AN OVERVIEW OF AUTOMOBILE INDUSTRY

SHAHZEB KHANZADA
Oct 01 - 07, 2007

Five years back, when government started showing a rosy picture to all the industries about economic growth, almost all the industries reacted accordingly and hence enjoyed the benefits of economic upturn and rising domestic demand. The financial sector has come up as the biggest beneficiary in this regard. Textile sector also expanded but suffered due to unfeasible way of expanding itself where focus remained on the low value added category. Power and auto sector lagged behind in this expansionary phase. For power sector government is the sole responsible as optimistic economic projections did not bring into account the energy shortage that will become the biggest obstacle in the growth of industry in Pakistan. Government did not take any measures that could attract private interest in the power sector.

Auto industry in Pakistan can be held responsible for the problems faced by the people in purchasing cars. Government asked sector to expand itself as future demand will outpace the supply and hence industry will not be able to fulfill the rising demand of the population where per capita income and hence size of middle class will improve rapidly. Cars per 1000 persons which stood at as low as 7 in Pakistan was also the lowest in the region and indicated an increase in demand provided government's claims of higher economic growth in the future will prove correct.

The industry perhaps did not expect that optimistic economic projections will materialize in future and therefore did not expand their existing capacity. The demand due to higher economic growth increased as was forecasted by the government. The consumer banking that was relatively very aggressive since last few years further added fuel to the fire, thanks to higher liquidity after 9/11 and lower interest rates in the era of former governor state bank of Pakistan, Ishrat Hussain. This resulted in a supply shortfall in the country. The masses that were showered with money due to all of the above discussed factors were desperate to buy cars to improve their living style, but hey were forced to wait for delivery of their cars for months after paying the money in advance. It was a dream time for car dealers as they earned huge sums in form of own money for the quicker delivery of the cars. The car assemblers, on the other hand, not only operated at full capacity and achieved 100% sales to production numbers but also earned significant portion of their earnings from other income which was earned as interest on their huge reserves taken 3 to 4 months in advance before delivering the car.

Another factor that supported this phenomenon was the lesser number of players in the automobile sector in Pakistan. It does not only limit supply but also leaves consumers with lesser options in their decision for purchasing locally assembled cars. Volatile policies of the past governments and unavailability of a long term policy frame work for the auto industry hampered the entry of new players in Pakistan. Though the policies were very liberal in order to attract and facilitate foreign investors in any sector but they lacked a long term approach that could give birth to the local entrepreneurship in this sector. Our neighboring country without being very liberal adopted prudent policies and hence its auto sector is one of the driving forces of the economic engine.

The sector faced stiff competition when government allowed import of used cars and relaxed duties. As a result the undue premiums came down but it had a negative effect on current account which was in excess of 1 billion dollars. The industry which was very conservative and did not expand in past started protesting on these policies. Almost all the manufacturers announced their expansions and also forced Government to reverse its decision of relaxing duty on imported cars. The industry showed their will to expand the local capacity to 500,000 cars in next five years but also demanded a five plan that could ensure consistency in policies and could also build trust for further investments for expansion.

After many negotiations and rejection of Government's designed policy by the industry, the auto industry development program (AIDP) was finally approved by the Government in consensus with the industry. It gave a five year picture for the duties on CKDs and CBUs in the future. The industry welcomed the government's decision of reducing the time limit for the import of used cars from five years to three years. However, it resulted in the difficult times for those who were involved in trading. According to them, Government should have announced a time frame before implementing such a sudden policy change. They claimed that this decision has earned very bad reputation for the country and has badly hurt the credibility of local importers as thousands of the cars that were booked in advance are stuck on Japanese port.

As a result, the premiums also went up again in the local market. One of the government ministers recently warned the industry that government may again allow the import of up to five years used cars if industry will not control this situation. However, premiums are still high and no decision is expected in this regard due to strong lobbying of the local assemblers.

Pakistani consumers are not very quality conscious. The low purchasing price and after sale availability of auto parts at low prices is still the top priority while making their purchase decision. It shows that the market has not matured yet. It also became evident after the launch of most recent Honda civic model. The company made a very high quality car and hence its price was also higher. The sales were much lower as compared to the company's forecasts which resulted in a significant lose in the market share of the company. At the time when one could expect the market to mature and become more quality conscious, the interest rates have significantly gone up thus making the cost of financing more expansive.

A strong vending industry is the most important outcome of the growing auto sector in Pakistan. The reliance of local assemblers on the vending industry due to increasing deletion levels has been mounting with each passing day and hence it is helping a great deal in the consolidation of the later. However, there is a further room for improvement. The vending industry should strive hard and upgrade itself to make and supply the high tech auto parts to the assemblers. It will further improve the deletion levels but will also develop the local industry. It will also make earnings of the local assemblers less averse to the currency fluctuations as industry's import bill will decline due to more and more reliance on the local vending industry.

The industry seems to be moving in the right direction after the announcement of auto industry development program. The production of 500,000 units in future will not only meet local demand but will also enable industry to export. However, technology should be developed at home so that industry can become competitive both locally and internationally.