AUTO INDUSTRY WITNESSING SLUM

SHAMIM AHMED RIZVI
May 19 - 25, 2008

After enjoying a boom for about 5 years, Auto Industry is now witnessing a slum. Auto sales fell to Rs 47.8 billion during the last six month from Rs 49.6 billion during the previous six months adversely affecting the profitability and impacting the car production.

Car production would be another major industrial target that is likely to be missed this year. Industry experts are of the view that it would be impossible for the car production to cross the 200,000 units mark as envisaged for the current year. According to them it would be a miracle if the industry could achieve the last year production target they estimate that car production this year would be about 150,000 units that would be 25 percent below the target. There are many reasons for this shortfall in demand such as soaring inflation, rising costs, growing lawlessness, deepening political crisis, rising oil prices and above all a very cautious approach adopted by banks for car financing because of increasing defaults. The demand for car financing has also declined.

The automobile and allied industry in Pakistan has developed at a highly impressive rate during the last 6 years because of liberal and pro-industry policies of the government. The leasing and car financing schemes launched by commercial banks have also contributed a lot in creating fresh demand for vehicles promoting manufacturers to enhance their production capacity through additional investment to expand their plants. As a result the average production of vehicle had gone up by almost three and half times during the last 5 years as in evident from the following chart.

VEHICLE PRODUCTION IN PAKISTAN

FIGURES IN UNITS

 

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

Cars

40,088

62,073

98,461

126,405

160,642

160,496

Trucks

1,134

1,929

2,022

3,204

4,518

4,410

Buses

1,086

1,296

1,380

1,762

825

993

LCV

9,055

12,548

14,896

24,733

32,053

38,490

Farm Tractor

23,801

26,240

35,770

43,200

48,887

54,098

Motorcycle

120,627

165,105

303,262

416,189

520,124

467,267

Total:

195,791

269,791

455,791

615,493

676,049

725,754

As was feared by experts neither banks could continue their liberal consumer financing schemes nor could the demand for consumer financing maintain its growth momentum. As a matter of fact it started declining last year if compared to its growth rate of 27 percent in 2006.

It was recently reported in the media that bankers were finding it difficult to make recoveries of the stuck up consumer loans of Rs. 10 billion against the recently financed 15000 cars. Low interest rates, easy credit availability until recently was the big factor in the recent boost to auto sales. Now that the pent up demand has been met; bank interest has started to rise, and the disposable income of the consumers has begun to shrink because of high inflation, there is a big question mark on the ability of the market to maintain past momentum.

The current economic scenario of the country has been a cause of serious concern to economic managers. There is a net trade deficit of $ 16.8 billion at the end of 10 months of the current fiscal. Government's deficit financing on the current account has reached alarming proportions and the unemployment seems to be getting out of hand. All these key indicators do not augur well for the planned level of nation's GDP to be achieved.

The expansion of auto market is largely dependant upon higher disposable income of middle class consumers. The prevailing inequitable system of wealth of distribution and unjust taxation system with high proportion of indirect taxes are increasing the prevalence of poverty in the country. There is no improvement in the balance of payments, foreign exchange reserves and GDP on the vast majority of the poor and middle class people in the country. The size of consumer finance market depends on the level of prosperity and consumers" capacity to repay debts. Similarly in auto financing, it is important to evaluate consumers" capacity to repay but many banks have ignored rule which led to high default rates.

"Initially when auto finance product was introduced by many banks with "no documents required", only NIC and two references were enough for the approval of auto financing," said a banker. One of the sources disclosed that only Bank Al-Falah's auto losses were around Rs350 million and that of UBL's auto losses are even higher. Such huge losses compelled banks to critically review their products.

In order to minimize the risk of defaults, banks have become more cautious and they have restricted the idea of "no documents". It was very easy to get an auto financing with least documentation but at present complete evaluation and proper assessment of the customers" ability to repay is considered before loan is sanctioned. It has become mandatory to provide bank statements, pay slips, CNIC, references and the most important is the Credit Information Bureau Report which contains details of borrowers" all previous loans record and capacity to repay.

Insurance companies have made it mandatory for the customers to avail car tracking system at the time of auto financing from banks to curtail their theft losses.

Many conventional banks have stopped or either slowed down auto finance because of the high rate of defaults. Analysts believe that recovery of auto loans was one of the major concerns for banks. Political turmoil in 2007 was another reason which also affected car sales.

As usual the auto industry has started demanding more concessions and protection from the government in the form of tax concession and ban on the import of all kinds of cars both economy and luxury type. According to them such immediate steps are must to save the auto industry from collapse.

All these proposals are under consideration before the budget committee which was then working under the guidance of Finance Minister, Ishaq Dar of PML (N). After his resignation there is a total confusion in the Ministry of Finance including the budget cell. However, a source told this correspondent on condition of anonymity that there was almost a consensus in the committee that as a part of over all policy of reducing the import bill, imports of all luxury items including expensive car should be banned or prohibitively taxed. Even import of second hand car may be stopped of few years. However final decision would be taken by the new finance ministry as per his priorities.