AUTO INDUSTRY

INDUSTRIAL DOWNTURN DAMPENS PASSENGER CARS DEMANDS

KANWAL SALEEM
July 06 - 12, 2009

Current business recession and other political issues confronting the country have hit Pakistan's car sector adversely.

The automobile industry contains heavy investments and along with the assemblers, it has a huge part of manufacturing. Major employment is in fact at manufacturing level.

Experts of auto sector told PAGE that the economic downturn had touched closely the lower middle class families, and thus affecting the demand for small cars. "Over the last five months, vehicle sales in this category have been almost negligible when compared to the last year. Overall a 65% reduction is evident."

According to them, major reasons for decline in sale of four wheelers are increase in mark up from a low of 6% to 20%, tightening of consumer finance eligibility conditions by the banks and increase in four-wheelers prices by local assemblers after rupee devaluation, and low production and high input costs.

According to experts, the auto industry, the government of Pakistan, and society has lost the following to downturn:

- Unemployment has increased by 50,000+ (estimate PAAPAM only);

- Federal government revenues in the shape of custom duty and sales tax has substantially decreased;

- Provincial government revenues have also been reduced; and the APM Engineering Industry has virtually stopped development of new technologies.

The industry sources are of the view that interdependency of the parts manufacturers make them highly vulnerable if such a low business cycle exists for long.

The industry people urged the government to intervene to ensure that the auto companies, which are the backbone of the engineering sector of Pakistan, remain solvent. They also proposed following package for the industry:

- The Engineering Development Board, MOI&P shall be monitoring and implementing department;

- OEM's shall register with SBP/EDB;

- SBP shall intimate the banks for offering of Special Category markup on specific vehicles;

- The GOP shall compensate any difference in markup to the banks via the SBP;

- Only local assembled vehicles shall be eligible for the Special preference markup facility;

- Mark up rates shall be dependent on the price and local content of the vehicle;

- Any vehicle that currently does not qualify for the scheme can enter if it fulfills the requirements;

- The local content list shall be compiled;

- The list shall be a component specific list and not based on percentage or any previous data of local content;

- The list shall be prepared under the supervision of the EDB, AIDC and revised every year to ensure maximum benefit of local employment and industrialization to Pakistan;

- All components under SRO 593 shall be part of any car eligible for this scheme;

- Where in future the Markup-Kibor rate is lowered then the above suggested rates shall be adjusted by SBP, which shall ensure incentive within the scheme to the automobile sector;

- The Government may consider further markup reduction or price support for smaller vehicles where the assembler gives a special price for specific vehicle use including taxi schemes;

- The Government must also channel all vehicular demands of the Pakistan Armed Forces towards the local industry;

- Small pickups, light trucks, and commercial vehicles may also be incentivized as these are a very important part of our country's transport chain;

- Rural and remote area's sales programs can also be introduced with special package schemes so that the vehicular density spreads evenly in our country.

Automobile manufacturing countries have announced some sort of incentives to keep their industries afloat. In China, an auto-industry stimulus package that includes cuts in auto sales tax, easier access to auto loans, subsidized old-car-replacement purchases, raised rebates for auto parts export, etc. was proposed. The package is effective in early 2009. To maintain tax revenues, China considers the auto-sale tax reduction the priority item among the stimuli, with the current 10% rate to be cut to five, or even zero for one or two years. It is a measure that would help achieve the official goal of moving 410,000 cars out the dealers in 2009, which would generate 3.5 billion RMBs in auto consumption tax and another 6.8 billion RMBs in value-added tax for the national treasury.

The stimulus package also targets promoting car sales in rural and remote areas. Such measures would boost sales of smaller sedans and light-duty trucks suitable for narrower roads in less-developed regions while the measure to subsidize vehicle purchases to replace older models would mostly benefit fleet operators, whose, for examples, taxi and trucks may be old and need replacing.