PAKISTAN'S AUTO SECTOR FACING SLUMP DUE TO HOST OF PROBLEMS
Oct 20 - 26, 2008
After registering unprecedented growth in the recent years, the country's auto sector is presently facing slump on account of host of problems such as import of foreign assembled vehicles, depreciation in Pak rupee, high inflation, high refinancing rate, decline in demand, cumbersome procedure of car financing by banks and rising prices of four-wheelers.
Currently, the country's auto industry is passing through a phase of consolidation. After registering an average growth rate of 40 percent from 2003 to 2006, the industry growth decelerated to 9 percent in 2007 and a marginal growth of mere 2.8 percent in 2008. The liberal policy to import re-conditioned cars badly affected the growth rate.
The data of Pakistan Automotive Manufacturers Association (PAMA) shows decline in car sales 4.2% in FY08 and stood at 164.65k units as against 171.79k units in FY07. The low price cars category was the beneficiary of this shift in customer preference. The cars with engine capacities of 801cc to 1299cc registered a decline compared to last year. The auto sector in general has witnessed a slowdown despite the fact that two to three times auto assemblers increased the car prices last year in order to support their declining gross margins.
The auto assemblers have linked the price-hike of locally assembled vehicles to rising prices of steel components and appreciation of yen against the rupee, which pushed up the production cost. Further, the car financing became more expansive due to increase of 200bps in discount rate in FY08. As a result, there was a slowdown in car financing amid rising mark up rates and tight documentation of car financing due to significant rise in NPLs of the banks. The rising trend of fuel prices also forced the new buyers of small cars to switch to motorcycle mainly due to cheaper cost and low fuel consumption.
Among different engine capacity cars, sales volume of low engine capacity cars i.e. 800cc was declined nominally 0.6% in FY08 over FY07. However, sales volume of high engine capacity cars i.e. 1000cc and above 1300cc was declined 11.6% and 15.6% to 48,887 units and 50,824 units in FY08 from 55,295 units and 60,190 units respectively in FY07. Federal excise duty of 5% imposed on import as well as locally manufactured cars with engine capacity above 850cc in budget 2008-09 has also increased product price, further dampening the already dwindling auto demand.
On overall basis, the auto industry products showed compounded growth rate of 50%, during last five years, out of which the cars registered growth rate (41%), Motorcycles (58%), LCVs (37%), Trucks (41%), and Tractors (20%). Since Pakistan is an emerging market for auto sector, with potential to develop certain components, therefore, enabling business environment such as zero duty on import of all kinds of inputs for parts manufacturing and availability of infrastructure including the human resources are advantages. The auto industry had become fast growing industry consisting around 72 assembly plants and 600 component manufacturers. During 2005-06, 1 million units of cars, buses, trucks, LCVs, motorcycles, and tractors were manufactured in Pakistan. Cars production stood at 160,642 during last financial year with a target to touch the mark of 500,000 in 2010.
Market sources told PAGE that the auto industry has the potential for development of entire engineering sector. It is responsible for increasing production in the other related industries including plastics & rubber, fabricated metals, auto parts, advertising, textile, aluminum, steel industry, painting & coating, glass, advertising, copper and brass.
They said the auto sector growth in Pakistan in recent years also led to tremendous growth and investment in the down stream vendor industry. The local production of parts and accessories added manufacturing facilities apart from creating new employment opportunities and generating additional revenue for the government. However, slump in business of auto sector and high refinancing rates also added problems for the vendor industry. Those associated with the vendor industry had expanded their manufacturing units, but now they are also facing problems due to less export orders, high cost of doing business and depreciation in Pak rupee, they added.
These sources further said that several vending units were closing down owing to frequent and long electricity outages, costly raw material and duties, excise duties, sales tax, CVT, advance income tax etc.
Moreover, the business leaders have asked the government to take immediate and concrete measures to control deteriorating law and order situation, which is hurting the whole business atmosphere and nobody would be ready to put money in any new venture if the situation remains the same.
The LCCI President Mohammad Ali Mian, Senior Vice President Mian Muzaffar Ali and Vice President Shafqat Saeed Piracha suggested to the government to expedite the intelligence network besides further strengthening the patrolling of officials of law-enforcing agencies.
They were of the view that the government must take the business community into confidence and take some concrete measures to help stabilise the country's economy, which is facing host of problems.