AUTO INDUSTRY

Achievements and failures

By SYED M. ASLAM
Jan 12 - 18, 2004

Let's start with the words that formed the part of Finance Minister, then as well as now, Shaukat Aziz's Budget 2002-2003 speech: "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 interest of consumer."

The strategic preamble was aimed to lessen the growing public dissatisfaction, which had started to find its way into the media increasingly, about the 'forced loyalty' by discouraging imports through high import duties thereby allowing the local auto manufacturers to develop monopolistic tendencies. The absence of 'real' competition did not only allow the local producers to increase the prices at will but also compromised the quality of the locally produced automobiles. The producers made it a habit to increase the prices of their products at the slightest shedding of value by the Rupee.

The preamble was obviously also aimed at underplaying the failure of the local auto industry to fulfil one of its basic promises production of affordably priced quality cars on the one hand and meet quality standards on the other. Most of all it was meant to justify reduction in import duty on passenger cars upto 1800cc by 25 per cent from 100 per cent to 75 per cent on cars upto 1000cc, from 125 per cent to 100 per cent on cars between 1001-1500cc and from 150 per cent to 125 per cent on 1501-1800cc cars. The biggest reduction, however, was made in the import duty of 1801cc and above cars which was slashed by a far greater margin of 50 per cent to 200 per cent. In Budget 2003-2004 last June, the policy makers infatuation with big cars continued and the import duty on 1801cc and above vehicles were further slashed by 50 per cent bringing it down to a cool 150 per cent, just 25 per cent more than applicable to smaller 1501-1800cc cars. What made the reduction even more starkly was that the duty slabs on the vehicles of less than 1801cc was left unchanged at its previous year's level. In a market reeling from a low per capital annual income of $ 492, and fast depreciating personal savings, the preferential treatment accorded to the luxury cars of 1801cc and above speaks volumes about the priorities of the policy makers.

PRODUCTION TRENDS

Two years later, today the auto market in Pakistan still primarily remains a seller's market failing to bring any competition as envisioned by the finance minister 18 months ago. The reduction in duties has failed to encourage imports to instill the sense of competition to help "not to tempt the local manufacturers to be costly and less quality conscious thus jeopardizing the legitimate interests of consumer." Imports of vehicles, particularly those with small engines, still remain effectively discouraged with a single exception of Korean-made 800cc Daewoo Chevrolet, only about 3,000 units of which is expected to be imported this fiscal, offering hardly any competition to the local producers.

On the other hand, a record number of cars will be produced in the country this fiscal. According to figures compiled by Pakistan Auto Manufacturers Association (PAMA), a total of 34,463 cars were produced in the country during the first 5 months of the current fiscal ended November 30 last year. Figures also show that a total of 53,067 four-wheelers of all types 34,463 cars, 726 trucks, 512 buses, 4,688 LCVs, 311 SUVs and 12,367 tractors were produced in the country during the first 5 months of the current fiscal. The projected overall performance of the auto industry based on the available statistics, however, show mixed trend and overall growth would be lead mainly by the car segment of the industry.

As is, analysis show that of the 53,067 four-wheelers of all types produced by the PAMA members during the first 5 months almost 65 per cent were cars while another 8.8 per cent were LCVs. The collective production of cars, LCVs and SUVs during the period under discussion totaled 39,462 equal to almost 75 per cent of the total 53,067 four-wheelers produced by PAMA members collectively. The overall four-wheelers production also got a strong boost from the farm tractor segment which contributed 23 per cent to the overall production of four-wheelers. However, projection made on the basis of first 5-month performance show that tractor production this fiscal ended June 30 this year would either remain at par with 26,240 produced last fiscal or only negligibly more. Though tractor production has played a significant role to help push the overall production of four-wheelers trends show that it has been on a constant decline over the last few years dipping from 34,559 in 1999-00 to 31,635 the next year and drastically falling to 23,801 in 2001-02 only to increase marginally to 23,801 in 2001-02.

Like farm tractors, the projected production of bus will remain stagnant during the current fiscal to either match or depict negligible increase over the 1,296 units that were produced in 2002-03. The projected production of truck is expected to touch around 1,700 units this fiscal depicting a healthy 30 per cent increase over 1,299 units produced last year. However, one should avoid being complacent because truck production has been on a constant decline during the last seven years. See the attached table.

The segment-to-segment analysis of the four-wheeler industry not only highlights the mixed performance but also shows that the expected growth this fiscal would be lead mainly by car. On the basis on average monthly production figures during the first five months ended November it would be safe to predict that a record number of around or over 82,000 cars will be produced in the country this fiscal. This certainly is a good news because trends of car production over the years have fluctuated wildly during the last 8 years. See the attached table.

DEMAND & SUPPLY

We have established that the record automobile production this fiscal will come mainly from the car segment. However, the record car production that we are heading towards this year would not only be a matter of jubilation but it would also be its test because the local manufacturers; particularly the big three, namely, Suzuki, Toyota and Honda, have booked enough cars to keep them busy for months and even years. For instance, Suzuki which contributed 52.5 per cent or 18,090 units to the overall car production volume of 34,463 during the first five months stopped taking bookings about 5 months ago. Sources told that the company had booked enough vehicles to keep it busy for next couple of years. Indus, the local producer of Toyota Corolla cars and Hilux trucks as well as Daihatsu's 850cc Cuore, and Honda Atlas, the producer of Honda City and Honda Civic cars, are also sitting on enough bookings to keep the assembly lines busy for months with more bookings pouring in each day. Dewan Farooque Motors, the manufacturer of Kia and Hyundai vehicles in Pakistan, has produced just 12 units of 1300cc Kia Classic and 72 units of 1500cc Kia Spectra in the first 5 months of the current fiscal due to what it calls "short supply of kits" from its South Korean principal for the first and being out of production for the second because of model change in South Korea. However, production of Hyundai 1000cc Santro Plus evinced a strong performance in November last year 682 units were produced compared to just 235 units a month earlier in October. In all, a total of 1,848 units of Santro Plus was produced during the five months ended November 2003. Dewan Farooque also produced a total of 1,063 Hyundai Shezore truck, 2600cc LCV, during the period under review. In short, the local auto industry is sitting on a pile of car bookings which it itself may not had dreamt possible just a few years ago.

For an industry reeling from acute under-utilisation of the collective capacity producing just 32,461 cars in 1999-00 the "over-bookings" can be called a "Godsend." However, the revival pushing production to record highs backed with tens of thousand of bookings has all the chances of creating delivery problems for the bookers. Even without the rush, as has been the case until recently, the local car producers are not known to fulfil their delivery promises which is only feared to get worse when they are pressurised with such immense volume of bookings.

The widening gap between supply and demand in a market where too many buyers are chasing too few cars produced by a handful of manufacturers who are facing increasing backlog due to widespread over-bookings is feared to result in inflating the delivery period way beyond reasonable time. While the producers have added clauses in the fine-print to absolve them of any responsibility to delivery the vehicles within six months there is no law that protects the bookers against deliveries way beyond the prescribed period. While the producers have found ways to circumvent the law, the buyers have no legal recourse to protect themselves against the rampant practice of delayed deliveries.

EXTENDEDLY DELAYED DELIVERY

Over the years delivery to bookers; at times months, and even years, beyond the prescribed period, has remained one of the persistent problem. Numerous attempts by the successive governments, including the tough statements by the Minister and Secretary of Industries and Production and by the Prime Minister Zafarullah Jamali himself, have remained futile due primarily to a general lack of cooperation on the part of the producers.

For instance, the high level Task Force established to review the performance of the auto sector last year met a stiff resistance from the producers. The producers refused to provide the Task Force information about the production costs on the pretext that it was a trade secret. Critics say that it was actually meant to hide the huge profit margins that the industry has grown accustomed to operate on.

The producers also rejected all attempts by the Task Force to slash the prices. It is interesting to mention here that the producers, which made it a habit to increase the prices at the slightest strengthening of the dollar, have remained conveniently silent not to pass off the slightest benefit of the substantial erosion in the value of dollar by as much as 15 per cent during the last two years to the buyers. There had been few exceptions but they too had been more token than real. For instance, Pak Suzuki reduced the prices of its 800cc Mehran standard car by negligible 0.6 per cent or just Rs 2,000 to Rs 297,000. It also slashed the price of Mehran air condition version by less than 0.9 per cent or Rs 3,000 to Rs 346,000. Similarly, Honda Atlas announced to slash the prices of its Civic EXi manual and EXi prosmatic transmission models by an average of less then 2 per cent or Rs by 12,500 to Rs 942,500 and Rs 982,000 respectively. It slashed the prices on the 4 versions of its VTi model by an average 1.5 per cent or Rs 17,500 to prices that ranged between Rs 1,087,500 to Rs 1,227,500.

PREMIUM OR 'PROFITEERING'

The Task Force which kept delaying the submission of its report, first on September 30 and once again on October 31 was also unable to make the producers lessen the delivery period from six to 3 months and also to come up with a mechanism to stop the rampant practice of 'premium', another name for profiteering by selling vehicles on cash to customers willing to part with substantial amount of cash for immediate delivery.

The ultimate victim of the unscrupulous, but rampant, practice are the people who have saved enough money to book the vehicles on 100 per cent payment who are made to wait for delivery way beyond the prescribed period. It would keep on pushing the delivery dates for thousands of people who cannot afford to part away with "premiums" which run from as low as Rs 35,000 to as high as over Rs 150,000 depending on the price of particular make and model.

Needless to say, the Task Force failed in a big way to help bring the much needed discipline in an industry where profiteering remains supreme. It has failed to make the producers cooperate to divulge important information such as cost of imported CKDs, accessories and parts and other inputs to make informed decision whether or not the prices of automobiles. Voices emanating at the highest level warning the producers of accountability by encouraging imports of completely built-up vehicles through reduced duties have now died down.

The industry has acted, and that too successfully, to protect its interests from the prying eyes of the Task Force. It has bluntly refused, once again successfully, to be accountable for many of the malaises that are aimed at protecting the interests of the buyers. With the sad demise of the Task Force which miserably failed to achieve even a single objective of regulating the industry, the rampant practice of profiteering continues unabated and gone with it are the assurances that could had made the producers follow an ethnic delivery schedule, to calculate the production costs with relation to price and so on and so forth. In fact, the failure of the Task Force has undermined the genuine interests of the buyers even more by providing impetus to be dictate all aspects of the trade with even more vengeance.

IMPORTS

As mentioned above reduction in duty has failed to encourage imports as envisioned by Finance Minister Shaukat Aziz in his Budget 2002-03 speech. True that it has prompted a single entrepreneur to import Daewoo Chevrolet 800cc cars but that is just not enough to instill the sense of genuine competition required to make the local industry price competitive and quality conscious.

Firstly, a mere 3,000 Daewoo Chevrolets would be imported this fiscal, a part of which has already find their way into the local market. The negligible import volume is just not enough to offer any competition to make local producers to lose even a single night's sleep to improve on quality and price of their products or the gray delivery schedule. Secondly, and more importantly, the total impact of 115 per cent duties and taxes 75 per cent duty, 15 per cent withholding tax and 5 per cent income tax makes it impossible to retail the imported model at competitive price to the buyers. That explains the reason why the manual and loaded versions of the vehicle are being retailed at Rs 549,000 and Rs 600,000 respectively way above the locally produced comparative models of 800cc Suzuki Mehran the manual version of which carries a price tag of Rs 297,000 and its air condition version priced at Rs 346,000. Various other locally produced cars 1000cc Suzuki Cultus VXR and 1300cc Kia Classic are also available at more or less the same price.

CHINESE IMPORTS

So, the import of a single import at duty reduced as is, would not make any impact on the local industry? But what about low-priced Chinese cars reportedly waiting to be retailed at affordable prices of around and over Rs 100,000. PAGE talked to informed sources and was told that the print media has been greatly misguided the people because these four-wheelers are actually motorized vehicles of the type used on the golf courses in the developed world. They are not "cars" and certainly not meant to be used as one carrying people from point 'A' to point 'B' on the busy roads of Karachi.

They are, in fact, more like four-wheel motorcycles fitted with covering that passes for body good enough to travel only small distances on a golf course.

However, the future prospects of Chinese cars finding their way into the local markets seems real if the inroads made by Chinese products in the local markets are any indication. By now we are aware of the growing presence of almost all sorts of Chinese goods across the shelves nationwide. Chinese motorcycles, both completely built-up as well as locally produced, have been able to snatch a respectable share of the market from the traditional manufacturers of Japanese two-wheelers. It has forced the biggest producer Honda to cut the prices of its 70cc and 125cc models by Rs 10,000 and Rs 5,000 respectively. What makes the sharp reduction even more significant is that like local car producers the traditional producers of Japanese motorcycles are also not known to reduce the prices. This is most obvious from the fact that none of them find it fit to cut the prices of their respective products until recently despite the substantial erosion of value by dollar during the last 30 or so months. Obviously, the only thing that forced the manufacturers of Japanese motorcycles, initiated by Honda and followed by others though at much lesser extent, was the growing presence and acceptance of Chinese two-wheelers which were 40 per cent less expensive then their Japanese counterparts.

Chinese electrical and electronic goods have also taken the markets by a storm to bring down the prices of split air conditioner, that use to be an item of status symbol until the recent years, to affordable level of Rs 17,000 compared to Rs 60,000 not too long ago. The same has been the case with other electrical and electronic items including television, refrigerator, window type air conditioner, microwave oven and a whole array of other items.

The prospects of the import of Chinese cars is all the more real because an estimated 4.9 million sedans are expected to be produced in China this year far in excess of local demand of 2.3 million. China has joint ventures with many multinationals auto manufacturers including Germany's Volkswagon, American General Motors and Ford Company and Japanese Honda and Suzuki. South Korean Hyundai also has plans to set up plants in China, the biggest outside the country.

For the time being, news about Chinese cars remains untrue. However, Chinese imports may well be available in the market in not too distant a future. As is, Chinese Dong Feng truck, bus and LCV have already started rolling off Sindh Engineering's assembly line in Karachi.

FINANCING

Declining interest rates and increased auto financing through banks, leasing companies and Mudarabas have played a vital role to boost up the auto sales like never before. In turn, it has helped enhanced the overall auto production because financing make up over 40 per cent of all car sales today.

Banks enjoying an unprecedented liquidity have find auto loan a highly receptive market offering attractive returns in a comparative short period of time. The incessant flow of increased home remittances in fiscal 2002-03, and evincing declining trend during the first half of the fiscal ended December 31 last year, has resulted in enhanced investment in the automobile which offered attractive returns than construction.

The availability of easy credit and the falling reduction interest rates have made financing a viable option for many. The base of auto credit has witnessed an expansion never dreamt possible before allowing the banks to find a lucrative market to invest the excess liquidity. That explains the complaints by leasing companies that the entrance of banks in auto and consumer financing is depriving them of level playing fields in a market which has long remained their field.

CONCLUSION

It would be appropriate to close the article with the comment that Finance Minister Shaukat Aziz made at a press briefing at the State Bank here in Karachi in reply to a question put by PAGE three months after he presented the 2002-03 budget in June 2002. He said, "The reduction in duty on car 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."

If continuation of rampant practice of 'premium', the refusal of the producers to pass of the benefits of the strengthened rupee to the buyers, the delayed delivery periods, and the booking of cars on payment of price prove that they have not got the message neither year-and-half ago nor today.

Instead, the failure of the Task Force and its inability to convince the producers the importance of inducting fair business ethics necessary to protect the interest of buyers have in fact put their interests at greater risks. Only larger volumes of imports would help instill the sense of real competition to provide buyers with the much needed respite.

TABLE 1
PERFORMANCE OF AUTOMOBILE INDUSTRY OVER THE YEARS

TYPE

1995-96

1996-97

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

JULY-
NOV. '03

Car

31,079

33,741

33,684

38,682

32,461

39,573

40,601

62,073

34,463

Truck

2,994

2,917

1,683

1,083

913

912

1,134

1,299

726

Bus

474

456

591

1,124

1,460

1,326

1,086

1,296

512

LCV

9,108

10,609

10,543

8,701

7,036

7,424

9,055

12,548

4,688

Tractor

10,093

10,417

14,144

26,644

34,559

31,635

23,801

26,832

12,367

Source: Pakistan Automobile Manufacturers Association

NOTE:

* Truck production figures do not include data of Ghandhara Industries because it is not a member of the Association.

* Data of tractor manufacturers who are not members of the Association is also included. PAMA, however, says it believe that some 2,000 tractors were produced by non-member producers during the first 5 months of the current fiscal.

TABLE 2
BREAKDOWN OF PRODUCTION (JULY-NOV. 2003)

CAR

 

BRAND/MODEL

UNITS

1300-1600cc (2000 Diesel)

Honda Civic

2,077

HONDA CITY

2,074

SUZUKI BALENO

1,625

TOYOTA COROLLA

8,316

NISSAN SUNNY

20

KIA CLASSIC

13

KIA SPECTRA

72

1000CC

SUZUKI CULTUS

4,181

SUZUKI ALTO

2,340

HYUNDAI SANTRO PLUS

1,848

800CC

DAIHATSU CUORE

1,974

SUZUKI MEHRAN

9,944

TRUCK

HINO

420

NISSAN

278

MAZDA/DONG FENG

28

BUS

HINO

444

NISSAN

30

MAZDA/DONG FENG

38

LCV

SUZUKI POTOHAR JEEP

280

SUZUKI BOLAN VAN

1773

SUZUKI RAVI PICK-UP

697

TOYOTA HILUX TRUCK

773

DONG FENG PICK-UP

112

HYUNDAI SHEZORE PICK-UP

1,063

SUV

KIA SPORTAGE

311

FARM TRACTOR

FIAT

6,493

MASSEY-FERGUSON

5,874

Source: PAMA