AUTOMOBILE INDUSTRY GOING THROUGH DIFFICULT TIMES
SHAMSUL GHANI (email@example.com)
Mar 02 - 08, 2009
The global financial meltdown has taken its toll on auto industries of developed and developing economies alike. From US's General Motors (including its German Opal unit) to India's Ashok Leyland and Tata Motors, all have been hit by the furious global tsunami. The German government plans to risk euro 3 bullion for Opal's bailout to save the unit from collapsing that may result in job loss to 25,000 workers at the unit and an equal number at supplier firms. Britain, after registering a 30 per cent fall in car sales during January 2009, plans to provide incentive to the old polluting-car users to go for replacement in order to boost the dwindling sales. In India, major auto manufacturers are cutting down on their production to avoid piling up of inventories. India's auto industry had been growing at a rate of 15 per cent during the last 5-6 years. Shaken by the unforeseen deceleration, the industry is now struggling for survival. The workers layoff specter is looming large on the entire world auto industry. In Pakistan alone, the auto venders and assemblers, according to a Dawn report, have laid off 150,000 workers. More workers fear job loss during coming months in case the recessionary trend persists.
With an average GDP growth of 7 per cent during the last five years when consumption and investment levels were on a constant rise, the automobile industry of Pakistan had registered phenomenal growth. We were producing around 30,000 units of cars till 1995. These numbers ballooned to 160,000 by the mid of 2007. The second half of calendar year 2007 witnessed further upsurge in the production of cars when 66,714 units were produced during the period July ñ October, 2007. With Rs.100 billion investment in the car manufacturing during the boom period 2003-2007, the automakers earned huge profits by expanding capacities in the wake of rising demand triggered by easily available consumer finance. It was prophesied that the auto making industry still had many milestones to reach and plans were put on anvil to invest further Rs.225 billion in the industry to churn out 500,000 units by 2010-11. These hurriedly thought-out plans were devoid of any sense. With around 500,000 units produced and sold during the last three years, the country's major cities have changed into urban ghettos. The overcrowded roads, frequent traffic jams, lack of parking space and growing number of road accidents are the bitter fruits of unplanned lop-sided growth of auto industry particularly car manufacturing sub-sector. Lop-sided, because the production of tractors trucks and buses did not attain the same level of growth as the car manufacturing did. While the manufacturing and sale of a constantly increased number of tractors is indicative of the well-being of agriculture sector, the progress of transport and logistics is measured by the increase in the manufactured and sold units of trucks and buses.
The uncalled for destabilization of economy triggered by political adventurism and the effect of global financial meltdown have combined to deliver a severe below to our industry. Textile and auto sectors have been hit most hard. The liquidity crunch and growing defaults have made the banks and financial institutions to put their shutters down with the result that auto leasing - the main driver of the industry ñ has now become outdated. Moreover, the policy rate hike spree has made the cost of leasing inhibitive in real sense. The huge rupee depreciation in terms of yen and budgetary measures have increased car prices exorbitantly pushing them out of the reach of those buyers for whom cost always matters.
The following table outlines the production pattern of auto industry.
JULY - DEC 2008
Cars, Jeeps & L.C.Vs 153,248 161,195 94,967 57,670 Motor Cycles 603,084 681,752 503,537 424,678 Tractors 39,745 44,274 25,045 26,793 Trucks 3,746 3,655 1,836 1,547 Buses 625 758 542 294
It will be observed that the production of cars, jeeps and L.C.Vs has decreased by 39 per cent during the first half of the current financial year as compared to the corresponding period of the previous financial year. The production of motor cycles has also decreased by 16 per cent. In terms of car sales, the decrease has been to the extent of 47 per cent as only 41,972 units were sold during the first six months of the current financial year as against 78,759 units sold during the corresponding period of the previous financial year. The credit-intensive industry is in dire straits as the pricing of loans written a few years back has been up-scaled with each policy rate hike. The dropping sales and falling profits have made timely debt servicing difficult for the industry people who are in waiting for a rescue package from the government.
The present situation is no doubt unfortunate, yet the industry people should do the stock taking job to find where they went wrong. Without a proper raw material base, the industry set for itself an optimistic target of producing 500,000 units of cars per annum. India's huge auto industry is sufficiently fed by the Indian steel giants Mittal Steel and Tata steel. We did nothing on technology transfer side whereas India took advantage of its market size to attract capital formation in the country. Our auto industry has no export potential. The high production cost, lack of modern technology, the tariff structure for imported units and manufacturers' greed for higher profits renders the indigenous production saleable only in the domestic market. China exports about 40% of its motor bike production. Thailand exports about 28% of its production. India produces 7.7 million units of motor bikes annually out of which 7% are exported. Even during the present crisis, India's export sales of certain items have gone up. We produce around 750,000 units of motor cycles annually and are able to export just one per cent or even less. Pakistan's share in the $600 billion world auto market is only $50 million. Instead of going blindfold for higher production of cars with no export prospects, we should have focused on technology transfer and enhanced steel production.