AUTOMOBILE INDUSTRY - THE DILEMMA OF GROWTH

SHAMSUL GHANI
shams_ghani@hotmail.com

Jan 14 - 20, 2008

THE BASIC QUESTION OF ECONOMICS

What to produce and how much? The answer to this basic question of economics depends in a particular economy on consumption level, producing capacity, export market for any surplus and socio economic constraints, if any. In the case of our automobile industry, the consumption level is a function of population and family income. We have a negligible size of export market due mainly to lack of a competitive edge. The producing capacity is variable and can be scaled up or down, should there be no economic constraints. There are no social constraints in owning or driving a car or a tractor or a bus (barring the fact that in certain areas of the country a vehicle must not be driven by a woman!), but there are a number of economic constraints.

THE BOOMING INDUSTRY

With an average GDP growth of 7.5 per cent during the last four years when consumption and investment levels have been on a constant rise, the automobile industry of Pakistan has flourished and still has a great potential for further growth.

The outgoing Prime Minister, Mr. Shaukat Aziz, said in February 2007: "The government attaches great importance to the growth and development of auto industry as it is a key driver of economic growth, technology transfer and a creator of jobs. The industry is playing a vital role in the economy and rightly called the mother of all industries and the engine of growth."

The following table outlines the growth pattern of auto industry.

VEHICLE

NOS. PRODUCED YEAR 2005-06

NOS. PRODUCED YEAR 2006-07

NOS. PRODUCED JULY - OCT 2007

Cars, Jeeps & L.C.Vs

153,248

161,195

66,714

Motor Cycles

603,084

681,752

327,806

Tractors

39,745

44,274

15,911

Trucks

3,746

3,655

1,115

Buses

625

758

421

When four month figures of 2007-08 are annualized and compared with the annual figures of 2006-07, the following inferences can be drawn:

1. Cars, Jeeps and LCVs production shows an increase of 24 per cent while the increase in motorcycle production during the same period has been to the extent of 44 per cent. This depicts an accelerated growth pattern and suggests peoples' marked shift from reliance on public sector transport to dependence on their personal transport. This trend has its own implications to be discussed under the next caption.

2. The increase in tractors production has been to the extent of 8 per cent. This is indicative of a sluggish growth in the all important agriculture sector.

3. On trucks production side, we see a negative growth of 8 per cent. This may add to the existing logistic problems making the transportation and distribution of agricultural produce and industrial goods yet more difficult. We boast of a boom in the auto industry, yet the all important segment that is truck making has been woefully neglected. Growth in this segment is indicative of an overall and balanced economic growth. In India 40000 trucks are produced every year as against a dismal number of few thousands produced in our country. India's truck manufacturing industry is controlled by Tata and Ashok Leyland. Now, international giants like Volvo and Daimler have taken to compete against the monopoly of these giants of India. Daimler had also plans to invest in the auto industry of Pakistan, but backed out on some technical reasons International car making heavy weights like Germany's Volkswagen, Japan's Suzuki Motors, Korea's Hyundai and United State's Ford and General Motors are also vying for a bigger market share in India.

4. Though the production of buses has registered an increase of 67 per cent, yet the absolute figures are far from sufficient to meet the transportation needs of masses.

THE GROWTH AND THE ECONOMIC CONSTRAINTS

The economic managers of the country have envisaged production of 500,000 cars and one million motorcycles by 2011. Following a sharp rise in demand for cars, the vendors and auto assemblers increased their investment in the auto industry thereby increasing the aggregate capacity from 97,000 units in 2002 to 223,000 units in 2006. The operations were also changed from single to double shift to meet the demand. One should have no problem with this scenario, but the theory of economic constraints compels one to ask some questions.

ARE WE SELF SUFFICIENT IN RAW MATERIAL, TECHNOLOGY AND LABOR?

In terms of raw materials; the answer is no. We require at least 4 to 5 million tons of steel to meet the target set for coming years. Our present capacity is only one million ton. The prices of imported steel are going up. The capacity of Pakistan Steel could be increased three fold but it will take some bold measures.

India's huge auto industry is fed by the Indian steel giants Mittal Steel and Tata steel.

In terms of technology, the answer is no. We have been trudging through a number of deletion programs without being able to achieve any thing of substance. During the last few years, productive money has been diverted to speculative markets instead of being used for capital formation.

In terms of labor, partly the answer is no. We have unskilled labor in abundance. Auto industry requires literate and skilled labor which we are terribly short on.

DO WE HAVE A COMPETITIVE EDGE?

The high production cost, lack of modern technology, the tariff structure for imported units and manufacturers' greed for higher profits make the indigenous production saleable only in the domestic market with ample demand. Locally produced 800 cc Suzuki Mehran has an ex-factory price Rs.360,000. Local manufacturer Adam Motors' Revo is selling at Rs.310,000. These are the lowest price cars in Pakistan having a dollar value of 5,000 to 6,000. Contrary to this, India's Tatas have recently launched the cheapest auto of the world having a price of $2,500 only.

For the reasons cited above, Pakistan's share in the $600 billion world auto market is only $50 million.

IS GROWTH CONGRUENT WITH OTHER ECONOMIC INDICATORS?

The growth of the different segments of auto industry itself appears lop sided. With the increase in population, the public transport sector has gone in disarray. Shortage of vehicles, lack of proper infra structure, absence of any workable mass transit system has raised the demand for cars and motorcycles to a high level. Most of the buyers have resorted to bank borrowing to solve their top priority problem - transport. The real family income has not increased to such levels as to allow them to out rightly own a transport vehicle. The other segments that are tractors, trucks and buses have not responded in line with the car and motorcycle segment. Moreover, auto industry's growth is not congruent with the over all industrial growth.

A proper infra structure that is good roads, modern railway tracks, highways etc. coupled with an efficiently run mass transit system afford a cheap mode of transport to the masses on one hand and economize on country's energy consumption on the other. Bank financed cars only induce a false sense of status and well being.