Booming auto industry has the potential to provide strong footings to the economy


Jan 31 - Feb 06, 2005



The changing exchange rates, especially depreciation of Pak rupee against Japanese yen, drastic cut in duty on imports of CBU from 65 to 15 percent, and exorbitant increase in steel prices were some of the genuine concerns of the booming auto sector in Pakistan. Otherwise, the vibrant automobile industry was giving strong signals for impressive growth in production in the wake of capacity enhancement program being carried out by all the major players.

In fact, things taking shape in the auto sector, it continues to attract investment in all segments of the industry for modernization, expansion and replacement to increase production capacity to the level of 300,000 units per annum. Obviously, easy access to liquidity provided by the banking system under consumer financing is the major factor in making the auto sector a growing concern.

If the light commercial vehicles and buses were taken into account along with cars, the existing production capacity was around 168,000 units per year, however, as far as car manufacturing was concerned the estimates were close to 113, 835 units during financial year 2003-04. The production break-up of different companies reveals that Suzuki remained on top with a contribution of around 57,757 units, Indus 29,722, Honda 13,415, Dewan 13,235 units, and Nissan 24 units bringing the total of 113,835 units in 2003-04. The car production during current financial year i.e. 2004-05 is expected to reach 135,000 supported by the imported CBUs which is likely to meet the growing demand to a large extent.

The market-led growth, however, was encouraging the major players to increase production capacity to reach the landmark of 300,000 during next five years.

By and large, all the stakeholders seem happy, the auto makers in terms of market potential, expansion in plants and growth in profits.

The government on the other side looks comfortable with the performance of the automobile sector due to contribution of increased revenues by this important segment of the large-scale manufacturing sector.

Though it presents a rosy picture in the given circumstance in short terms, the long-term strategy, however, calls for concrete steps on war footings to gradually move towards economy of the scale if we have to tap the real potentials the auto industry offers. It was the auto industry which set many precedence of changing the course of economic history in different countries of the world which are now called economic giants both in Asia and the West.

The auto industry in fact needs a direction to achieve motorization level within the country as the first step and to grab the market share available in the Central Asian States and Africa in the second phase.

So far, Pakistan's economy has to heavily rely on cotton and textile and despite efforts made to diversify our economy by the governments in the past, cotton textile continues to enjoy the status of the mainstay of the economy. There were hopes that the much talked about Information Technology may assume the role of another leading contributor to the economy couple of years back, however, despite all hue and cry, either the IT sector failed to produce the desired results or our economic managers could not deliver the job.

The automobile sector after remaining idle for over a decade has made an impressive comeback and the way it is striving, this labor as well as technology-intensive industry has the strength to provide a strong economic base with the spread in the downstream and extending the arms into export sector, provided the government plays as the real facilitator with a clear vision and the direction. The game certainly deserves candles.

Japan, which is the most valuable partner in the growth of the auto industry in Pakistan, can contribute significantly to make auto sector a booming industry in the real sense. The auto market in Pakistan is mainly dominated by the Japanese technology being its friendly nature and economical. However, despite having a major share in Pakistan, there is a lot of room for transfer of technology as the auto sector has yet to rely on imports for basic parts and accessories. Indus Motors which is producing prestigious Japanese automobile models of Toyota, Corolla and Cuore, claims to be the best in terms of quality and aiming to take lead in the production as well as eyeing to be the most respected and successful enterprise in Pakistan.

During a recent visit to Indus Motors, I appreciated their vision and the pleasant working environment in highly professional manners, the target seems very close to them. However, the goal they were aiming for is especially to become the most respected enterprise. It may become easier provided the company sincerely extends its support towards the growth by helping out auto industry with the impetus of transfer of technology in the real sense. Some senior officials of the Indus Motors including Shah M. Saad Hussain, Director Corporate Planning, Akira Sato, Director Manufacturing, Norimitsu Hayakawa, Chief Marketing Advisor, M. Ilyas Suri, Director Technical, Tariq Quddusi, GM Manufacturing, warmly received my suggestion and explained that the company was already contributing significantly towards human resource development and also believes in the well being of Pakistan.

They acknowledged that the economy in Pakistan was on the right track and continues to grow. GDP, foreign exchange reserves, per capita income and other macroeconomic indicators that affect automobile sales have shown a positive trend in recent years. Auto demand was also spurred by excess liquidity in the finance industry, easy availability of consumer finance and low interest rates were extending support to the growth of the large scale manufacturing in Pakistan. They said with a sense of pride, Indus Motors enjoy the distinction of being one of the highest contributors of revenue to the government. The contribution to the exchequer, inclusive of sales tax, customs duty and income tax was approximately Rs8.20 billion, 1.6 percent of the total national revenue collection of Rs510.6 billion in 2004.

During the year, sales of Corolla registered an increase of 58 percent (20,321 units compared to 12,867 units last year) making Pakistan the third highest in Corolla sales in Asia (excluding Japan), just below Thailand and Taiwan. The Corolla continues to dominate the high-end segment with a market share of 54 percent. Sales of Daihatsu Cuore also increased by 40 percent (6,393 units compared to 4,579 units last year) whilst sales of Hilux were 2,399 units. They were of the view that Cuore has established itself as a leader in its class by virtue of its superior styling, quick acceleration and quality. During the year, demand for all variants of the Cuore, including the Cuore CNG, ECO launched last year, continued to remain strong. Cuore Automatic was launched on April 10, 2004 and became an instant success. Cuore Automatic is the only locally manufactured automatic car available below 1300cc.

The success story does not end on the Toyota family alone, as the sun of success was shinning equally for other auto makers as well. While Suzuki remains on top of the list with the distinction of the largest auto producers in Pakistan, Dewans prestigious Santro and sturdy Shahzore have also make their presence felt in the market. All these auto players with their agility and ability seem determined to give a real boost to the economy along with their respective enterprises.


The government has reduced the gap between CKD and CBU duties with the objective to ease the mounting pressures on the automobile companies for timely deliveries which usually take even more than 8 months for the models which are much in demand. Though the impact of the import cars was not so severe during the current year but the size of CBU imports is likely to take quantum jump in the coming days because the manufacturers have also shift their interest in the trading as well. As an immediate impact, the government's step for reducing duties may provide a cushion against the pressing market demand, yet it may become a gray area for the industry and the economy as well in the long run. It may be in the interest of the economy and to pave the way to provide a strong base to the auto industry as well as the downstream vendor industries to provide duty protection when the dust settles down with the increase in volume of production of the companies which are currently in process of expansion of their production capacity.




According to an assessment, to reach Motorization level of countries in the region, Pakistan needs to cross 500,000 units mark a year. Currently, Pakistan was on the bottom line with a Motorization level of 8 cars per 1000 persons. Motorization figures available from other countries indicate China has 10 cars per 1000 persons, India 12, Indonesia 21, Iran 23, Sri Lanka 25, Philippine 31, Turkey 67, UAE 193, Saudi Arabia 326, UK 426, Japan 543, New Zealand 580, Australia 619, Malaysia 641 and the USA 785.

The opening up of the banking system for consumer financing was of course the brainchild of our economic managers which deserve appreciation. In fact, it was due to continued access to credit, which played as the key driver especially for the large scale manufacturing growth in the current economic scenario. The direct impact of continued easy monetary policy is more evident in the robust growth of automobile sector in Pakistan.

Automobile industry recorded an increase of 23.7 percentage points in capacity utilization. Within automobiles, the capacity utilization in tractors industry witnessed the largest increase of 44 percentage points, followed by motorcycles/scooters, light commercial vehicles, cars and jeeps.

Since the capacity utilization in motorcycle and tractor industry has reached about 112.3 percent and 113.9 percent respectively, manufacturers were planning to expand the production capacity, working hours by six days a week besides increasing the shifts during the current year to bridge the gap between demand and supply.

Auto loans or car financing schemes launched by the banking sector saw an even larger jump in the current financial year, accounting for approximately 32 percent of consumer loans.

According to official figures released by the State Bank of Pakistan, 40.2 percent YoY growth by the automobile manufacturing was on top of 48.4 percent growth recorded last year.

Interestingly, within the automobiles sector, the production of Light Commercial Vehicles (LCVs) recorded the highest growth (84.9 percent YoY) following by buses 65.2 YoY during current financial year. The quantum jump in the growth of LCVs was quite in contrast to trends during last year when the production of LCVs and buses had declined by 14.1 percent YoY and 38.5 YoY percent respectively in the early quarters of previous financial year.

Some other segments of the auto sector witnessed a relative deceleration in growth due to a high-base effect as well as capacity constrains, but the growth in most segments is certainly impressive.

In particular, the production of motorcycles and scooters increased by an exceptionally 52 percent during current financial year, followed by cars and jeeps by 36.4 percent and tractors 36.2 percent YoY basis. The large jump in the production of motorcycles reflects not only the continuing impact of consumer credit but also the fall in prices following the entry of low-priced Chinese motorcycles in Pakistani market. On the other hand, the production of trucks registered a decline of 12.9 percent in the first quarter of the current financial year, in contrast with the growth of 18.5 percent during the same period last year. This is largely due to suspension of manufacturing of a Japanese brand truck by a local facility as it switched to the production of a new Chinese brand

Despite having comprehensive expansion plans in hand by all the major automobile manufacturers aiming at double their existing capacity, the leading auto assemblers were compelled to import completely built units (CBU) as they are cheaper than the units produced within the country.

The import of cars is likely to take a quantum jump next year, said representative of a leading car manufacturing company in Pakistan.

Since imported cars were comparatively cheaper than the ones manufactured or assembled locally, majority of the leading auto manufacturers like Indus Motors which produces renowned models of cars in Pakistan have started importing CBU units.

According to industry sources, the duty on CBUs has been reduced almost to the bottom line from 75 percent to 15 percent up to 1000cc, 1300cc 15 percent, 1300-1500cc 35 percent, 1500-1800cc 45 percent and 1800cc and above 65 percent.

Since the auto industry really has enormous potential to generate tremendous economic activity and has played a role model in the growth of developed economies of the world, the significant sector can emerge as the engine of economic growth in Pakistan as well needs protection.

Though all leading car manufacturers have already geared up expansion of their existing plants, yet all of them are considering going into expanded trading activity into imported vehicles.

The automobile, according to Pakistan Association for Automotive Parts and Accessories Manufacturers, is the sector which has the capacity to make things happen.

The current economic scenario, however, places the auto industry with the credit of one of the major contributors to the economic growth of the country. The industry has impressive expansion plans with the target to produce 300,000 cars, 3,000,000 motorcycles, 40,000 tractors within next five years.

This growth in production would mean to contribute Rs368 billion to the GDP, Rs121 billion to the revenue, 300,000 job opportunities, investment of Rs233 billion, import substitution worth over $5 billion and a substantial foreign exchange saving of around $2.830 billion during next five years.

Although the government has decided to reduce duty on imports of car to bridge the gap between demand and supply, as the addition arrival of imported cars may ease the situation especially for timely delivery and root out the malaise of premium being extorted by the middleman and profiteers, yet it would ultimately affect growth of auto industry in the wider terms and in the long run.


It is heartening to note that the auto sector has assumed a position where the market forces are determining the stretch of investment as compared to other sectors where the efforts have to be made to attract investment. According to figures released by Pakistan Association for Automotive Parts and Accessories Manufacturers (PAAPAM), the target of investment in car manufacturing segment was projected at Rs42 billion, Motorcycle manufacturing Rs13.75 billion, tractors Rs5.50 billion, while investment in the vendor industry is projected at Rs171 billion during next five years.

In fact, the current chaos in meeting the target of timely delivery to the genuine buyers is due to a free for all situation encouraging resellers, investors, roadside dealers who are causing increase in delivery times for genuine buyers as the current registration regulations do not stop investors from charging premium.

The Indus Motors has suggested some correctives measures to discourage investors and the resellers which include detailed scrutiny of PBO, customer details and copies of NIC, only one vehicle should be allowed against one NIC. Indus Motors have further recommended for mandatory registration for all vehicles for 6 months in the name of original buyer. An effective provision is required to be evolved through the Central Board of Revenue and Income Tax authorities can investigate NTN buyers who order vehicles. NAP may also investigate investors charging premium as well as the customers paying the premium to the middleman or the investors.