Dec 17 - 30, 2007

Today, the vending industry for automotive sector is facing numerous challenges, causing serious concerns about its further development, if not that of its basic survival.

The automotive sector has shown phenomenal growth during recent years, having produced 160,496 cars during the year 2006-07, which is estimated to be seven-fold increase over the past decade. During first quarter of the current fiscal year (July-September 2007) a total of 41,550 cars, 4,993 light commercial vehicles (LCVs), 971 trucks and buses, 11,574 tractors and 139,267 motorcycles were produced at various plants located countrywide. In fact, the number of cars and LCVs produced during first quarter of 2007-08 is more than annual production of these vehicles at any given yesteryear until 2001-02 when industry produced 40,088 Nos.

OVERVIEW: At present more than 25 automotive industrial units are engaged in the assembly/manufacturing of cars, LCVs, trucks, buses, motorcycles and tractors. These units are either world-class Original Equipment Manufacturer (OEM), such as Suzuki, Toyota, Honda and Daihatsu cars and Hino, Nissan and Volvo trucks and buses, or independent manufacturer that include Master trucks and Fateh-Hero and Sohrab motorcycle assemblers. The Japanese OEMs dominate the automotive sector, whereas the Chinese have entered recently in a big way in the assembly of LCVs and motorcycles.

Logically, the vending industry should have been benefited proportionate to the growth of automotive sector. But it did not happen. Rather, there has been regression. It is reported that there were over 200 vendors supplying parts and components to the largest assembler of vehicles in Pakistan until 2001-02. Now, when the production of vehicles has almost doubled, the number of vendors has decreased to almost 100. The situation is attributed to the fact that vendors were getting higher orders because of more volumes but the prices offered to the vendors were extremely low and unrealistic.

Also, the OEMs do not allow the vendors to supply parts they manufacture for the OEMs in the local after-sales market, which is growing fast. The other constraints of the vending industry include stagnation in sales volume, roll-back of locally produced parts, forced price reduction and reversal of local content in new models. Of late, there has been problem of availability of raw materials to the vending industry, in particular coke pig iron from Pakistan Steel.

The vending industry for automotive sector, though still in developing stage, is dynamic and well established. Currently, there are over 1,250 industrial units engaged in manufacturing of components, parts and accessories for cars, buses, trucks, tractors and motorcycles, with an investment of $ 1.5 billion, providing employment to about 40,000 workforce. Out of these, 500 vendors are registered with the OEMs. The industry has saved foreign exchange to the cumulative level of $ 280 million in terms of import substitution, having played a key role in indigenization of major components under the deletion program for the automotive sector.

ACHIEVEMENTS: A major breakthrough in the export market has already been achieved and current yearly exports of automotive parts are to the tune of $ 25 million. A declining trend however is observed in the performance of the first quarter of 2007-08, as export of automotive parts decreased by over 12 percent compared to corresponding period of last year. Export market includes countries like USA, Italy, Belgium, France, Holland, Spain, UK, Poland, Iran, Sri Lanka, Turkey, Bangladesh and UAE, which speaks of high quality of locally produced parts. In particular, there is worldwide acceptability for Pakistani parts available for Massey Ferguson and FIAT tractors.

There are over 2,000 components and parts constituting assembly of a vehicle. The vendors and sub-contractors supply most of these parts and accessories primarily to the vehicle assemblers. In Pakistan, the OEMs and other assemblers use the original components and parts produced by vendors for assembly under deletion program. These parts constitute 56% to 70%, weight-wise and item-wise, of total CKD kit in case of cars and over 80% in tractors, though of much less by value in percentage. Small but critical hi-tech components, of higher value, are being produced and supplied by the OEMs themselves as a matter of policy.

The vending industry manufactures and supplies a large variety of items like pistons, engine valves, gaskets, camshafts, shock absorbers, steering mechanism, cylinder head, cylinder liners, wheel hubs, brake drums, wheels, bumpers, instruments and instrument panels, gears of all type, lights, doors and door locks, radiators and auto air-conditioners etc.

The industry has technical collaboration with Showa Corporation (Japan) and Kayaba Industry Co (Japan) for the manufacturing of shock absorbers, whereas radiators are being produced under license from Toyo Radiator Co (Japan) and UE Automotive Manufacturing (Japan). Likewise, NGK of Japan has provided technology for local production of spark plugs, and Hamana Buhin Kogyo (Japan) for propeller shaft and gear, shift lever and other components.

PROBLEMS AND CONSTRAINTS: Pakistan Association of Automotive Parts & Accessories Manufacturers (PAAPAM) alleges that the OEMs and commercial importers were involved in malpractices in the import of auto parts, as they bring these parts at lower than prescribed rate of tariff to save duty. Deletion program for automotive sector has been phased out under the WTO regime and replaced with the tariff-based system, effective 1st July 2006. Parts indigenized, or "deleted", by June 2004 have been placed at higher rate of custom duty, whereas parts not indigenized, or "not deleted", would be allowed at CKD rate of custom duty.

Apparently, there is no check on the OEMs on declared value of "deleted" parts that are importable at higher duty. Thus, supply of output of the vending industry to the vehicle assemblers is not optimized. On the other hand, the assemblers claim that technological level in the indigenous manufacturing of the auto parts remains low and quality standards were not strictly adhered to by the vending industry.

The vending industry is unable to availing facilities under the State Bank of Pakistan scheme for providing finance to engineering sector at concessionary rate for enhancing their production capacity. Since most of the vendors belong to the SME sector, with low-volume and low-value exports, they can not meet the condition of exports of $ 500,000, the limit fixed under the scheme.

There is nothing salutary proposed for the enhancement of export of auto parts either, as far as recent measures adopted by the government are concerned. An undue financial burden has been placed on the exporters; with the implementation of Sales tax Notification SRO 824(I)/2007 dated August 16, 2007. Before effectiveness of this SRO, all input tax paid by the exporters was adjusted from output tax. But, according to the new rules, only a part of input tax, that is, related to domestic taxable purchases (goods and services), is now adjustable. The remaining part of the input tax can be claimed through a refund application only, which is a time-consuming process.

FUTURE OUTLOOK: The government has recently approved the Auto Industrial Development Program, which outlines a five-year roadmap extending policy incentives to attract investment for achieving targets set for the automotive sector. According to the projections, production capacity of the automobiles would reach 500,000 mark by 2011-12, envisaging an additional investment of US$ 3.75 billion.

This will result in 32% growth of automotive sector increasing its contribution to the GDP from current 2.8 percent to 5.6 percent projected within a period of five years. With a view to sustain rapid growth of the industry for long, through innovative and competitive development, it is planned to establish two automotive clusters, each in Karachi and Lahore, for which the land has been acquired by the government.

It is yet to be seen as to what is in store for the promotion of the vending industry in the Auto Industry Development Program that is focused on providing incentives to the OEMs and other vehicle assemblers. The document though covers promotion of investment in the production capacities of auto parts manufacturing and improving the technological level and quality of products, specific measures to achieve the objectives have not been explicitly outlined. Instead, the government would like the OEMs to motivate their international vendors to manufacture in Pakistan through joint ventures.

CONCLUSION: The implementation of such measures is likely to deprive a large number of local vendors, who mostly operate in the SME sector, to continue to get their increased share of parts and components. Furthermore, there is no indication to addressing the issues the vending industry is confronted with at present, largely impeding its growth.

A recent report, funded by the European Union, on the automotive parts sector in Pakistan has recommended the government to encourage vendors with grants to go for international accreditation and certification. It is emphasized in the report that the government need to provide funds at individual firm level for technology transfer and replication of modern machines, developing linkage with international machinery suppliers and hiring advisor/consultants with matching grants on the basis of output, productivity, efficiency and operational performance improvements.

Until the time the vehicle assemblers realize that improving the vending industry would directly benefit them in terms of lower cost, timely delivery and improved quality, the government need to extend due support to the local vendors. Pakistan is considered a low-cost manufacturing destination and has the potential to become part of the OEM's global supply chain for automotive parts and components.

(The writer is former Chairman of State Engineering Corporation of the Ministry of Industries, Production and Special Initiatives, Government of Pakistan).