IS THE WORST OVER?
SHAMSUL GHANI (email@example.com)
Jan 25 - 31, 2010
The CY09 was the worst year of the decade for the auto industry as car sales dropped 28 percent. The low-base effect has made the second half of 2009 a better performer as it recorded an increase of 34 percent increase in car sales over the corresponding period of the previous year. It will be premature to say, for a variety of reasons that the worst is over for the industry.
The upsurge in the inflation rate that will put pressure on disposable incomes, the rebound in steel prices, the record below-capacity operations of Pakistan Steel Mills and the unreliable domestic currency, all may add up in different combinations to jack up the auto prices and subdue the resurgent demand. Manufacturers are not used to sell their products on low margins.
They rather drivel for any conceivable opportunity to raise prices. The recent, somewhat slight improvement in the state of economy and the sales numbers has prompted them to add from rupees ten to hundred thousand to the prices of different makes and models. One hopes that such arbitrary increases in prices attract the attention of competition commission of Pakistan.
Despite the low-base effect, the entire auto sector has not shown an upward trend; the sales of buses, jeeps, vans, light commercial vehicles, and pick-ups have gone down during the second half of CY09.
Car sales boomed during FY06, FY07 and FY08 when in aggregate 511,450 units were sold. The sales abruptly came down in FY09 when only 82,844 units could be sold. A reasonably low interest rate and freely available consumer credit provided fuel to the car financing business during the boom period. In fact, there was nothing wrong in it. The middle class went through a social uplift phase that contributed to country's economic development in many ways.
Unlike credit card and personal loans, auto financing came as a boon for the society. The spate of non-performing loans that followed was more related to the credit card and other unsecured financing that gave rise to unproductive spending during the excessive liquidity era. Auto financing defaults were fewer than other consumer financing defaults, simply because an auto financing default can be quickly remedied through repossession and sale of the financed vehicle.
The comparative figures presented in the tabular form show an approximate 26 percent shrinkage in the size of transport/car financing during a twelvemonth period. There might be a good number of vehicle repossession and loan liquidation cases, but it is reported that a large number of cases relate to voluntary liquidation through premature repayments forced by high interest rates. So, car financing should never be a problem for banks and financial institutions.
COMPARATIVE FIGURES OF CONSUMER FINANCE
CONSUMER FINANCE JUN-08 JUN-09 % CHANGE NOV-08 NOV-09 % CHANGE Transport/Car Fin. 104.996 78.151 -25.6 95.378 70.659 -25.9 Credit Card Fin. 44.427 35.533 -20.0 42.765 31.697 -25.9 House Bldg. Fin. 66.546 61.222 -8.0 65.393 58.329 -10.8
Once a burgeoning industry, auto manufacturing has gone through a bumpy drive during the last two years or so. The consumer credit crunch, a high interest rate and run-up auto prices in the wake of a falling rupee have made the industry go through a quick and abrupt fall. The worst hit has been the cars segment, which recorded a 46 per cent drop in production during the FY-09.
The drop in production ensued from a matching drop in sales. The industry posted a mammoth job loss. For any industry, a number of variables ascertain the demand level. In the case of automobile industry, the demand level is a function of population and family income.
Pakistan has a negligible size of auto export market due mainly to the lack of any competitive edge. The auto price factor combined with the disposable income level shall determine the rate of progress of the industry, which mainly caters to the domestic market. Auto industry's reliance on imported parts and material when seen in the backdrop of a week local currency places it in a vulnerable proposition. It cannot afford to frequently raise prices as it might shift the focus of domestic buyers to imported used autos.
Only the attainment of a maximum deletion level can stabilize prices and sustain the industry. This will require investment, efficient engineering, and consistency in government policies. The Auto Industry Development Program (AIDP) foresees production of engines and transmission parts in 2010. In the absence of appropriate technology transfer and heavy investment, this may not be possible at all.
Pakistan Association of Automotive Parts and Accessories Manufacturers (PAAPAM) is a key institution that looks after the interest of auto vendors who usually find themselves pitted against their more powerful counterparts, automotive manufacturers and assemblers, who most of the times resort to profit maximization techniques rather than to develop the indigenous capacity to minimize dependence on original equipment manufacturers (OEMs).
Inconsistency in government policies is yet another factor that hurts the industry's overall interest. Off and on permitting of used vehicles' import and components in CKD form gives blows to both the assemblers and the vendors. Furthermore, there has been no consistent achievement on indigenization front. The ratio of indigenization ranges from 25 to 80 percent for various auto products. Since assemblers are immune of control over pricing, they prefer to use imported components factoring in the additional cost in their product prices. This severely hurts the part manufacturers' interest. In-house preparation of certain parts by the manufacturers and relegating of tier-1 suppliers to tier-2 position are some of the tactics that manufacturers employ to destabilize auto vendors.
The government, manufacturers, vendors will have to act in unison if auto industry is to achieve any sustainable growth targets.