PLIGHT OF VENDING INDUSTRY

FOZIA ISHAQUE (fozia.ishaque@hotmail.com)
Oct 20 - 26, 2008

Development of automobile vendor industries assures transfer of technologies in nearly all spheres of engineering, specifically, metallurgy, plastics and glass. Technology exists for major engine, suspension and transmission components but due to limited market, prospective entrepreneurs shy away from investment. In Pakistan over 400 vendors are engaged in the production of auto parts locally including tyres, sheet metal parts, mirrors, gaskets, engine valve, camshaft, oil pump gears, pistons, radiators, seats, dashboard, and axles. The local production of after market vehicle parts and accessories is estimated at US$850 million. Four hundred vendors that manufacture vehicle parts and accessories support 25 vehicle manufacturing and assembly facilities in Pakistan. Due to current electricity crisis in the country, it is making almost impossible for auto parts' manufacturing units to meet local and export orders. In addition to this, non-availability of electricity is forcing the industrialists to close their units subsequently causing heavy loss to the national exchequer and increase in unemployment.

In addition current turmoil in the automobile industry has claimed jobs of around 150,000 workers, mostly from auto-vending industries which are now operating at around 40% of their installed capacity. The auto vending industry, when running at full capacity, provides 500,000 direct jobs, mostly skilled. Nearly 20 to 30% workforce has either already been fired or would be in next few months if the current slowdown in the car industry lingers for long. Most of the vendors increased their capacity substantially in the wake of sustained growth of over 20% in automobile production during 2001-2006. This capacity is now lying idle as instead of registering some growth the automobile production is on the decline. Most of the auto-vendors, which were running three shifts a day two years ago, are now meeting their orders by operating one shift only.

The drop in car sales isn't the only worry for the auto vendors. They invested in the industry when real interest rates were low, rather negative, and economy was growing rapidly and car sales touched record highs. Now the situation is reversed economy is slowing down, demand for cars is fast losing momentum and interest rates are going up as inflation moves up making car leasing expensive. That means the auto vending industry is being squeezed both ways as their production falls and their financial charges go up on account of rising credit cost. These small and medium industries, which have been forced to reduce their workforce, are in deep trouble as they earlier went for expansion on low-interest loans when the industry was moving on a sustainable growth path. Then the demand for automobiles started declining with increase in mark-up rates on car finance while vendors are now forced to service their loans on current interest rates as they had borrowed money at floating rates.

At the same time, the vendors allege the deletion policy of the government is in doldrums. Even in vehicles with a deletion level of 70%, the cost of imported components is much higher than the price paid to vendors for local components. In fact, for 70% local parts the auto-vendors get only 30% of the total cost of vehicle parts while the foreign exchange component for 30% imported parts comprises 70% of the total cost. Even some motorcycle parts makers are also finding it hard to stay in business because their buyers (assemblers) are also in trouble. Besides reduction in demand for cars, the vendors' ability to sell and pass on the impact of the increasing cost of production to domestic car assemblers was severely hampered due to replacement of the deletion program for the auto industry with tariff based system from the financial year 2006. The assemblers either import the components or offer reduced price to its local suppliers for the same. Cost has risen enormously on account of galloping steel and energy prices but assemblers are not ready to absorb that increase

The vendors also deeply regret losing their skilled workforce due to low production as these workers were provided in-house training at a substantial cost in various skills. The workers would divert to other fields as currently there is no work for them in the auto industry. They would have to retrain fresh workers when the automobile industry resumes its growth in future. Some car makers have gone into in-house production of importing parts due to tariff-based system being produced by vendors and thus shunting off suppliers and hurting their business interests. However the falling rupee is making imports expensive and has begun to injure such assembler's sales. That is a positive development for suppliers. The assemblers must understand that localization of components is also in their best interests. There are no chances of resumption of a growth cycle in automobile in the next two years. By that time, most of the vending industries would go sick adding many vendors would soon default on their bank loans and might be liquidated by bankers. The cost of production has increased enormously due to high steel and energy prices and auto assemblers are not prepared to increase the rates of parts corresponding to the rise in the cost of production. Even operating vendors will close down if prices of parts are not increased by the manufacturers in line with the increase they have made in their cars and tractors.

Motorcycle manufacturers are also in trouble. Prices of motorcycles are going down while cost of production is increasing. Many assemblers of various Chinese brands are in deep trouble as those producing 400 to 500 motorcycles a month are operating much below the economies of scale and some might close down. The minimum survival level, according to industry experts, is production of 2,000 bikes per month or above. However, some vendors are still operating comfortably despite a negative growth in the automobile industry. They are few in number and their survival depends on finding new markets other than local original equipment manufacturers. Many vendors have opted for exports, developing stable markets after years of hard work. Moreover many vendors have entered the local after-sales auto market that until now has been monopolized by Korean and Taiwanese auto part producers. Local vendors have expertise to produce auto parts of international standards. They now produce parts for many foreign brands and models that are not assembled in Pakistan.

The auto vending industry has changed a lot in last five years. They have invested heavily in capacity and technology and need volumes to sustain. The government should understand this fact and facilitate to give boost to the industry. The auto industry needs a stimulus to prevent further downturn and to grow at sustainable rate. This isn't critical for our industry only but also for the economy in general.