AUTO INDUSTRY

Steering towards solution

By RAHEEL RIZVI
Oct 20 - 26, 2003

The continuing debate over possible reforms of the domestic auto industry has now gone into overdrive, with personal attacks on certain concerned government officials throwing up a smokescreen that threatens the interests of both consumers and the industry. The time has come to cut down on rhetoric and zoom in on solutions that are at the same time investment and consumer-friendly.

Let us for the sake of argument postulate a scenario where the government allows even a one-time import of re-conditioned cars. Who is to guarantee that under the cover of import, the car smuggling that was once so rampant in Pakistan would not make an unwelcome return, with all its unpleasant ramifications? One is all too aware that in this country the government is often ill equipped to enforce regulations that are enacted for the common good of what is euphemistically called the common man.

Pakistan has the distinction of being one of the few countries where the smuggling Mafia has not only succeeded in bringing in finished cars but also actually managed to get them registered, adding no inconsiderable weight to the coffers of corrupt officials. Not surprisingly, these vehicles ended up in the hands of bureaucrats, businessmen and influential politicians, and it clearly was not either the common man or the government which benefited.

To match the import of re-conditioned or used cars, which was permitted from time to time, the government also allowed the free import of used auto parts through special arrangement until 1998. The result was that some used parts dealers imported these under the category of scrap and sometimes even succeeded in bringing in brand new engines. Rather than replacing their old vehicles, many motorists took the less expensive route of replacing the car engine. Defective engine parts were replaced with used parts freely available from used parts dealers. The government exchequer was significantly affected by the loss of potential revenue.

With the economies of scale denied to them by these ad hoc import measures, the early growth prospects that might have been expected from the local automobile manufacturing and auto parts vendor industries were also stunted. Today, though both industries have made major strides in development, past events still cast a long shadow.

Ironically, the events of September 11, 2001, which were disastrous for the world economy in general, have proved beneficial for the local auto industry. With home remittances flooding in from abroad and attractive investment opportunities becoming scarcer, market liquidity has improved considerably. One of the most visible beneficiaries has been the auto industry, which has evidenced a growth of 20 per cent; demand for new cars has also increased by 50 per cent. This increased demand has been extremely beneficial for the country's once-flagging economy.

To meet the spurt in demand, the local auto industry has increased production levels drastically, with several car manufacturers now operating second shifts. The ripple effect has also benefited the domestic vendor base. A little recognized fact is that the automobile industry has played a major role in transforming the country's domestic vendor base by making it more export-oriented. According to internationally accepted norms, domestically manufactured parts are first tested by the original equipment manufacturers at their own facilities and awarded a certification of quality. Only then can they be used by domestic manufacturers. The manufacture of quality parts domestically has ensured competitive pricing, opened up export opportunities and increased deletion levels in locally produced vehicles to a considerable extent.

Though Pakistan entered into the field of auto parts exports less than four years ago, this year's target of US $55 million is likely to be exceeded. Vendors are even exporting auto parts of vehicles that are not manufactured in Pakistan, such as Mercedes, Ford Van, Morris and even the famous London taxi. To date only about 40 of the more than 500 registered auto parts vendors registered with manufacturers of international car brands have entered the exports arena. When the rest exploit the potential, as they are expected to do in the next couple of years, there may well be a major boom for the auto engineering industry. To a great extent the credit for the success of the auto parts industry goes to the vendor development programs organized by the domestic auto industry, whose mainstay is technology transfer.

The current direct investment by car manufacturers in the country's economy is over Rs.8 billion, and today the domestic automobile industry contributes upwards of Rs.30 billion a year to the national exchequer. Along with its allied industries, it provides a livelihood directly or indirectly to over 115,000 people. Buyers in Pakistan now have a choice of various domestically produced models of Toyota, Honda, Suzuki, Nissan, Kia, Hyundai and Fiat cars and vans, Mazda coasters and Hino-Pak buses. Between 30,000 and 33,000 tractors are also produced in the country annually, a major boost to the agriculture economy.

One can only hope then that when the newly constituted automobile industry task force presents its recommendations, they will reflect a balanced picture that goes beyond the contentious issues and identifies the vested interests that stand to gain from a sea change in the present industry-friendly automobile policy of the government.