Non-implementation of deletion policy and increase in prices are also adversely affecting the industry

By Syed M. Aslam
Dec 21 - 27, 1998

Owning an automobile is a basic human need— the desire for easy mobility. During 1997 the world-wide production of automobiles touched record 39 million mark, up by 5.4 per cent over 37 million in 1996. The world automobile fleet grew from 489 million vehicles to 501 million during the same period.

The production of passenger cars in Pakistan during 1996-97 increased only marginally by 1.5 per cent, if the production volumes of three most active car assemblers— Suzuki, Toyota and Honda — are any indication. The three companies produced a total of 42,457 cars during 1997-98 as compared to 41,718 units in the previous year as 43 per cent of their collective production capacity remained under-utilised.

Car production

Pak Suzuki Motor is a public limited company which was established in August 1983 when a joint venture agreement was concluded between Pakistan Automobile Corporation which represented the Government of Pakistan and Suzuki Motor Corporation, Japan. It started commercial production in January 1984 with the primary objective to progressive manufacture of passenger cars, pickups, vans and four-by-four vehicles in the country.

By early 1990, after the completion of the first phase of its existing plant at Bin Qasim in 1989, the in-house assembly of Suzuki vehicles started. In 1992, the plant was completed and production of Margalla cars commenced. The production of Margalla was, however, stopped earlier this year with the introduction of a 1300cc model, ‘Baleno’.

Suzuki was privatised and was placed directly under the Japanese management in September 1992 under the privatisation policy of the government. At the time of privatisation the Suzuki Motor Corporation Japan increased its equity from 25 per cent to 40 per cent which was subsequently increased to 72.8 per cent as remaining share from the Automobile Corporation of Pakistan was bought. Today 78.99 per cent shares of Suzuki are held by 23 foreign investors.

Immediately after the privatisation, Suzuki started expansion of the installed production capacity of the Bin Qasim plant to 50,000 vehicles per year which was completed in July 1994. Today Suzuki is the major car producer in Pakistan with over half-a-dozen product variances.

Honda Atlas commenced the production capacity on July 16, 1994. It rolled out its 5000th car on July 20, 1995 and the 10,000th car on August 11, 1996. Today, of the three major car assemblers, Honda not only enjoy the highest utilisation of the installed capacity (See Table 1) but also improved its operating profit by 80 per cent from Rs 124 million in 1996-97 to Rs 222 million in 1997-98. The operating profit of Suzuki and Indus declined by 27 per cent and 10 per cent respectively during the same period. See Table 2.

Indus Motor Company, the producer of eight variances of Corolla cars and two variance of light commercial Hilux trucks, is a joint venture between House of Habib, Pakistan, Toyota Motor Corporation Japan and Toyota Tsusho Corporation, also of Japan. It acquired the sole distributorship of Toyota vehicles in Pakistan from July 1, 1990 and is engaged in its import and marketing. The company was incorporated as a public limited company in December 1989 and started commercial production in May 1993. Today it is the second biggest car assembler after Suzuki.

In 1997-98 Indus sold a total of 9,295 vehicles as compared to 8,100 in 1996-97. However, Indus sold the most vehicles, 11,034, in 1992-93 followed by 9,440 units in 1993-94. Indus sales were the lowest in 1994-95 when it managed to sell just 6,802 units.

New Plants

The inauguration ceremony of Ghandhara Nissan plant was held on April 23, 1997. The estimated cost of the Ghandhara Nissan, the local assembler of trucks and buses in Pakistan since 1985, a project to assemble Nissan Sunny cars in Pakistan, is Rs 550 million Rs 200 million in equity, Rs 275 million lease financing and Rs 75 million LMM financing. Nissan Motor Company Limited and Tomen Corporation, both of Japan, are the two principals of the project.

The single shift of the plant will be 6,000 units per year and the company will produce three variances of Nissan Sunny cars— Manual and Automatic Transmission, both in 1.4 Litre and 2.0 Litre in Diesel. Pakistan is the first South Asian country to have a Nissan Sunny assembly plant. The deletion level for Nissan Sunny will start at 31 per cent which the officials said would be at par with its competition. Ghandhara has achieved a deletion level of 50 per cent for the assembly of its trucks and buses.

Ghandhara Nissan’s collaboration with Nissan dates back to 1982, the year it was formed. The initial cooperation was in import, marketing and distribution of mainly Nissan cars and small number of four-wheel drive vehicles. Ghandhara imported some 17,000 cars alone during the first ten years till 1992, the biggest import of completely built-up vehicles over its competitors.

Ghandhara’s history dates back to 1963 when General Motors Plant in Karachi was purchased by late General Habibullah Khan Khattak and was renamed. General Motors had appointed Ghandhara Industries as its distributor for Bedford trucks, buses and light commercial vehicles. In the late sixties, Ghandhara Industries built assembly plant for range of Bedford engines under the name of Ghandhara Diesel Limited. The two companies were nationalised in 1972 and rechristened Bela Engineers and National Motors respectively.

In August 1981, Ghandhara Autos Limited was incorporated as a private limited company and was later re-named Ghandhara Nissan (Pvt) Limited and was subsequently renamed as Ghandhara Nissan (PVT) limited in September, 1992.

Daihatsu Cuore Plant

The foundation stone laying ceremony of Daihatsu Project was held at Bin Qasim on November 18, 1998. With an estimated cost of Rs 750 million the project at 10,000 units of Cuore 850 cc cars per year and the first car is expected to roll-off the assembly line in the year 2000. Daihatsu has finalised an agreement with the Indus Motor which already has an established network of showrooms to be the sole distributor of all Daihatsu vehicles in Pakistan.

The entrance of Daihatsu will help lessen the monopoly of Suzuki which, thus far, faced no real competition in the group of comparatively lesser priced cars which it manufactures and markets in the country.

Fiat of Italy has also shown interest to have a car production plant in Pakistan.

Trucks and Buses

While the production of passenger cars and light commercial vehicles increased marginally in 1997-98, the production of buses and trucks has slowed down considerably at present due to a number of factors. A highly placed official in bus and truck assembly plant who asked PAGE not to mention either his or his organisation’s name, blamed that the slow-down of the economic activity is affecting the productivity and financial performance seriously. "The production of bus and trucks by four manufacturers— Hino Pak, National Motors (the assembler of Isuzu), Ghandhara Nissan (Nissan) and Sindh Engineering (Mazda) has declined by almost half," he told PAGE.

He said that the four assemblers among themselves have produced just 2,000 units collectively this year as compared to over 4,000 units in the previous year primary due to a sharp decline in movement of goods— one of the basic prerequisite for bus and truck sales.

Hino Pak assembles heavy commercial vehicles of 8.5 tonnes and above capacity; Ghandhara Nissan and National Motors15 tonnes and above vehicles while Sindh Engineering is the market leader as it is the sole producer of comparatively smaller 3.5 tonnes capacity vehicles.

The sluggish market and economic conditions along with the introduction of floating foreign currency rate after the nuclear explosion in May has neutralised any positive impact of the reduction in duty on the import of Completely Knock-Down (CKD) kits for the manufacture of buses and trucks from 40 per cent to 15 per cent for buses earlier this year (the import duty on CKD for trucks was left unchanged at 30 per cent).

"While the cost of production has gone up substantially due to devaluation and the introduction of floating rate which requires the importers to buy half of the foreign exchange at 15 per cent above, the official rate from the open market the manufacturers have only increased the prices only marginally as there are no customers," the source said. "Increasing prices of vehicles when there are hardly any buyers have forced us to absorb the losses ourselves," he added.

However, the prices of passenger cars have increase drastically during last five years.


Table 3 shows the substantial increases in the prices of locally assembled cars by the three major assemblers. In April last year, car assemblers reduced their prices as the government reduced the duty on the import of CKD from 40 to 35 per cent. However, the relief was short lived as prices were increased again in May. The prices have been increased numerous times by all the manufacturers during last four months. The frequent price increases have become a regular feature of local auto industry.

Suzuki has increased the prices by an average 11.7 per cent since September; Indus by 14.5 per cent since July; Honda by 12.9 per cent since June; and Nissan by 10 per cent since August this year.

Table 3 shows the drastic price increases in the prices of passenger cars during last few years.

While the producers blame the depreciation of rupee by over 35 per cent against yen since June this year for the increase and numerous devaluation of the currency before as the primary reason for the continuous increase observers say it would hurt the industry in many ways. The price increases will result in lesser sales to the detriment of the industry.

The car manufacturers themselves have admitted that the sluggish market pose many challenges for them. The Chairman of Pak Suzuki Motor, Hirofumi Nagao, warned in the Annual Report 1997-98 that "the devaluation of Pak Rupee, composite exchange rate, requirement of 30 per cent cash L/C margin and appreciation of the Yen are pushing the costs up. The market is gradually responding to higher prices arising out of the changed economic scenario."

In spite of the price increases during last few months the manufacturers claim that they are not enough to cushion the losses. Hirofumi claimed that "Currently the Company is partly sharing impact of increase in cost in order to maintain volumes."

The Annual Report 1997-98 of Honda Atlas chronicled the events since August ‘92 with specific attention on currency devaluations— 7 per cent each in July ‘93 and October 95; 3.65 per cent on September 10, ‘96 and again 8.5 per cent in October 22 the same year; 8.71 per cent in October 1997, and 4.4 per cent on June 26 this year.

The chairman of Honda, Yusuf Shirazi, cited imposition of Capital Value Tax (CVT) @ 6.25 per cent for both the tax and non-tax payers (withdrawn earlier this year), 8.7 per cent devaluation and high rate of duty on the import of CKD kits (40 per cent) in Budget 1997-98.

The chairman of Indus Motor, Ali S. Habib, in the Annual Report 1997-98 lauded the government measures such as reduction in the duty on the import of CKD and the abolishment of CVT on passenger cars in January this year. The record sales of locally assembled Corollas and Hilux vehicles during 1997-98 was due to these positive measures, he added.

However, the constant and drastic cumulative price increases during last five years is criticised by H.M. Shehzad, the chairman of All Pakistan Motor Dealers Association. Calling the numerous price increases since June this year unwarranted and unjustified, he has a written to the prime minister.

"Why the government has given so much liberty to this particular industry to extort money from the helpless buyers who are left with no choice to buy the locally assembled cars at such high prices," he said. "It is most surprising that there is no price, quality and deletion control over these assemblers who have failed to fulfill such basic contractual obligations with the government as 30 per cent rate of deletion and 20 per cent increase in production annually," he added.

Yellow Cab Scheme

The local auto industry is expected to get a boost from the re-introduction of the Yellow Cab Scheme, introduced by Prime Minister Nawaz Sharif during his first tenure in early ‘90s. Unlike the previous scheme which allowed import of foreign vehicles this time around only the locally assembled vehicles will be offered.

The recent price increases is seen by Shehzad as a move by the local car assemblers to create artificial shortage of the vehicles though the big portion of their installed capacity remains unutilised. In the prevalent situation when the locally assembled cars are sold at a premium way above the booking price in the black market in connivance with the selected dealers it is easy to see what will happen when the proposed scheme is implemented, he said.

Shehzad made a number of proposals for easy acquisition of vehicles under the scheme such as the government should obtain a definite time frame from the local assemblers to ensure supply without disturbing the market. Secondly, as the lowest-priced of the locally assembled car is Rs 283,000 at the control rate and the prospective buyers have to pay at least 30 per cent or Rs 95,400 as down-payment making it impossible to benefit the unemployed youth. The maximum pressure should be exerted on the assemblers by the government to bring down the prices.

Ban on import of used cars

Shehzad criticised the continuation of the ban on the import of reconditioned cars up to 1300 cc since ‘94 and claimed that it has resulted in the creation of monopoly by the local car producers at extreme inconvenience to the buyers. Asking for the withdrawal of the ban and bringing the customs duty and taxes on them at par with the CKD kits by the car assemblers, he said, the import of these used but durable cars and their induction in the scheme would provide buyers a chance to earn livelihood for at least a decade. It will also help the government to earn a substantial amount of revenue without any foreign exchange problems for the government as importers are ready to arrange the purchases from their own resources, he added.


The deletion policy is framed by the successive governments so that individual auto manufacturing unit implement the given percentage of indigenisation within a given period of time. The policy designed to achieve such objectives as attaining self-reliance in engineering sector to ensure transfer of technology, liaison between various segments of the industries.

The advantages of indigenisation and deletion programme can be summed up as— encourage long term investment, create technology momentum which could be diversified to other fields such as defence, aeronautics, keeping the prices low even in times of high inflation, job creation as in automobile sector one per cent of deletion means 200 jobs.

However, in practice, the ineffective implementation of the deletion programme has resulted in lesser deletion in the auto industry as compared to 84 per cent in tractors and an average 50 per cent in bus and truck manufacturing.

Both Honda and Indus claim to have achieved a more or less similar level of deletion— 38 per cent while Suzuki a comparatively better level.

To encourage and support the auto industry the Prime Minister appointed a Special Cabinet Committee in November 1997 to review its performance and to suggest measures for its revival. The recommendations of the Committee, formulated in consultation with the industry, were welcomed by the producers. The suggestion focussed such crucial issues facing the industry as substantially enhanced capacity utilisation, reduction in prices, increased indigenisation, and an increase in government revenues.

Talking to PAGE, an official at one of the three major car manufacturers, who preferred not to be quoted by name, said that the industry specific deletion programme, formulated by the Engineering Development Board, is an industry friendly programme which would help achieve the desired result of increased local indignation.

Over 400 vendors are engaged in the production of local auto parts locally including tyres, sheet metal parts, mirrors, gaskets, engine valve, camshaft, oil pump gears, pistons, radiators, seats, dashboard, and axles. However, the inconsistent and ineffectual implementation of the programme in the previous years highlights the necessity of increased deletion as many feel the deletion levels claimed to be achieved by assemblers are on the higher side as compared to the actual level achieved. Many of the benefits of deletion still remains much evasive and could only be achieved by monitoring the progress and performance of the industry.

Vending Industry

According to Yusuf Shirazi, the chairman of Honda Atlas Cars, 30 per cent of the vending industry, which comprises 400 units, is operating at just 30 per cent of its capacity.

In response to a questionnaire the managing director of Agriauto Industries, Syed Ikram Haider, blamed a poor record of growth in the commercial vehicle industry primary to socio-economic reasons and also lack of attractive incentives to the industry on the part of the government.

Though, growth in the car industry has slowed down in the nineties, he said, the restriction on imported cars and reduction in duty and taxes seem quiet assuring. However, he added, that unless the overall economic situation improves the car market will remain restricted.

He claimed that while the deletion targets set by the government have been met by and large the extensions in time period in certain cases give a leverage to the manufacturers to delay the indigenisation unnecessary.

While Ikram welcomed the entrance of new car assemblers in the country specifically from the point of view of vendors he added that they fear that it would not have a positive impact as new entrants will take away the share of the market from the existing manufacturers to neutralise the overall benefit.

The auto and the vending industry face many challenges from the continuous devaluation, 30 per cent advance for L/C margin and political and economic uncertainties posing major constraints for the auto industry. In addition, smuggling and under-invoicing also pose a serious threats for the autoparts vendor industry as the market is flooded with competitive priced smuggled products, he said. He proposed that non-fixation and/or low priced fixation in the Import Trade Price Manual is the root cause of under invoicing which is even more dangerous than smuggling.

Ikram said that as autoparts manufacturers like agriauto are dependent on Original Equipment Manufacturers (OEMs) their growth directly affects the former. Unless the government comes up with long-term strategies and takes a very strict controls and measures to stop unscrupulous practices, the performance of vending industry would not improve. The situation could only be reversed with the development of the replacement market which remains non-existent at present, he added.


The inconsistent and ineffectual implementation of the deletion policy, the drastic increase in the prices, the under-utilisation of the installed capacity, the low vending base, the heavy dependence on imported CKDs and parts are the major hindrance in the growth of the local auto industry.

The economic sanction imposed on Pakistan after it used its option to carry out the nuclear blasts to deter the Indian threat and the resulting devaluation, composite rate and an overall sluggish economy, pose many challenges for an already under-utilised auto industry.

The proposal to re-introduce the Yellow Cab Scheme can benefit the local auto industry but the high prices plus the mark-up may discourage many a potential buyers not to take advantage of the scheme to neutralise any benefit to the assemblers.

With bulk of the installed capacity remaining under-utilised the economy of scale could not be achieved by the individual auto manufacturers as well as the industry as a whole.

Much is required to monitor the progress, performance and problems of the industry to develop long-term and consistent policies to revive the auto industry.

Actual Production and Production Capacity

Company Actual Production Installed Capacity
1997 1998 1997 1998
Pak Suzuki 31,513 30,513 50,000 50,000 (Double Shift)
Indus(Toyota) 7,341 7,874 20,000 20,000 (Double Shift)
Honda Atlas 3,944 4,070 5,000 5,000 (Single Shift)
Total 41,798 42,457 75,000 75,000

Source: Annual Reports




Financial Performance in 1997-98 (In Rs million)
. Suzuki Indus Honda
‘97 ‘98 ‘97 ‘98 ‘97 ‘98
Sales 7,710 8,681 4,538    4,973 2,556 2,763
Operating profit 486 358 289 261 124 222
Financial & Other Charges 173 57 201 207 108 75
Pre-Tax Profit 403 489 226 272 20 158
After-Tax Profit 391 358 150 147 48 158
Unappropriated Profit 4.1 3.6 .707 .971 .646 .825