The industry keeps on suffering the lackof raw material, quality control and high cost of raw materials
By Syed M. Aslam
Jan 05 - 11, 1998
Hardly any aspect of our life remains untouched by engineering today. Engineers put power and materials to work for human race steel and concrete to build bridges, roads, buildings, dams and glass, metal and plastics to manufacture hundreds of everyday products.
Engineers design machines that transform hydro power into electricity to light our homes, offices and to run factories. They develop machines to use petrol to drive our cars, aeroplanes, locomotives and ships.
Engineering industry is the pre-requisite of industrialisation of a society or a nation as it portrays the capability to add value to primary products in our economical world of today where trade has replaced war and finance has replaced arms.
Pakistan inherited a negligible engineering base comprising small workshops producing diesel engines, lathe machines, cane crushers in and around Lahore, Sialkot and Gujranwala. The only large engineering unit, the Moghalpura Engineering Workshop, was exclusively engaged in production of railway machinery and stock.
During the first ten years of independence, engineering industry maintained a low profile in the unorganised sector through the indigenous efforts of mechanics, craftsmen and immigrants who had the employees of large industrial units in India. However, things improved in late fifties when large units such as Karachi Shipyard and Engineering Works (KSEW) was commissioned in 1956.
Similarly Pakistan Engineering Company was also created during the same period. PECO is engaged mainly in production of electricity transmission towers, bicycles, power looms, diesel engines, pumps, rolled material and machine tools. With the closure of Badamibagh Works Lahore in March 1995 PECO discontinued producing machine tools, engines and power looms.
While engineering industry has made a substantial progress over the years to produce such as tractors, motorcycles, electric transformers, switch gears, electric meters, air conditioners, refrigerators, sewing machines, cars, trucks, diesel engines within the country, the uncertain as well as non-availability of right type of basic raw material steel and its alloys plus lack of precision needed for the manufacture of parts and machinery are one of the major constraints for the development of the engineering industry.
While the necessity of a steel mill was felt soon after Pakistan gained independence, it took the country over three decades to have its first and only steel mill, the Pakistan Steel Mill near Karachi. The first blast furnace was started in 1981 and it went into full production in 1984.
While Pakistan has the capacity to manufacture some key engineering items like diesel engines and machine tools the growth of the engineering industry has been restricted by a number of factors. The main constraint is the uncertain availability of the basic raw materials iron and steel. In addition, these basic raw materials are available over 30-40 per cent higher cost.
The local engineering industry is only meeting between 25 per cent to 40 per cent of the demand within the country while the rest is being met through imports.
The import of engineering goods electrical, non-electrical machinery, transport equipments and iron and steel manufactures has doubled during last decade and collectively makes up one-third of the total import bill.
Apart from the uncertain availability of the basic raw materials, the lack of research and development and the link between science and industry to provide the technological back-up have also contributed for the dismal performance of the engineering industry over the years. In addition, the high cost of electricity, fuel, transportation, capital investment and high financial charges have tend to render the locally produced engineering goods incompetitive not only in the domestic market but also outside to make the exports unviable.
The engineering industry in India, on the other hand, has performed well as it has an abundant supply of steel ingots which the country produces over 13 million tonnes. In addition, India has developed a large number of scientists and a chain of R&D organisations to provide the technological output towards upgradation and quality control to produce precision goods.
In spite of the capability to manufacture engineering goods in the iron and steel basic industries and fabricated metal products, machinery, electrical machinery, air-conditioning plants, plants and equipments for sugar mills, edible oil units, cement factories, transport and agricultural equipments and an array of household appliances the same lays highly unutilised due to the various factors highlighted above.
Though total number of engineering industries has increased from 1,700 in early seventies to 2,500 at present, due primarily to 850 vendors engaged in manufacture of auto parts, much is required to lessen the heavy dependence on imported capital goods for the all important textile industry and agro-based industry, electrical machinery, road transportation and construction and mining.
Despite the lack of direction and the inconsistent policies the local engineering industry has been successful to achieve self sufficiency and transfer of technology in some sectors.
For instance, hundred per cent deletion is achieved in electric motors, 95 per cent in electric pumps, 70 per cent in motorcycles, 50 per cent in trucks and buses. In addition the local engineering industry has achieved 84 per cent deletion in manufacture of tractors, 85 per cent in electric meters, 80 per cent in deep freezers, 75 per cent in switch gears.
In simpler terms this means that the bulk of the materials required in the manufacture of above products are now produced within the country to save foreign exchange and to have a local substitute which is less expensive than import.
But the lack of quality assurance, precision control and finishing necessary to fetch the premium price in addition to the general perception that locally produced goods are inferior to foreign counterparts keeps on posing serious problems for the local industry not only within the country but also the exports. Those who could afford do not mind paying more for a genuine foreign product or a spare. Not surprisingly, the engineering industry exports have remained negligible.
In spite of the fact that both Pakistan and India gained independence at the same time, the state of the engineering industry in the two countries differ from each other altogether.
While the Indo-Pak subcontinent had the required infrastructure, to some extent, for the industrial sector under the colonial rule. This in addition to political stability and consistent policies has turned India one of the top ten leading industrial nations of the world even though manufacturing contribute 27 per cent to the GDP and employs about 29 per cent of the work force. Indias industrial sector earns nearly 60 per cent of its total export earnings.
The industrialisation of India could be attributed to the many incentives on all aspects of setting up of industry. For instance, the government provides the capital for industrial investment on easy terms and on much lower interest rates.
The power supply is ensured by the government and the new units are provided 50 per cent discount on electricity bill for 5 years. In hilly areas the industrial units are given special rebate of 33 per cent from the date of production.
To boost industrial investment a schememodvat has been introduced where trade tax paid on raw material gets adjusted against the tax payable on the finished products.
Trade tax exemption/deferments of between 150250 per cent are available depending upon the term of fixed capital investment for 8-12 years. A hundred per cent export oriented unit with a fixed capital investment of Rs one billion is exempted from sales tax for eleven years.
The developed infrastructure, well-knit transportation facility and the low labour and power tariff has helped India to develop a well organised, self-sufficient industrial sector to produce abundant varieties of industrial products, engineering goods and electronic goods from indigenous raw materials.
On the other hand, political instability and the deteriorating law and order situation has taken a heavy toll on the industrial progress of the country. An apt example is that of the Nooriabad Industrial Zone 40 kilometers from Karachi off the Super Highway. Supposed to be the largest industrial area of the country, today the area is almost finished due to an overall breakdown of law and order to threaten both life and property.
In addition, the investment capital is not only difficult to get but is also available on extremely uneconomic terms at higher rate of interest. The electricity for industrial use is charged at a very high rate and at times its availability is made very difficult.
The duties and taxes remain inconsistent and tariff structure on import of raw material and finished goods continue making our indigenous engineering industry uncompetitive in the local as well as international markets.
In its annual report 1996-97, the chamber of commerce and industry Karachi (KCCI) commented that though Pakistans engineering sectors export potential is quite significant it has remained largely untapped due to lack of coordinated policy and incentives package by the government. The capacity of our engineering industry is highly under-utilised about 25 per cent, it added.
The Chamber suggested a number of measures to help eradicate the under-utilisation of the capacity in particular and to give a boost to the engineering industry in general such as allowing 5 per cent of export sales of engineering goods and services as export development expense.
Other suggestions called for provision of export re-financing for the engineering goods industry at half the regular rate. And revamping duty drawback scheme for engineering goods to account for duties paid on tooling and chemicals.
A number of measures were announced in the Trade Policy 1997-98 to encourage the engineering industry. The import of raw material and components for the manufacture of engineering goods meant for export has been allowed duty-free against bank guarantees for specific orders.
The local auto assemblers and manufacturers of automotive components have been allowed to import duty-free assembly kits corresponding to the number of the exported units provided no duty drawback was claimed at the time of export.
Engineering industry in Pakistan covers about 2,000 registered vendors including small engineering companies as well as the large units in the public sector such heavy mechanical complex at Taxila, Karachi Shipyard and Engineering Works (KSEW), Railway Workshop, Pakistan Steel. The private sector contribution is also fairly significant through such units like Ittafaq Foundaries, Alwin Industries, PEL, multinational Siemens, Deacon, AEG etc.
Although engineering output has grown at 10 per cent per annum during last five years, the industry has failed to improve on the quality and price of its products.
The share of engineering industrywhich produces machinery and equipment for such industries as textile, footwear, printing, boilers, pumps, and electrical machinery, etc. is less than 15 per cent of total manufacturing value addition. The annual production of machinery other than electrical is only 15 per cent of the total production of the engineering goods in the country. About 60 per cent demand, as mentioned elsewhere, is met through imports which has increased from Rs 60 billion in 1994-95 to over Rs 95 billion last year. On the other hand, exports of engineering goods has declined from Rs 858 million in 1991-92 to Rs 505 million in 1994-95.
A study carried out by National Management Consultants for the Eight Five-Year Plan (1993-98) stated that engineering exports would cross half billion dollar mark this year if adequate measures like tax holidays, duty-free imports of raw materials, export refinance facility and soft loans are provided to the industry.
Free trade with India
India is rich in production of raw materials required for producing engineering products. The availability of good quality iron ore reserves of over 5 billion tons with an iron content of over 62 per cent helped India in exporting iron ore worth $ 433 million in 1993-94 which depicted a 13.5 per cent increase over the previous year. The annual production of iron and steel in India is 18 million tons compared to a mere 1.1 million tons by the sole steel mill in Pakistan, the Pakistan Steel.
Engineering Industry in India is well organised and produces capital goods, iron and steel items, non-ferrous metals and related products, consumer items, etc. The vital role the engineering industry is playing in India is apparent from its weight in the index of industrial production (30.5 per cent) and its share in the industrial value-addition (31.5 per cent. India exported $ 2.7 billion worth of engineering goods in 1993-94 which depicted an increase of 20 per cent over the previous year.
The fears of the adverse impact of free trade on the local engineering industry are therefore well founded as India enjoys a substantial edge on following points:
In 1996 Pig iron in India cost Rs 8 per kilogram while Pakistan Steels price was Rs 14 per kg. Similarly, the price of steel billets, another basic raw material was almost 50 per cent higher in Pakistan.
Electricity charges in Pakistan are more than twice as high as in India. Besides , the newly established industrial units were given 50 per cent discount on electricity bills for five years. According to Economic Survey of India, India is providing a gross subsidy of Rs 150 billion per annum to its power sector in 1995-96.
In addition, wages in the manufacturing sector in India are two-third to that in Pakistan though the productivity standards are better in India. According to the World Development Report 1995, while wages in Pakistan increased at the rate of 4.89 per cent per annum during 1963-88, wages increased by only 1.74 per cent per annum in India during 1963-90.
An analysis of the manufacturing cost of engineering industries listed on Karachi Stock Exchange carried out by KCCI showed that on an average share of raw materials, wage and power bill in the total cost of goods sold worked out to 51.5 per cent, 9.7 per cent and 4.5 per cent respectively. The Indian engineering industry thus enjoy an edge of 30-35 per cent in the cost of production over its local counterpart.
The cheaper pig iron and steel billets plus price of other inputs gives a clear edge to Indian manufacturers of sanitary fittings, castings for tractors and bicycles, pipes, etc. Indian consumer industry is also well developed compared to television and air conditioner manufacturers who primarily remain the assemblers depending on Korea and Taiwan for components. Gujranwala based washing machine industry is till primarily a cottage industry though with the entrance of manufacturers in the organised sector such as LG has resulted in availability of better models in the local markets.
But amid the lingering fears that opening up trade with India would adversely affect the local engineering industry there is also a silver lining the free trade will not only enable our engineering units to acquire steel from India at cheaper rate but also enable Pakistan Steel to produce steel at lower cost by importing iron ore from India at cheaper rate rather than from Brazil and Australia. Besides saving the shipping cost, the import of raw materials from India would result in reducing the excessive inventory carrying cost of the engineering sector.
There is no hi-tech textile machinery industry in Pakistan and almost all the requirement for setting up a textile mill and expansion is met through imports. Pakistan imported over Rs 11 billion of textile machinery in 1994-95.
At present there are 200 engineering units engaged in manufacture of textile machines, parts and accessories, the majority of which are the copies of old imported designs. As most of the textile producers use modern technology and apply quality control methods they have to depend on imported machinery.
By contrast, about 95 per cent needs of the textile mills in India are met through indigenous machinery. Most of the textile manufacturers in India have collaborated with leading textile machinery manufacturers such as Reiter of Sweden, Shubert and Salver of Germany and have proved to be able to absorb and adapt the latest technology. A few of them are exporting machinery and accessories either under buy-back arrangement or as a part of their global export package.
Some of the textile machinery imported by Pakistan from Switzerland and Germany is made under licence in India at much lower costs. The opening up of trade with India may help the local entrepreneurs to buy these machinery directly from India at much lower prices.
Automobile plants were established in Pakistan as early as mid-fifties but were nationalised by the government in early seventies.
However, the industry was opened to the private sector in 1980s. Pakistans automobile industry is still in infancy and basically engaged in assembling activities to produce not more than 50,000 cars and commercial vehicles, 4,000 trucks, 450 buses, 10,000 tractors and less than 100,000 two-wheelers. The local contents of vehicles produced in the country ranges from 25-45 per cent in case of cars and commercial vehicles, 45 per cent in trucks and buses, 80 per cent in tractors and 60 per cent in motorcycles.
India produces between 150,000 to 200,000 passenger cars and over 2.1 million motorcycles of numerous models per year.
The automotive sector in India is a net foreign exchange earner and the country exported Rs 11 billion of automotive vehicles in 1993-94 compared to Rs 7.46 billion in the previous year.
According to Pakistan Association of Automotive Parts and Accessories Manufacturers (PAAPAM) there were over 2000 units with a total capital investment of Rs 4 billion to manufacture a wide range of auto-parts from two-wheelers to heavy vehicles. The industry manufactures such precision parts as pistons, engine valves, gaskets, shock absorbers, wheels, bumpers, instruments and instrument panels, gears, radiators, auto air conditioners. The local industry is exporting auto parts to the US, Europe, Japan and other countries. In 1994-95 Pakistan exported $ 4.52 million of auto parts.
With all said and done the performance of the engineering industry has been less than satisfactory due to the various factors discussed above. The Industry keeps on suffering from the lack of raw material, quality control, high costs of raw materials and inputs, precision and quality control and smooth finishing which enhances the price of value addition.
It is about time that long term policies be made to make up for the damage done to the engineering industry in the past and to take the bold decision to ascertain whether the benefits of free trade with India outweigh its disadvantages particularly in relation to the engineering industry.