AUTOMOBILE INDUSTRY - CHALLENGES AND OPPORTUNITIES
SHAMSUL GHANI (firstname.lastname@example.org)
Sep 14 - 20, 2009
The ex-prime minister said in February 2007, "The government attaches great importance to the growth and development of auto industry as it is a key driver of economic growth, technology transfer and a creator of jobs. The industry is playing a vital role in the economy and was rightly called the mother of all industries and the engine of growth."
Once a burgeoning industry, our auto manufacturing has gone through a bumpy drive during the last one and a half year or so. The consumer credit crunch triggered partly by the global financial meltdown and partly by our political and economic inaptitude has thrown the industry in a tailspin. The worst hit has been the cars segment, which recorded a 46 per cent drop in production during FY09. The drop in production followed a matching drop in sales. The industry posted a mammoth job loss. The following table presents a two-year comparative view of auto production.
VEHICLE NOS. PRODUCED
MINUS PLUS % NOS. PRODUCED
JUNE - 2008
Cars, Jeeps, L.C.Vs 101,398 187,654 -46 8,153 13,825 Motor Cycles 912,067 1057,751 -14 102,265 81,173 Tractors 60,107 53,607 +12 6446 5665 Trucks 3,135 4,993 -4 369 623 Buses 657 1,146 -4 84 89
For any industry, a number of variables ascertain the demand level. In case of our automobile industry, the demand level is a function of population and family income. We have a negligible size of export market due mainly to the lack of any competitive edge. The production capacity is variable and can be scaled up or down, should there be no social or economic constraints. There are generally no social constraints attached to owning or driving a car, a motor cycle, a truck, a bus, or a LVC, but there are a number of economic constraints. The major constraints include raw material, technological, and skilled labor. These major issues contribute to the high-cost production in the industry.
Auto industry's reliance on imported parts and material when seen in the backdrop of a depreciating rupee vividly explains its low share in the export market. By default, it is a self-sufficient industry fully catering to the domestic market. Our domestic market has great potential for the auto sector to develop. The ever-deteriorating and now almost intractable public transport system has awakened the masses to the need of owning personal transport means, even at the cost of food and clothing.
Until 2007, the easy access to consumer credit drove the herds of masses to the doorsteps of banks and financial institutions. As a result, the auto industry went into the boom cycle. This brought about a positive social change in the society. Economic pundits criticized that era as unsustainable consumption-based-growth era. They might be feeling relieved to see their prophecy come true. However, let me say this relief is not genuine. It was not the consumption-led-growth theory that failed rather it was the incongruity and hollowness of our political and economic systems that brought about the untimely downfall of this industry, the negative contribution of the financial global meltdown notwithstanding.
The potential of the industry - with its reliance on domestic market - is still intact. The bank liquidity is improving, the illogically high bank rate is under an all-round fire and is bound to come down to the realistic level. The banks have learned a lot about how to ensure the quality of their assets. The high ratio of auto finance NPL was not an outcome of a bad-borrower selection policy, rather it was caused by an unexpected fall in disposable incomes and ever-rising cost of debt servicing.
Auto financing is the surest form of bank lending, as the default-driven repossession of asset invariably suffices the liability write-off. A number of positives on both domestic and international fronts herald a better economic era. The auto industry is set to revisit the recent past.
THE SOUTH ASIA INVESTOR REVIEW REPORTS:
"Given strong underlying growth dynamics in South Asia, the negative feedback effects of the global financial crisis are expected to be temporary. A relatively rapid rebound is expected in 2010, with a projected revival of GDP growth to 7.2 per cent. The long-term prospects for the auto industry in the continent of Asia appear to be quite favorable. As the current financial crisis ebbs, there will be significant pent-up demand for our automobiles in Asia including India, Pakistan, and China, that will drive the growth in industry."
Therefore, our domestic demand for auto products has neither reached saturation, nor it has indicated a sign of dying. It is the case of pent-up demand that is bound to have its way as soon as the conditions improve. The improvement of conditions include, proper inflation control by the government to reduce pressure on disposable incomes, the removing of lid by the banks and NBFIs from auto lease business, the further lowering of policy rate by SBP to make auto financing a viable proposition both for the lenders and the borrowers, and expansion of auto industry base to ensure cost effective production and marketing of auto products at competitive prices.
While the federal government, the State Bank, the financial sector, the industry, and the potential consumer market are the main players, the role of city governments is equally important as they can ensure proper infrastructure for hassle-free plying of ever-increasing number of private and commercial vehicles. In case of major urban cities, the relevant city authorities have huge responsibility towards their citizens. Karachi can rightly boast of having a much-improved infrastructure during the last few years for which the Karachi city government and its Nazims are to be commended. Other urban cities can take a lesson from the Karachi Nazim's success story.