Automobil sector as an attractive investment avenue?

Oct 07 - 13, 2002

The auto industry in Pakistan has come a long way from its infancy stage to enhanced output in accordance with growing domestic demand. However following the September 11 tragedy there was considerable liquidity in the Pakistani market and no alternative avenues for investment.

In such a scenario many people saw the automobile sector as an attractive investment avenue. By paying a nominal down payment speculators book cars in bulk quantity and thereby deplete the supply of newly produced cars. In such a scenario genuine buyers find that cars are not readily available as there is a waiting period of approximately sixty days now. They can get early delivery of their vehicle by going to an unauthorized dealer who can procure cars from investors at a "premium". Cornering the supply of new cars by the "investors' mafia" in this manner is a negative trend and one that can retard the growth of the local car manufacturing industry.

Recently in order to discourage 'speculators', the government has made registration in the name of car booker mandatory, which would not be transferred before six months. "Whoever purchases the car, it will be registered on his name and he cannot transfer it for six months," announced Commerce and Industries Minister Abdul Razak Dawood.

In future, Razak said, if anybody books a car, he must give the identity card number to the dealer so that the car must be registered in his real name.

He also announced that delivery time has been reduced from 90 days to 60 days, after which car manufacturers would pay mark up to the booker at the prevailing rate of State Bank of Pakistan (SBP).

Currently the auto industry has the capacity to produce 120,000 cars annually on a double shift basis. The Original Equipment Manufacturers (OEMs) have also been instrumental in transfer of technology, value addition and manpower development. As a consequence a vibrant auto vendor industry has emerged that is now not only supplying parts to local OEMs like Toyota, Honda, Suzuki, Nissan, etc., but also exporting internationally.

Pakistan is engaged in the manufacture/assembly of cars, trucks, buses, van / pickups, motorcycles, three-wheelers, 4-WD vehicles and tractors. There are some 20 auto engineering industries and thousands of ancillary and vendor units catering to Pakistan's automotive industry. In the automobile line, units like Pak-Suzuki, the Indus Motors, the Atlas Honda Motors, the Dewan Farooq Motors and the Gandhara Nissan have set up their units for vehicles of various ranges.

The Association of Pakistan Automotive Parts and Accessories Manufacturers (PAAPAM) was established in 1988. The main purpose of this association is to safeguard the vendors industry and provide financial and technical assistance to its members.

The up-coming automobile industry, last year, came out from a decade of stagnation posting a growth of over 20 per cent which is the highest growth achieved in any manufacturing sector of the country. This year, domestic demand for new cars has skyrocketed by approximately 50 per cent.

As would be expected, given the limited market size, production volumes have been low. But there are clear indications that the industry has finally come of age, producing cars of eight international brands in scores of models all fully approved by the original manufacturers for quality and endurance.

The introduction of new Corolla and Baleno models has suddenly given a boost to the car demand within a very short period of time. A leading assembler said that the demand flow, that came two to three months back, had slightly reduced to some extent, however assemblers have not slowed down the production.

Since its inception Suzuki had enjoyed the position as market leader in small car segment, while Honda and Toyota competed in the higher priced market. Suzuki commenced production in 1983 eyeing the small and LCV car segment, 800cc- 1000cc. The industry was regulated until early 1990's, after de-regularization, major Japanese manufacturers entered the Pakistani market to produce locally.

Until recently Suzuki, Honda and Toyota dominated the market but now new competition has emerged following the entry of Daihatsu and Hyundai.

Vendor industry plays a critical role in the growth of auto industry as all the components and parts are not manufactured under one roof. Development of vendor industry means greater employment opportunities, reduction in cost of production, lesser imports and achievement of deletion programmes. Furthermore the vendor industry has entered the export arena. Last year parts worth US$ 27 million were exported around the world including the United States.

Both the private sector as well as the government must make all out efforts to create a conducive environment for the robust growth of the automobile industry where all the automotive parts and components are fabricated locally pre-emptying the need for import and thereby saving precious foreign exchange.

Automobile industry is a sector with lucrative investment opportunities and the growth of the sector augurs well for the future.