WHERE ARE AUTOS HEADING?

The recent change in govt policy will cause a downward trend in all this fast paced growth and enhanced investment

By TALHA BIN HISAAM
July 18 - 24, 2005

History of the auto industry in Pakistan is as old as the country itself. The industry has remained an active contributor to the economy. However, the pace of growth till 2002 was at snail's speed and the industry did not play a major role in the consumer durable market. The vehicles that were produced in the country were mostly limited to tractors and only a few thousand buses and trucks. As far as the demand for passenger cars was concerned, it was mainly dependent on the imports. The imported second hand vehicles are of inferior quality and are priced very high. In short, owning a car remained a far fetched idea for even the middle and high income class for a very long time.

In the early eighties, Pak Suzuki provided some relief to the demand of the local consumer. They were followed by Indus Motor (Toyota & Daihatsu), Atlas Honda, and Ghandhara Nissan, in the early nineties. These manufacturers met the market demand and successfully introduced many locally produced cars to cater to the needs of various consumer segments.

Initially the pace of growth was slow as the demand was stagnant from 1996 till 2002, but the contribution of the industry was enormous. With huge contribution to government revenue, foreign exchange savings and import substitution, the industry also became the backbone for technology transfer and provided employment to hundreds of thousands. Keeping in mind the contribution of the industry the government supported the industry by introducing consistent policies with protective measures to safeguard the industry.

After 2002, the demand increased tremendously. This unexpected shift in demand was due to easy car financing and better macro economic conditions. The manufacturers in turn responded to this enhanced demand by increasing their production capacities many times, as indicated in the following graph.

In 1995-96 the total production of the industry was 48,000 units. In 2004-05 the total production swelled by more than 3 times to 150,000 units, which is an increase of almost 300%. In spite of the impediments of mandatory deletion, huge and sudden demand of local auto parts, shortage of trained manpower etc the industry made a tremendous leap in terms of production enhancement.

During this time Atlas Honda increased their production capacity from 4,000 units in 96-97 to 12,500 units in 04-05. The company has undergone another capacity enhancement to raise its production to 38,000 units per annum. Like-wise, Indus Motor, the manufacturers of Toyota and Daihatsu vehicles, also embarked on multiple production enhancement projects to increase their capacity. From 10,000 units in 96-97 the company enhanced its capacity to produce 34,000 units in 04-05. Very recently Indus Motor launched another phase of capacity enhancement which would enable the company to produce 44,000 units per annum from October 2005 and 50,000 units per annum from April 2006. In January 2005 Pak Suzuki made an investment of over Rs. 2 billion to increase its production capacity from 50,000 to 80,000 units per annum. In phase-two of this expansion plan the company plans to increase the production capacity to 100,000 units per annum by 2006. Dewan Motors, manufacturers of Huyndai and Kia cars, has also increased its production capacity to 16,000 units p.a. at the beginning of this year.

The fast paced growth of the industry and consistent policies of the government attracted further investment in the industry from some other players. In mid 2004 Master Motors introduced pickup trucks in collaboration with Chinese manufacturers. Nexus Automobiles introduced Chevrolet in the local markets. Initially the company test marketed 800 cc imported cars. With good response the company is now going to locally produce two models, Exclusive and Optra. Further more, Roma Group of Companies has formed an alliance with Chinese auto manufacturers and will commence operations very soon. According to recent news items French company Renault and German giants Volkswagen are also planning to make significant investment in the Pakistan markets.

A significant achievement during this time is the launch of first Pakistani car. Adam Motors introduced Revo in 800 cc and 1050 cc engine capacities. The company has plans to reach the masses even in far flung areas of the country. With extremely low prices the company aims to make the dream of owning a car come true for more people.

If the consistency in government policies had continued, the country would have reached self sufficiency in the auto industry. By the fiscal year 2010, the car manufacturing industry was projecting to contribute Rs. 210 billion to the country's GDP. The revenue of the government from the industry was projected to increase to Rs. 70 billion. The further enhancement of capacity by the industry at around Rs. 42.50 billion was planned. There would have been thousands of additional jobs created throughout the industry, with a projected 12,500 direct employment in the industry. In addition to these benefits, the increase in production would have provided for import substitution of $3,425 million, which would have meant a foreign exchange savings to the tune of $ 1,475 million.

However, the rosy scenario and optimistic projections were destroyed by the recent 2005-06 budget. The recent change in govt policy will cause a downward trend in all this fast paced growth and enhanced investment. The new budget with all its import friendly policy may destroy the local auto industry. Slowly and gradually not only the direct foreign investment will be withdrawn, but also, with reduced sales and margins, the local manufacturers may also stop investing in the industry and opt for trading of used cars themselves. This way, not only will the government lose a lot in revenues but also hundreds of thousands of people will lose their jobs. Even worst, local manufacturers may withdraw their investments and start importing vehicles. This will not only destroy the whole industry but also, the country will become merely a trading nation and dumping ground for foreign used cars like Bangladesh, Sri Lanka and other poor countries in Africa.