IMPACT OF BUDGET ON AUTO INDUSTRY

S.M. ABBAS ZAIDI,
Research Analyst
, PAGE
June 22 - 28, 2009

The budgetary measure of the removal of five percent federal excise duty (FED) on sales of locally produced vehicles would result in easing of automobiles prices. Automobile companies have passed on the impact of the duty waiver to buyers in shape of price cut. The FED was charged at the retail level and was mentioned on sale invoice at the time of delivery. There appeared a reduction of Rs 50,000 on passenger car with retail price of one million rupees and Rs25,000 on Rs500,000 ex-factory price.

A subsidy of Rs 4 bn for farmers for purchasing tractors under Benazir Tractor Scheme would boost the sales of local manufacturers. Increase in withholding tax on imports to four from two percent is adjustable in the input cost for the manufacturers and it will not make any negative impact. The input cost would however rise with the increase in power rates after withdrawal of subsidies on electricity. The buyers of Suzuki car may get further relief as the company had already reduced the prices by Rs 2,000 to Rs 55,000 in April last. But, customers of Toyota cars may not benefit much as Indus Motor Company had already enhanced prices by Rs 30,000 in May.

AUTO SALES DURING 2008-09

The car sales totalled 54,072 units in July-March 2008-09 as compared to 107,262 units in the corresponding period last year. However, March 2009 witnessed a mixed trend. Figures released by Pakistan Automotive Manufacturers Association (PAMA) revealed negative growth in vehicles sales during the period under review. Dewan Motors' Hyundai Santro (1,000cc) sales dropped by 85 % to 266 units from 1,745 units in the corresponding period of last fiscal year. Suzuki Liana sales plummeted by 72.4 % to 668 units from 2,420 units, while Suzuki Alto sales fell 63.6% to 4,970 units from 13,685 units in July-March 2007-08. Sales of Suzuki Cultus and Suzuki Mehran fell by 62.43 and 62 % to 7,266 and 10,187 units as compared to 19,342 units and 26,675 units, respectively. Sales of Daihatsu Cuore also plunged by 44.5 % to 4,810 units as compared to 8,671 units. Toyota Corolla recorded 29 % fall in sales to 17,260 units from 24,223 units. A total of 3,659 units of Honda Civic and 4,986 units of Honda City were sold in July-March 2008-09 as compared to 4,146 and 6,355 units, a decline of 12 and 21.5 %, respectively. The monthly break-up of sales data showed that Toyota Corolla sales improved to 2,606 units in March as compared to 2,444 units in February while Honda Civic and Honda City sales rose to 457 and 1,202 units against 428 and 795 units in February. The sales of Suzuki Cultus and Daihatsu Cuore fell to 371 and 397 units in March from 412 and 524 units in February, while sale of Alto and Mehran rose to 255 and 678 units as compared to 170 and 598 units in February. Sale of Hyundai Santro and Suzuki Liana jumped to 79 and 45 units from 58 and 33 units in February.

PRODUCTION & SALES

VEHICLES SALES PRODUCTION
  JUL'08 - MAY'09 JUL'07 - MAY'08 JUL'08 - MAY'09 JUL'07 - MAY'08
1300 & ABOVE cc 35,636 45,551 34,764 45,601
1000 cc 14,683 43,560 14,839 45,347
800 cc & BELOW 1000 cc 25,846 60,416 26,596 61,873
TOTAL CARS 75,293 149,527 77,071 152,821
TRUCKS 2,721 4,741 2,766 4,370
BUSES 3,311 5,807 3,339 5,427
LCVS, VANS & JEEPS (4X4) 14,021 19,063 15,324 19,616
FARM TRACTORS 53,567 46,804 53,528 47,607
MOTORCYCLES & THREE-WHEELERS 443,775 594,074 443,679 593,579
Source: PAMA

CHALLENGES FOR AUTO INDUSTRY IN 2008-09

High prices and costly leasing/financing have depressed the demand for new cars, which was evident from 49.5 % plunge in automobile sales in the first nine months of this fiscal year. A substantial and consistent growth of auto industry for a good period in the recent past had happily placed the industry at a reckoning position in the economy which came to be almost three percent of GDP and 15 % of the large-scale manufacturing (LSM).

There is a consensus that trend of growth led to commitment of more investment by the assemblers in the expectation of growth in production numbers as highlighted in the government document known as Auto Industry Development Programme (AIDP).

The bad days started when things started to get infection from increasing cost of inputs and when consumer financing started becoming expensive and multifarious levies imposed on the industry in 2007-08. Initially, the industry had survived the adverse impact of this policy presumably due to then prevailing buoyant economic conditions. When the buoyancy subsided in the wake of worldwide economic and financial crunch and further taxes were imposed in 2008-09 (like five percent federal excise duty on locally produced cars), the industry's ability to fight the adverse had frittered away. The concurrent weakening of currency and rising inflation and sale suddenly came down to almost half of its size with widespread closures and job losses.

CONCLUSION

High inflation and weakening of the currency has hit the industry badly thereby dissipating the price affordability of the consumer. The situation is further aggravated by higher interest rates, resulting in lower demand in leasing/financing. However, the government is trying to support the automobile industry with the removal of the five percent FED, which will hopefully revive sales growth of automobiles.