Record production and sales


By Syed M. Aslam
Sep 09 - 15, 2002


Is the assembly-driven Pakistani auto industry living on borrowed time? Has the protection accorded against imports helped it adopt a laid-back attitude to monopolise on the absence of genuine competition only to develop an unnatural base of involuntary customer loyalty? Will the industry be able to survive in the quota- free and tariff-reduced post-January 1, 2005 world governed by diktat of the WTO?


With the removal of the quota and the tariff barriers less than 28 months away, it is imperative for the nascent auto industry of Pakistan to find ways to retain the customer base once the protection will no longer be available to it. The question is all the more important as the Pakistan auto industry reels from absence of economies of scale; heavy dependence on imported Completely Knock Down kits, parts, accessories, raw materials, etc.; underutilization of production capacity; and prices which are deemed unaffordable even by international standard.

True, the industry has provided direct and indirect employments to thousands and pumped in billions of investment and contributed billions more in taxes and duties to the national economy. It has also saved billions in import substitution laying down foundation for many down-stream related industries as auto production requires all sorts of materials plastic, rubber, steel, glass, etc., etc. The importance of developing a local auto industry can hardly be over-stated.

However, that does not discourage one to question the failure of the industry to fulfil one of its major premise producing affordable cars within the country. Over the years, the auto prices have registered increases far above the rising rupee-dollar parity which took a turn for reverse in the middle of last year as dollar kept shedding its value and today trades for less than Rs 60 compared to Rs 67 then. None of the assemblers, who never miss an opportunity to immediately increase the prices of their products at the slightest depreciation of the rupee, have seen it fit to reduce the prices despite the substantial reduction in the value of the dollar. The only relief offered to the customers is that the prices have not gone up.

For the time being the industry seems to be in a mood for jubilation to celebrate the record sales during the fiscal 2001-02 ended June 30 this year. According to the statistics compiled by Pakistan Automotive Manufacturers Association (PAMA) a total of 40,601 cars were produced by its members in 2001-02. During the same period PAMA members sold a record 42,341 cars depicting 7 per cent increase over the previous year. The sales of trucks and Light Commercial Vehicles (LCVs) also increased by 23 per cent and 17 per cent to 1,134 units and 9,033 units respectively during the comparative years.

The first month of the current fiscal July 2002 depicted an even better performance by the auto industry. Car production and sales increased by 42 per cent and 21 per cent respectively over the corresponding month last year. A total of 3,991 cars were produced in July this year compared to 2,794 units last July while car sales soared from 3,044 units to 3,691 units during the same period.

The improved performance, however, hardly offers any room for complacency on the part of the auto industry for the simple fact that the production is not enough to keep up with the rising demand fuelled by leasing companies and banks. More so the production remains still much low not enough to create economies of scale, improved turnovers and better utilization of the collective production capacity to help bring prices to an affordable level.

Prices play an important role in auto sales anywhere in the world including the developed countries and they remain the top deciding factor in a developing economy like Pakistan. That explains the reason for the big used-car market in the country which surpasses that of the new car by one-to-five. The low per capita income, the increasing cost of living, the shrinking purchasing power and the high auto prices are shying away a vast majority of potential buyers in the middle income segment of the society who dream of owning a personal vehicle. Though the leasing companies and banks have played a vital role to help boost car sales, according to an estimate over 40 per cent of all new car sales are financed, the overall auto production and sales volumes still remain low in a population of 140 million.

The record car sales figure of 42,342 in 2001-02 means that only one in 3,333 persons in the country bought a new car last year. The car production and sales volume remain much too low to help create the much needed economies of scale, turnovers and investment in vending industry, particularly the precision-engineered parts which require heavy investments and guarantee of adequate returns over a specified period of time. The low production and sales volume discourages the induction of latest technology to keep depending heavily on imported CKDs, precision parts and accessories to inflate the production costs and prices of the locally assembled cars. This is a vicious cycle indeed.

Besides the price, the inefficient regulation is also depriving the industry of an immense goodwill necessary for developing voluntary loyalty, which the auto producers would be needing in not so distant a future when it would no more be possible to stop the flow of foreign counterparts in the local market. In the recent months the government has taken a number of measures to better regulate the sector to protect the interests of the car buyers. However, as we see, most of these measures are more symbolic and token than practical and thus so far has not seem to have a positive impact on the overall performance of the auto industry. For instance, the government reduced the duty on car imports on all range of cars by token 25 per cent in Budget 2002-03. Despite the reduction the duty still remain much discouraging to allow import of cars into the country to maintain the status quo to keep protecting the industry.

In addition, the government has also tried to abolish the unscrupulous practice whereby authorized dealers were selling the new cars at a premium over the fixed price to customers who wanted immediate delivery on cash. The rampant black-marketing kept the people who booked the cars had to wait for the promised delivery, for months. The government has ordered the dealers to ensure the delivery within 60 days of the booking and has also issued order to book one car per person that can not transferred to another person for a specified period. In addition, it also imposes a penalty on the dealers if they fail to deliver the vehicle by the agreed date.

Informed sources, however, expressed concerns that the measures, which look good in theory, would not be able to protect the interests of the buyers in practise due to inherent problem associated with the producers themselves the over booking. "The assemblers have find it convenient over the years to book vehicles way above their production capacities and availability of CKDs. The overbook vehicles to improve their cash flow without the least care whether or not they will able to deliver the vehicles on time. One of the major assembler booked some 5,000 high-priced vehicles in March and April when it has no more 800 CKDs in its stock. Number of people who booked vehicles with the assembler in early March and promised delivery with 3 months have yet to receive their cars. The fact is that the assembler just can not deliver the 5,000 vehicles on time and the measure to reduce the delivery date from three months to 2 months by the government recently would hardly make any difference."


While presenting the Budget 2002-03 in June, Finance Minister Shaukat Aziz said that the 'duties on import of vehicles are extremely high and thus there is no import ...The sense of lack of competition tempts the local manufacturers to be costly and less quality conscious thus jeopardizing the legitimate interests of consumer."

He also announced to reduce the duty on imported vehicles by 20-50 per cent depending on the engine power. Duty on cars upto 1000 cc was reduced by 25 per cent to 75 per cent, duty on 1001-1500 cc cars was reduced by 20 per cent to 100 per cent, and duty on 1501-1800 cc cars was reduced by 25 per cent to 125 per cent. The biggest reduction was made in 1800 cc and above cars the import duty on which was slashed by 50 per cent from 250 to 200 per cent.

The reduction was token and was meant only to send a 'signal' to the local auto assemblers as the overall impact of duties and taxes at the import stage still remains much too high to encourage imports to help improve quality and prices 'to protect the legitimate interests of the consumer'. Not only the duties on cars still remain high but the imports are also subjected to 15 per cent sales tax and 6 per cent income tax, like all other imports, as well CVT (Central Vehicle Tax) depending on types of vehicles. While cars up to 800 cc are exempted from the CVT, 800-1000 cc cars are subjected to a CVT of 3.75 per cent, 1000-1500 cc 5 per cent, 1500-1600 cc cars 6.25 per cent, and 1600-1800 cc cars 7.5 per cent. Increased rate of CVT is imposed on the import of cars of 1801 cc and above.

Thus duties and taxes push the prices of imported cars to discourage imports to maintain the status quo. However, the industry and those related with it attribute the high car prices on the government as well as the producers the former to enhance its revenue by subjecting the industry with highly uneconomical taxes and the later to resorting to high built-in profit. In addition, they also attribute the rising costs of production, particularly the incessant rise in such basic utilities as electricity, gas and water.


Mumtaz Shamim is the chief executive of Mumtaz Engineering which provides a range of parts to car and motorcycle producers. Mumtaz who manufactures a range of sheet metal, plastic and machine parts as well as dyes say that the local auto vending industry is heavily dependent on imported raw materials which are subjected to high duties.

"With the inclusion of the sales tax the total impact of duty at the retail stage adds up to an uneconomical 25-30 per cent. In addition the price of such major inputs as electricity, gas and water are on a constant rise to push the production costs to exorbitant level. For instance, from the 15th of the last month, the industrial rates of water was increased by 50 per cent- from Rs 600 to Rs 900 and from Rs 1,000 to Rs 1,500 per tanker depending on its size.

"The local vending industry, which primarily comprises of small and medium size entrepreneurs, has no access to loans as the banks still don't recognize it as an industry. The loans are just not available to the deserving entrepreneurs and a few who are lucky to get it have to pay high interest on it. How can a vendor expect to make a profit at the high mark-up rate of minimum 13 per cent?

"Like many other industries auto vending industry is also a high power consumer. While there has been an incessant increase in the power rates which today have touched an extremely high uneconomic level the power supply pattern has become extremely erratic taking a heavy toll on the productivity. Like all other industries, the auto vendors are not allowed to install their own generators a NOC is required to switch from petroleum generators to gas generators while a similar permission is required by the Karachi Electric Supply Corporation (KESC). The procedure for both does not only involve a load of paperwork but also greasing of many palms at every level. In addition, the KESC also charges a fee for using a generator. The inconvenience and the costs involved discourage the use of generators to help better the productivity."

Mumtaz also lamented the heavy dependence of the vending industry on imported tools. "Quality tools and machines for the vending industry do not come cheap and the prices are further inflated by the import duty. There is no industry in Pakistan which manufactures the required tools necessitating the need for the manufacture of these tools in the country. We have failed to invest in tools manufacturing in the past and it is imperative that we should invest in it now."

He stressed the need to slash the import duty on raw materials, machinery and tools used in the manufacture of auto parts and accessories, including duty free import of those not manufactured in the country, to create economies of scale and improve the quality of the products. He also stressed on the need to cut the industrial rates of power, gas and water to help the industry produce affordable parts without which auto prices would keep remain high. "We don't need protection, we need genuine incentives without which the local auto industry would not be able to compete with the impeding imports a couple of years from now."


For the time being the local auto industry enjoys the protection against imports as imports are discouraged by heavy import duty. While the protection has benefited both the government and the producers the former in substantial revenue and latter in profitability it has come at the cost of buyers whose concerns just don't seem to matter with the policy makers. The protection has deprived the market one of its basic essential the presence of genuine competition and token measures announced by the finance minister in his Budget 2002-03 speech would not help improve the situation. The protection has allowed the industry to remain complacent with the involuntary royalty in the absence of a choice and the situation is feared not to favour the industry if and when the market opens up for imports after the extension accorded to it by the WTO.

PAGE would once again like to quote Finance Minister Shaukat Aziz who replied to a question put by it at the press briefing at the State Bank in Karachi saying that "the reduction in duty on car imports is a signal to the local auto assemblers to improve efficiency and productivity. It will help encourage the local industry to become price competitive and quality conscious. They have got the message." It would also like to add that the measures taken by the government recently to ensure timely delivery of the cars to the people is indeed in the larger benefit of the industry itself to restore its public confidence, a precious commodity which it will be needing in the years not too far away.

However, measures would also be taken to address the problems related to the rising production costs and quality. Much has been done but much still remains to be done to ensure the development of the local auto industry on professionally sound lines to meet the challenge head-on when consumers will have a real choice about the price and model of a vehicle.

The industry just cannot complain about consistant profitability over the years. While the annual reports of the auto makers are awaited half-monthly results of the major auto producers for the period ended December 31, 2001 show increased profitability all around and the trend continued during the first quarter this year.

The government's prodding has pushed car producers to increase their production as obvious from the performance in the first month of the current fiscal. The substantial increase shows the potential for the creation of economies which according to observers could have been even better if the producers passed on the benefit of the rupee appreciation to the potential buyers.


Leasing companies and financial institutions have played a pivotal role to push the auto sales during last couple of years and are expected to play this role in the years to come. However, the mark-up rates on auto financing still remains much too high shying away many potential buyers as compound interest in the majority of leasing options add up to over 40 per cent depending on the payment period.

In addition, the rising cost of petrol and high incidence of auto thefts in all the urban centers across the country, particularly Karachi, are also discouraging auto sales. Since 1997 over 25,000 cars have been either stolen or snatched in Karachi, over 45 per cent of which still remain un-traced.

The survival of the local auto industry which employs over 125,000 persons directly or indirectly and contributes a substantial of revenue Rs 7 billion annually, excluding Rs 3 billion revenue by the auto vending industry, and saves around $ 5 million in import substitution means a lot for the national economy. Better regulations and protecting the interests of the consumer, however, will also play a vital role to instill the much needed customer loyalty which will pay dividend in the years to come.

Thanks to the increasing internal competition resulting in the introduction of new models in recent months, and with many more such plans in the offing, the Pakistani automobile industry is in transition. Car buyers today enjoy a better choice brands and models as well leasing options. The time is ripe for the local auto industry to solidify its base on merit alone both in terms of quality and price.


























































Source: Pakistan Automative Manufacturers Association