AUTOMOBILE SECTOR - FACING SLUMP SITUATION
SHAMSUL GHANI (email@example.com)
Aug 18 - 24, 2008
Growth was based on increased consumption rather than on any industrial breakthrough with the country in the grip of political turmoil and economic uncertainties, the stock market has acted as a true indicator of the events taking place all around. A fall of 36 percent during a short period of four months is what we should really expect in return of what we have been doing. A political change at the cost of a derailed economy and a crumbling social order is an achievement only insane nations can be proud of.
The Auto sector, like other sectors, recorded sizeable value diminution. The Assembler segment dropped in line with the KSE-100 index, whereas the Parts & Accessories segment overstepped the KSE-100 index fall level. When compared with the two other major sectors namely Financial and Oil/Energy sectors, the Auto sector ended up as a better performer than the Financial sector which recorded a fall of 44.64 per cent, and as a worse performer than the Oil/Energy sector which recorded a drop of 26.82 per cent.
TABLE - AUTO SECTOR COMPARED WITH OTHER SECTORS ON STOCK EXCHANGE
Rs. In Million
AUTO PARTS & ACCSR.
The comparison shows that the auto sector is not very speculative from stock market perspective. But also it is not as resistant as the oil and energy sector. The recently experienced slump in the car business may further depress the stock values of companies predominantly engaged in the business of car manufacturing. Our auto industry has no export potential. The high production cost, the lack of modern technology and local manufacturing facilities, the tariff structure for imported units and manufacturers' greed for higher profits render the indigenous production suitable for sale only in the domestic market. That is why the demand and sales pattern of local market remains the sole determinant of auto stock prices.
With an average GDP growth of 7 per cent during the last five years when consumption and investment levels recorded unprecedented rise, the automobile industry of Pakistan got a boost in collaboration with the financial sector which took care of people's financing need through consumer and lease financing. We were producing around 30,000 units of cars till 1995. These numbers ballooned to 160,000 by the mid of 2007. With Rs.100 billion investment in the car manufacturing during the boom period 2003-2006, the auto makers earned huge profits by expanding capacities in the wake of rising demand triggered by easily available consumer finance. It is prophesied that the auto making industry still has many milestones to reach and plans are put on anvil to invest further Rs.225 billion in the industry to roll out 500,000 units by 2010-11.
These hurriedly thought-out plans failed to factor in economic and social fallouts of an uncontrolled auto market growth based on increased consumption rather than any industrial breakthrough. The lavish auto finance put the financing institutions in a sorry pickle when mounting defaults started to raise their ugly heads. With around 500,000 units produced and sold during the last three years, the country's major cities have changed into urban slums. The overcrowded roads, frequent traffic jams, lack of parking space and growing number of road accidents are some of bitter fruits of unplanned lop-sided growth of auto industry particularly car manufacturing sub-sector. Lop-sided because the production of tractors trucks and buses has not registered the same level of growth as the car manufacturing has. Manufacturing and sale of tractors is indicative of well being of agriculture sector and the progress of transport and logistics is measured by the increase in manufactured and sold units of trucks and buses.
HAPPENING OF THE INEVITABLE
The inevitable has happened. The political uncertainties, the high auto finance default ratio, the sky rocketing oil and CNG prices, the enhanced duty and tax rates for auto buyers, the influx of used imported cars and the fast shrinking disposable incomes have brought about the threatening slowdown in the local car business. The FY08 has recorded an eleven per cent drop in car sales, whereas the month of July alone has recorded a drop of 55 per cent vis-‡-vis the month of June-08. Perhaps this is high time we take stock of the situation. We will do well to rethink and rationalize our auto policy. Having great potential auto industry needs to be developed in line with our economic priorities.
The focus needs to be shifted from car manufacturing to tractor, trucks and bus manufacturing. The motorcycle manufacturing is constantly picking up and will continue to do so. A motorcycle is the most cost effective mode of transport devoid of any semblance of luxury. This segment should be allowed to grow at its own pace. We can not achieve a major breakthrough in agriculture without the help of modern farm technology. Tractors and allied farm vehicles are major components of modern farming systems. The industry must focus on the production of low-HP tractors that can be leased out to small farmers with the intermediation of banks. The production of trucks and buses also needs to be jacked up to solve problems of logistics and public transport. The banks and financial institutions have overly indulged themselves in the economics of consumption through personal and car loans. They must now involve themselves in the more promising economics of agriculture and industry by diverting their resources to the financing of agriculture, logistics and public transport vehicles. This will ensure a sustainable growth for both auto and financial sectors besides doing a lot of good for the overall economy.
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 have gone and are still going up. We will have to use our raw material options very judiciously by producing an optimal mix of auto units. On technology front too, we lag far behind. We have gone through a number of deletion programs without achieving much. We now need to attract local and foreign investment towards capital formation. A broadened industrial base capable of delivering goods of industrial value is the only answer to all economic dilemmas, auto industry being no exception.