OVERVIEW OF CROSS SECTION OF AUTO SECTOR
FOZIA ISHAQUE (firstname.lastname@example.org)
Oct 20 - 26, 2008
For the Pakistani automobile industry, 2008 started off on an unpleasant note. Giant auto manufacturers with almost 60% market share reported a declined of 61% in the net profit of auto assemblers (cars and light commercial vehicles only) to Rs 828 million in the quarter ended June 30, 2008 as compared to Rs 2.1 billion in the same period in 2007. Auto sales also witnessed drastic drop of over 51% from over Rs. 47.8 billion during last six months of the year 2007. The domestic cars sales have dropped by 42% on a year-on-year basis to 7,418 units this July, the first month of the current financial year of 2008-09, from 12,830 sold during the same period last year. The Pakistan Automotive Manufacturing Association (PAMA) reiterates auto sales fell alarmingly by 58% from 17,583 units sold this June on a month-on-month basis. The domestic auto sales are expected to fall by 30% to 50% this year if the existing market conditions don't change and improve. The auto sales are feared to drop to almost 1,30,000 units this year from the peak of around 200,000 units a couple of years ago.
Automotive industry in Pakistan started in 1950 and has gone through different phases of progress. It underwent thrived activity since the year 2000 as interest rates came down to record lows thereby encouraging banks and leasing companies to launch consumer financing. In 2005-06 car assembling went up to 160,500 units per annum from around 30,000 units production in 1995-96. Just in a matter of a decade, the car making went up by almost 430%. At that point in time during three to four years over Rs100 billion was invested in auto business. Out of this investment, Rs52 billion was invested in the assembling plants, Rs35 billion in the ancillary industry and remaining in the development of sales outlets. Resultantly Pakistan appeared on the global automobile business map as foreign investors; particularly the Japanese followed by Chinese came in a big way.
Presently the whole auto industry in Pakistan is exhibiting dismal performance which is largely in line with the economic slowdown. The declining volumetric sales amid rising costs are the main reasons behind this low level. The halt in auto financing facilities, political impasse, mounting inflation and rising car prices have led to a substantial decline of 14% in volumetric sales. Higher product prices, however, gave some support to the top line as sales fell by only 6%. Rising international oil and domestic steel prices, growing lawlessness, deepening political crisis triggered by promulgation of emergency on November 3, stronger yen and other international currencies are attributed by the industry as having combined adverse effect on their business. Adding to the problems is the increase in the cost of sales causing a 700bps decline in gross margins for the sector to 4.9%. The costs rise primarily due to 26% yen appreciation against rupee on year-on-year basis. Moreover, international steel prices increased sharply in the past one year causing rise in raw material costs. Hence, net profits for the sector declined from Rs 2.1 billion in April-June 2007 to Rs 828 million in April-June 2008, a phenomenal decline of 61%.
Like all industries, the auto industry too is increasingly coming under impact of a regressive tax structure, weakening rupee, domestic inflation and a host of other political, social and economic factors. Much of the problems of the industry can be attributed to the foreign trade liberalization that has been practiced with religious zeal in last eight years. The major factor for the huge decline in demand is said by the industry to be the sharp increase in prices by assemblers to pass on the impact of imposition of the 5% federal excise duty (FED) and 1%† increase in sales tax to 16% from 15% announced in the budget for the current fiscal. Moreover, implementation of the fixed rates of withholding tax (WHT) on the purchase of cars in the budget has also added to the cost of cars and other vehicles. The total impact of various taxes and fees as announced in the current year's budget is calculated to be in the range of Rs30,000 to Rs1,25,000 per unit depending on the make and engine capacity of the vehicle. The assemblers had also raised the prices on an average of 10% to 20% to factor in inflation and increases in their other costs. The rising prices of cars, galloping inflation, escalating cost of leasing and imposition of taxes ó which will generate little revenue for government but destroy the industry ó are responsible for the slowing demand for cars.
As a matter of fact till 2005-06 automobile tycoons were upbeat of their business and many of them planned Rs225 billion investment to push up annual car production to 500,000 by the year 2010-11. But by then, the consumer financing that had touched about 13% of total lending, started showing signs of strains. The interest rates of banks started going on the back of inflationary pressures and fuel prices too increased. Finally, law and order started getting worse .All these factors led to gradual withdrawal of banks from lending for auto financing, accumulation of debt defaults and a drop in sales of cars. Banks do not delineate precise statistics for missing cars or debt default amount but unofficial figures reflect that at least 65,000 to 70,000 cars are being searched throughout the country and the amount of stuck- up auto loans is not less than Rs15 billion. The auto industry is facing hard days ahead.
It is also believed that growth in sales of domestically-produced cars dropped off as the Pakistani car market opens up to imports, which are comparatively cheaper, although the effects are not likely to be felt immediately. However, the government should aim to protect the domestic industry by making the local auto industry more competitive, creating capacity for local design and innovation, domestic competition, human resource development and auto-cluster development.
Problems are manifold in auto sector in the wake of the receding economy. However, automobile industry of Pakistan has great potential and can achieve new heights provided that a balance is maintained between production levels of vendors and assemblers, stable policies, continuity of governmental policies and assistance in financing investment and taxation. The real challenge is the implementation of policies, assessment and monitoring, and to make efforts to keep it on the path as determined jointly by the government and the industry. Value-addition should be a national priority to improve Pakistan's position on the value chain as well. Moreover, a long-term, well defined auto policy is required that would provide investors a predictable and transparent environment and would facilitate long-term investment, encourage growth and competition, and enhance competitiveness.