REVIVING PAKISTAN'S AUTOMOBILE INDUSTRY

SYED FAZL-E-HAIDER
Mar 02 - 08, 2009

Pakistan's automobile industry is an export driven industry attracting both local and foreign investments. Presently, the declining sales and production volumes predict a bleak future for the country's auto industry, which is still waiting immediate remedial measures from the present government. Owing to the present slump in the industry, several companies are on the verge of bankruptcy and are feared to be closed down any time. The improvement in performance of auto sector is subject to an economic turnaround in the country.

The ongoing global financial crisis has had an adverse impact on the once booming auto industry. The increase in raw material prices has increased the input cost. Similarly, the severe deterioration of Pakistan's macro economic fundamentals has also crippled the growing industry over a period of past one year. Over 30 percent depreciation of local currency against the US dollar, widening trade deficit, rapid erosion of foreign exchange reserves, rising inflation and ballooning oil import bill have been the factors that adversely affected the country's booming auto industry.

Over two dozens Pakistani manufacturers and assemblers have technical collaborations with Japanese and Korean manufacturers. Largely Japanese dominate the market and Korean manufactures like Suzuki, Honda, Toyota, Hino, Hyundai, and Mazda. The major segments of the industry include two wheelers, cars, jeeps, wagons, trucks, buses, and tractors. Under former government of Prime Minister Shaukat Aziz, the industry had set the target of manufacturing half a million cars and one million motorcycles by 2010. Under previous regime, many banks were providing auto financing and the country witnessed car sales boom during past three years.

Pakistan Automotive Manufacturers' Association (Pama) comprises of 21 local companies, which are working in association with multinational companies for the assembly and manufacture of vehicles. According to the PAMA statistics, cars and light commercial vehicles (LCVs) sales drastically declined by 44 percent in the first quarter of FY 2009 (27,159 units) compared to first quarter FY 2008 (48,559). On annual comparison, the sales of locally produced cars and LCVs, that had previously recorded sustained growth over the last five years, declined by 8 percent, from 204,121 units in FY 2007 to 187,412 units in FY 2008.

The government has not played its supportive role in strengthening the auto industry, which had attracted huge foreign investment during past three years. Increase in different taxes including sales tax and withholding tax at registration stage and inconsistent policies by the government continued to hurt local automobile sales. During past three years, auto financing has been the main driver for auto sales. Presently, the financing companies have put restrictions on loan disbursement. Similarly, higher interest rates have also played havoc with rising sales volumes. This resulted in decline in profits of the auto manufacturers.

The government should intervene immediately and take remedial measures to save the local auto industry. It should abolish 5 percent federal excise duty imposed on cars above 850 cc and ban import of used auto parts and vehicles. It should withdraw 35 percent L/C margin on imports and 2.5 percent withholding tax at registration stage. The government needs to formulate a consistent policy for vibrant growth of automobile industry in the country. The Auto Industry Development Plan (AIDP) needs to be implemented to attract foreign investment.

SEEKING CHINA'S HELP

Pakistan may seek help from China, its closest friend in order to revive the local automobile industry. China's vehicle market is the world's third largest behind the United States and Japan, but the after-market segment is in its relative infancy. In the United States and Europe, after-market sales account for roughly 70 percent of the auto industry. According to an estimate, after-market sales accounted for one-third of the total industry in 2002 in China. It totaled roughly $23.7 billion in 2004. The sector has been growing 8 percent a year. It is on the track to reach $31 billion this year. China's auto market has gone into overdrive in the last five years as millions of Chinese bought their first cars. Now, the market for replacement parts and service centres is racing to catch up.

Established in June 2003, Dongfeng Motor Co., Ltd is China's first joint venture enterprise in motor vehicles with a complete series of trucks, buses, commercial vehicles, and passenger vehicles. It was formed because of strategic cooperation between Dong Feng Motor Corporation and Nissan Motors Co. It has a registered capital valued at US$2 billion. The Dongfeng brand is used for its commercial vehicles and the Nissan brand is used for passenger vehicles. Two years back, a visiting delegation of the Dong Feng had evinced interest in entering into joint venture with the Pakistan Automobile Company (PACO). The Chinese company wanted to introduce its products- trucks, pick-ups, and buses in Pakistan according to the market demand.

The former government had decided to revive PACO, as a joint venture with Dong Feng, rather than selling it to the private sector. The Dong Feng was negotiating to acquire 51 percent shares percent shares of the company. Similarly, The Chinese auto manufacturer-Zhengzhou Hongda Automobile had also shown interest in setting up a plant in Pakistan for manufacturing of trailers initially and later specialized vehicles. In the third phase, it had planned to start manufacturing light trucks. The Chinese car manufacturer "Chery" has also been negotiating with local companies to build car-manufacturing facilities in Pakistan. According to its plan, the local partner will invest in building plants and buying manufacturing equipment, whilst Chery will provide engines and parts to produce the cars.

With the entrance of Chinese manufacturers, the industry has already gone through a major phase shift over the past few years because low-priced Chinese products have created a situation of cutthroat competition in the market. With the entrance of Dong Feng, one of the biggest automobile manufacturers in China, it would be harder for the Japanese and Korean manufactures to maintain their dominant positions in the country's market. China is already giving tough competition to Japanese bike makers in Pakistan. Out of 53 units assembling two wheelers in the country, 50 Chinese units are competing with three Japanese assemblers units. Owing to the rising competition with their Chinese counterparts, the Japanese bike makers have slashed prices of various models for improving their sales volume, which have been on the decline for the past two years.