MASSIVE RETRENCHMENT IN AUTO SECTOR
AUTO INDUSTRY GOING THROUGH CONSOLIDATION PHASE
Mar 02 - 08, 2009
Auto industry in Pakistan is going through a phase of consolidation. It has also been under pressure in recent months due to host of issues. Around 28 per cent depreciation in rupee against the dollar and 58 per cent against the Japanese yen, galloping inflation, high rate of interest, restriction on leasing and imposition of five per cent excise duty, withholding tax and increase in sales tax can be blamed for drop in demand of cars.
The economic slowdown and lack of credit availability has severely dented sales volumes (auto sales down 42 percent in seven months of FY09).
After registering an average growth rate of 40 percent from 2003 to 2006, the industry growth decelerated to 9 percent in 2007 and a marginal growth of 2.8 percent in 2008. The total production of the four-wheel industry for the period of Apr-Sep 08 was down by 26% at 66,726 units against 90,224 units in the same period last year.
The sales were also down by 27.6% at 66,358 units against 91,613 units in the same corresponding period. The production and sales have decreased by 43.9% and 50.6% respectively in July-Sept 08 over the preceding quarter of Apr-Jun 08. Similarly, the Honda also produced 7,361 units against 9,060 units in the same six months of last year. The sales were also down to 7,051 units against 9,029 units in the same corresponding period. The liberal policy to import re-conditioned cars affected the growth rate.
As per the data released by the Pakistan Automotive Manufacturers Association (PAMA), after witnessing a growth pattern with 6-year CAGR of 28.0% to 171,786 units in FY07 from 39,047 units in FY01, car sales declined by 4.2% in FY08 and stood at 164.65k units as against 171.79k units in FY07. The low priced cars' category was the beneficiary of this shift in customer preference. The cars with engine capacities of 801cc to 1299cc registered a decline compared to the last year.
The auto sector, in general, has witnessed a slow down owing to the fact that two to three times the auto assemblers increased the car prices during the last year in order to support their declining gross margins. Auto assemblers have linked the price-hike to rising prices of steel components and appreciation of yen against the rupee, which pushed up the production cost. Further, car financing became more expansive due to increase of 200bps in discount rate during FY08. As a result, there was a slowdown in car financing amid rising mark up rates along with strict criteria of car financing due to significant rise in NPLs of the banks.
The rising fuel prices also forced the new buyers of small cars to switch to motorcycles mainly due to cheaper cost and low fuel consumption. Among different engine capacity cars, sales volume of low engine capacity cars i.e. 800cc declined nominally 0.6% in FY08 over FY07. However, sales volume of high engine capacity cars i.e. 1000cc and above 1300cc declined 11.6% and 15.6% to 48,887 units and 50,824 units in FY08 from 55,295 units and 60,190 units in FY07.
The average annual earnings growth of corporate sector is likely to decline by 19 percent in the current fiscal year, mainly due to decline in banks earnings growth and few other adjustments, analysts said.
MASSIVE RETRENCHMENT IN AUTO SECTOR
The auto vendors and assemblers have laid off an estimated 150,000 workers in the last few months in the wake of persistent fall in sales of cars.
According to executive committee member of Pakistan Association of Automotive Parts and Accessories Manufacturers (Paapam), Razak H. Bengali, about 20-30 per cent of the workers are feared to be fired in the next few months in case the slowdown in the car industry lingers on.
He said most factories running three shifts until a few months back had been forced to shed workers and slash the number of shifts to one or two due to sharp decline in car demand.
He said car sales had plunged by 47 per cent to 41,972 units in July-Dec 2008 as compared to 78,759 units in the same period of 2007.