest rates, foreign currency appreciation, increases in the prices of oil, steel and other inputs and the negative impact of used cars imports and most importantly banks have slowed down the auto financing. Demand had also decreased due to a rising inflation and food prices as well as lost work time due to power outages resulting from energy shortages in the country. Industry sales have declined by eight percent in FY08, from 204,000 units in fiscal 2006-07 to 187,000 units in 2007-08. The recent one per cent hike in interest rate will further push down the auto financing product.
The step initiated by the State Bank of Pakistan, though commendable as a step to reduce inflation, spells trouble for the local OEMs as it will work to discourage auto financing. Financial institutions have played an integral role in the growth of Pakistan's auto sector by facilitating motorization through the easy availability of car loans and debt servicing. Auto financing has also faced a crunch due to falling demand and increasing bad debts and SBP's latest decision is bound to cause more uncertainty in an already unstable market. This further adds to OEMs cost of doing business, as financial borrowing becomes all the more expensive. In the previous fiscal year, the Government of Pakistan had taken the initiative to provide momentum to the local industry in the shape of the Auto Industry Development Plan (AIDP) officially sanctioned in November 2007, to promote development of the automobile sector, provide assemblers a structure to base their expansion plans as well as provide the much needed stability in policies. Auto Industry Development Plan is yet to be implemented.
According to auto industry the assembling sector counts for 91 percent of cars and light commercial vehicles (LCVs) sold in the country. Domestic production of passenger cars and LCVs has increased four-fold, from 49,000 units in 2001-02 to nearly 190,000 units by 2007-08. This has made Pakistan's auto industry one of the highest potential sectors of the national economy. Auto sector says that the current federal budget has announced additional levies and taxes which are expected to dampen demand further. These include the imposition of 5 percent Federal Excise Duty (FED) on cars with engine capacity higher than 850cc. The situation was further aggravated by the renewed implementation and shifting of the 2.5 percent Withholding Tax at the registration stage which has led to an increase in car prices. The auto industry also believes that the provision of valid driving license of the country of origin would help deter illegal imports of used cars under Transfer of Residence scheme.
A leading name in the motorcycle industry and Chief Executive Officer of HKF Engineering, Haroon Arshad has urged the government to pay special attention towards the country's motorcycle industry as it was not only playing an important role for economic stability of the country but also employed more than 200,000 people directly and indirectly. He said that although motorcycle was a transport for common man, due to rising prices of daily use items as well as raw materials purchasing motorcycle was becoming difficult.
He said that banks should be directed by the government to initiate leasing programmes in a bid to enhance the production of motorcycles in the country as due to high inflation rate the purchasing power of the potential buyers has been squeezed resulting in lesser growth rate. Haroon Arshad was speaking at the launching ceremony of two new models of Ravi Motorcycle STORM 125 and PREMIUM.
There has been a sharp decline in the profitability of auto sector posing a serious threat to the industry. For instance Suzuki Motor Company announced on August 20 that it earned Rs. 598.76 million during the half year ended June 30, 2008, compared with NPAT of Rs. 2.01 billion in the same period last year, a decline of 70 percent year-on-year. The company's earnings per share in the period under review declined to Rs. 7.28 from Rs. 24.40 in the same period of last year. Turnover declined by 11.59 percent year-on-year to reach Rs. 25.26 billion in 1HCY08 compared to Rs. 28.19 billion in the same period last year. But the cost of sales declined only marginally, from Rs.24.629 billion to Rs.24.275 billion, causing the gross profit to dive to Rs.989.989 million from Rs.3.568 billion.
Automobile manufacturers and auto-parts' vendors have warned the government that despite an additional levy of 5 per cent excise duty, the revenues from automobile sector would decline by over 25 per cent this year due to declining demand. In a presentation made to the government, they pointed out that the industry paid Rs.63 billion cumulative taxes that the government has levied on automobiles. This year despite additional duty the sector would hardly contribute Rs50 billion in the national exchequer. The Pakistan Association of Auto Parts and Accessories Manufacturers (PAAPAM) and Pakistan Automobile Manufacturers Association (PAMA) in a joint presentation have suggested various steps that should be taken by the government to arrest the slow down in sales. The two associations appealed to the government to withdraw the 5 percent excise duty on cars and impose a ban on import of used parts instead of allowing their import after imposing 30 percent redemption duty.
They asked the government to place stringent checks on auto-parts imported commercially or as semi knocked down kits. They proposed introduction of non-tariff measures to curb the import of parts that are being manufactured in Pakistan. They pointed out that 50 percent duty has failed to stop the import of these parts as the import prices are easily manipulated by the importers. Moreover, import under SRO 63 attracting 50 percent duty should not be allowed under FBR's CARE system. They have also appealed for special incentives for the auto sector including lower mark-up on loans and a waiver of 35 percent L/C margin. They said that encouraged by the automobile growth from 2001-2007, the industry and the government of Pakistan had fixed a target of over half million units' production by the year 2011-12 that now seemed out of reach.
Under the current scenario the two associations warn production would decline to 1,12,778 units by 2011-12. The two associations pointed out that investment in the automobile sector has frozen at Rs98 billion and is expected to remain at the same level by 2011-12. They said that if things go as planned, investment might be projected to increase to Rs225 billion. They said even at the current high taxation, government revenues would decline from a peak of Rs63 billion to Rs38 billion.
There are 500 auto-parts manufacturers in the country that supply parts to original equipment manufacturers (PAMA members). Half of these units are in Lahore and adjoining cities while half are in Karachi and cities around it. Total gross sales of automobiles in Pakistan were Rs214 billion in 2006-07 or $2.67 billion, which is z peanut, when compared to the global automobile annual turnover of $460 billion. The number of cars per 1000 persons in Pakistan is eight compared to 10 in China, 12 in India, 25 in Sri Lanka, 641 in Malaysia and 765 in the United States. "The share of auto mobiles in Pakistan's GDP is 2.8 percent and its share in the manufacturing sector is 16 percent.