VENDOR INDUSTRY AT THE VERGE OF CLOSURE

DRASTIC CUT IN PRODUCTION BY ASSEMBLERS

SHABBIR H. KAZMI
Oct 20 - 26, 2008

Automotive parts manufacturers are at the verge of closure because whatever assembling units are producing is nothing but temporary suspension of production activity, which seems to be extending? If the situation prevails hundreds of units manufacturing parts and accessories would be closed and the estimated half a million people would become redundant and jobless. The closure would also add to non-performing loans of the banking sector.

Some of the critics may say that it is a very pessimistic narration of the prevailing situation but the data displayed at the website of Pakistan Automobile Manufacturers Association (PAMA) confirms gravity of the situation. Production of cars during July-September 2008 reduced to 23,974 compared to 45,904 during the same period in 2007. Worst hit was 1300cc and above cars, where production declined from 15,574 to 6,648 units. Similarly production of 1000cc cars declined from 13,387 to 6,528 units. Production of cars in 800-1000cc category declined from 16,943 to 10,798 units. Only production of pick-ups improved from 4,703 to 5,981 units. It seems that production of Hyundai Santro has been suspended because output was just 93 units in three months period compared to 888 units assembled during corresponding period of 2007.

According to Mohammad Ashraf Shaikh, ex-chairman, Pakistan Association of Automotive Parts and Accessories (PAAPAM), it will not be wrong to say that parts and accessories manufacturers are facing bleak future. Not only that half a million people would be rendered jobless but owners of these units would also incur huge losses. The parts manufacturers were told by the government to gear up to meet the requirement for the assembly of 500,000 cars per annum by 2012. Most of the units have already expanded the capacity, whereas the total assembly may not be more than 150,000 units during the year.

Ashraf was also of the view, for considerably long time the working environment has become too hostile for the industry in general and for the automotive parts and accessories manufacturers in particular. Depreciating Rupee, rising cost of steel, long hours of load shedding and sky rocketing electricity tariff in the country has turned even the most efficient units into loss incurring entities. On top of this, senseless hike in the interest rate is making very difficult for the manufacturers to survive in the highly competitive market. All the countries prepare there long and medium term plans and implements policies to achieve the stated objectives, whereas no such plans are prepared in Pakistan. Even if any policy is prepared by a government, its successors scrap it. Experts Advisory Centre, later on converted into Automotive Development Board came up with a plan. Some of its policies attracted a lot of criticism and necessary amendments in policies were made. However, bureaucratic hassles have not allowed the automotive assembly to stand on its own feet. The prevailing situation may cripple it to an extent that its revival may not be possible.

Interestingly, the governments around the globe formulate policies which attract foreign investment without hurting the local entrepreneurs? But the successive governments in Pakistan have been bias to the locals and operating industries. The present government is planning to establish new industrial estates but seems hardly concerned about the problems facing the operating units.

One fails to understand whether Pakistan faces inflation or recession but one thing is certain that the industries suffer from all sorts of adversities. The persistent hike in interest rates has certainly not helped in containing inflation but rendered the local manufacturers uncompetitive. Worst speculation in crude oil by the international fund managers pushed its price to a peak of US$ 147 per barrel but now the commodity is being traded at less than half this price. Since most of Pakistan 's imports are inelastic the country became the worst victim. While most of the central banks around the world were trying to bail out the local industries, front loading in Pakistan due to hike in interest rates, did not allow the local industries to achieve economies of scale. It seems that the country is being pushed to a stage where it's local industrial infrastructure would be destroyed and it would become a net importer of all the items, from fertilizer to wheat and from cotton to eatables.

It must be kept in mind that developing an integrated policy and protecting the interest of all the stakeholders is not an easy task. Adhocism and myopic policies have hurt the local industries the most. Be it Yellow Cab Scheme or Green Tractor initiative the plans have always hurt the local assemblers and in turn the manufacturers of part and accessories.

The policy planners must take a queue from the Indian success, it initially concentrated on developing local engineering industries and now manufacturing most of the leading automotive brands locally. The failure of Pakistan in indigenization has not allowed the local engineering industry to stand on its feet. The policy has always been tilted towards the assemblers.

Financial crunch and decline in auto financing may be the temporary phenomena but higher cost of production, duty on CKD kits and absence of indigenization plan are the factors plaguing the automotive manufacturing industry.

Another factor hurting the local manufacturers of parts and accessories is rampant smuggling under the disguise of second-hand parts and scrap. This billion dollar financial scam has been going on for ages. It is not only robbing the national exchequer but crippling the local engineering industry.

The policy planners must understand that engineering industry is the backbone of economy but Pakistan has not been able to do so. Pakistan has an elaborate textiles and clothing manufacturing infrastructure, but neither the key machineries nor the parts of these machines are manufactured in the country. It is time all the stakeholders join their hands and convince the government to take immediate corrective else by ready to become a net importer of every conceivable item.