MOTORCYCLE PRODUCTION DOWN 14% IN FY09

MUHAMMAD SABIR SHAIKH
Sep 14 - 20, 2009

Total 906,204 motorcycles were produced in the country in the fiscal year 2008-09 ended June 30. This depicts a decrease of 14.4 per cent over 10,56,113 units produced in 2007-08. However, despite the substantial decrease there was a massive underutilization of the installed capacity in the fiscal 2008-09 as statistics show that of the total installed capacity of 1.885 million units less than half was utilized.

These 906,204 motorcycles were collectively produced by 49 licensed motorcycle manufacturers, out of total 63 licensed motorcycle assemblers. It means 14 licensed assemblers were not in production. With the issuance of additional licenses during the current fiscal year, the number of licensed motorcycle manufacturers has increased to total 68 though the new entrants are yet to commence production.

The deregulation of the motorcycle industry has attracted substantial amount of investment and dozens of manufacturers, all local, to push the two-wheeler production to record levels since 2000-01. Two-wheeler production has registered over seven-fold increase from 117,858 units in 2000-01 to 906,204 units in 2008-09. It has increased to record levels every year; 133,334 units in 2001-02, 176,591 units in 2002-03, 327,446 units in 2003-04, 476,333 units in 2004-05, and 752,603 units in 2005-06 as per the statistics provided in the Economic Survey of Pakistan 2006-07.

The availability of low-priced Chinese brands not only has given an option to the people to have access to affordable two-wheeler but has also forced the manufacturers of traditional manufacturers of Japanese bikes including the top two-wheeler Honda, Yamaha, and Suzuki to slash their prices substantially. Though Atlas Honda still remains the top manufacturer enjoying the biggest market share, there emerged tough competition from non-traditional manufacturers of Chinese brands. Dawood Yamaha has slid from second to third position in 2006-07. Non-traditional manufacturers accused by the critics as the 'manufacturers of clones' are steadily increasing their share in overall production and market.

PRODUCTION TREND

The statistics show that Atlas Honda production declined by 21 per cent to 349,525 units in 2008-09 over 460,561 units in 2007-08. Pakistan Automotive Manufacturers Association (PAMA), a representative of manufacturers of Japanese car and motorcycle manufacturers, now also have non-traditional motorcycle manufacturers. Besides the original Honda, Suzuki and Yamaha the four non-traditional motorcycle manufacturing members of PAMA are Fateh Motors, Plum Qingqui Motors and Pakistan Cycle Industry, Ravi Motorcycles.

Fateh Motors is the manufacturer of Hero RF 70cc motorcycle. Plum Qingqui Motors manufactures Qingqui QM 70cc, QM 100cc motorcycles, and Qingqui 150cc rickshaw while Pakistan Cycle Industry is the manufacturer of Sohrab JS 70cc and Js 100cc motorcycles and S-100 rickshaws, and ravi motorcycles.

The production figures also show that the non-traditional manufacturers have consistently been able to improve their share, which stood at 33 per cent in 2008-09.

It is interesting to note that while the production of the top manufacturer Honda dropped by 21 per cent in FY09 it managed to retain its top position by a far margin. Second top manufacturer, Yamaha's production dipping sharply by 5 per cent to 66,190 units, lost its far second position by a hair-thin margin to non-traditional and non-PAMA N. J. Auto Industries whose production increased by almost 4 per cent to 56,134 units in 2008-09.

However, the statistics could be deceiving as N.J's production figures also include rickshaws, a vehicle that Yamaha does not manufacture.

Despite the tremendous growth the overall performance of the local motorcycle industry is somewhat overshadowed by a massive underutilization of its overall installed capacity. The collective installed capacity of the 49 active licensed manufacturers stood at 1.885 million units in 2008-09 of which just about 50 per cent was utilized. The massive underutilization, with few exceptions, was not restricted to small manufacturers and the new entrants only but even to the top manufacturers like Honda, which managed to utilize just 46 per cent of their 500,000 units.

The continued growth in production last fiscal has started showing a sign of stagnation over the years. The last fiscal's production down of 14.4 per cent, though welcomed, was not as impressive as that of the previous years. For instance, in 2003-04 motorcycle production increased by almost 86 percent to 327,446 units.

PAKISTANI MOTORCYCLE ASSEMBLERS FIGHTING FOR SURVIVAL

Pakistani motorcycle manufacturers are facing dilemma of increasing prices of their respective models due to rising cost of production. Traditional manufacturers of Japanese-origin motorcycles have already increased the prices four times of Rs 1,000 each compared to single increase of Rs 1,000 by non-traditional manufacturers of Chinese-origin bikes before the announcement of Budget 2009-10.

The move, aimed at to preempt any "budgetary shock", was repeated for the fifth time by the traditional manufacturers in July and the non-traditional manufacturers are still mulling over to increase the prices of their respective products.

What has stopped the non-traditional players to announce the price increase thus far after the budget is the fear of losing whatever share of the market that individual non-traditional manufacturer has managed to capture.

The dynamics of the motorcycle market is that around fifty non-traditional manufacturers are competing for the same market, which has been drying up since the murder of Pakistan Peoples Party leader Benazir Bhutto on December 27, 2007.

The market has remained more or less since then and token and symbolic measures announced in Budget 2009-10 have not helped improve the situation even slightly.

Auto industrialists talked to a number of non-traditional manufacturers to understand their views about the challenges that they are facing.

Muhammad Sabir Shaikh, Chairman of Association of Pakistan Motorcycle Assemblers (APMA), said that the Budget offered no incentive to the non-traditional manufacturers his organization represents. There has been no reduction in the import duty on the completely knock-down (CKD) kits used in the manufacture of motorcycle because though the import duty has been reduced by 5 per cent to 15 per cent the additional duty on the same increases by 2.5 per cent to 32.5 per cent.

In additional to 15 per cent duty and 32.5 per cent additional duty the imported CKDs are also subject to 16 per cent sales tax, 1 per cent special excise duty, and 2 per cent income tax that push the total incidence of duty and taxes on the CKD import to exorbitant 90 per cent.

The appreciation of dollar against the rupee has also pushed the production cost because local manufacturers are heavily dependent on imported CKDs, components, accessories and parts used in manufacturing of two-wheelers.

Similarly, the motorcycle vending industry is also heavily dependent on imported raw materials for the manufacture of related parts, accessories, and components. In January this year, one dollar equaled Rs 81 but today it is hovering around Rs 83 thereby pushing the landed price of the entire range of imported parts, accessories, and components. That in turn has pushed the cost of production to unaffordable level.

Sabir blames the unjustified valuation advice of Customs as another setback. The prices of CKDs, components, and parts from China are much cheaper than that from Japan but the Customs find it fit to subject the same at much higher import prices than actual for calculating the duty and taxes. Sabir accuses the Director General Valuation of Federal Board of Revenue for the unjustified values of many parts used in the manufacture of two-wheelers.

The substantial increase in the prices of basic utilities such as petroleum products, electricity, gas, in addition to up in minimum wage to Rs 6,000 per month has also contributed in pushing up the production cost that necessitates the increase in retail prices of two-wheelers, Sabir said.

Calling the unjustified valuation advice by Pakistan Customs "by far the most disturbing and alarming matter", Sabir said that the representatives of non-traditional motorcycle assemblers have provided all the relevant documents in several meetings held in Karachi and a market survey has also been conducted but the unjustified valuation still continues.

It is clear that if the said valuation advice based on overvalued import prices is allowed to be continued it will result in the closure of a number of non-traditional manufacturers. The ultimate cost of which would be borne by the consumers because non-traditional manufacturers have been able to provide an affordable choice to the transport-hungry low and middle income segments of the society. If the non-traditional manufacturers are forced to close down, the prices of the 70cc bike produced by traditional Japanese-origin manufacturers would be increased to Rs 100,000, he warned.

Sabir called the issuance of certificates to individual assembler by the EDB every quarter and the verification of Import Lists at the end of each fiscal year (June-July) 'useless'. Once the OEMs provide the records, the non-traditional assemblers should demand the EDB to issue life-time certificate or at least a 5-year certificate subject to be cancelled if input record submission requirements are not met any particular year.

The import lists are useless, because Chinese engine manufacturing companies use different names for parts that become problematic when the shipment-packing list is tallied with the EDB's approved import lists.

The same is more or less the case with the issuance of PSQCA License against the EDB Certificate. For instance, PQQCA license is valid up to March 31, 2010. The APMA should ask the PSQCA to help solve the problem by issuing a 2-year certificate.

Sabir said that the requirement of EDB certificate for registration of new motorcycles in Karachi- the economic powerhouse of the nation- is extremely unjustified and a great cause of inconvenience for the OEMs.

"However, I feel that they, however, would ultimately be forced to increase the prices as it will not be possible for them to sell at a loss or without margin for long. I feel that over the next three months or at the most by end of this year the minimum price of 70cc Japanese-origin bike would touch Rs 65,000 while the price of the same produced by non-traditional assemblers would go up to Rs 40,000.

Amendments were made in the SRO 656 through Finance Act, 2009 whereby list of annual requirements and consumption has to be submitted by OEM by August 15, 2009. OEMs are facing lot of problems, which are as follows:

Only two months time has been given to OEMs to adjust under the new deadline environment. Sufficient time is not given to OEMs to adjust with the new environment.

Lot of problems are faced by OEMs at PRAL as list is not properly loaded on the system. Customs people are not ready to cater this new environment.

Small OEMs do not have resources to meet deadlines.

Even EDB has only two managers who are unable to meet this deadline. They are making lot of late sittings, which affect their efficiency. If the entire OEMs list will be available to them, they are unable to meet this deadline.

Format on which list of requirement given by EDB is not in accordance with SRO.

EDB has provisionally allotted the 25% quota based on last year requirement, which creates the problem which is as follows:

Small and medium size OEMs purchase their stocks in one go due to economic order size which save their cost by US $10 to 15 per unit and also country foreign exchange reserve.

Growing OEMs require more than 25% of quota in first quarter as their product will more than that in first quarter.

Provisional manufacturing facility certificate has been issued by EDB to two/three wheelers OEMs valid up to 30th September 2009. OEMs are facing problems with Excise & Taxation Office Motor Registration Authority, Government of Sindh in this regard.

In the Finance Act, 2009 four items are put into the list of SRO 693, which is subject to additional duty @ 32.5% in accordance with AIDP. Such action is not beneficial for Two/Three Wheelers OEMs due to the following reasons:

As such no vendor available in Pakistan to manufacture such products.

Vendors are not ready to manufacture such high precision products (even they are also not producing what they are producing at the time of issuance of SRO 693) as other incentives not in place with legal backing which are committed in AIDP such as: Human Resource Development through Auto Industry Skill Development Company, Proper Statutory Rules and Regulation for qualifying under PAII, Allocation of Funds for TASS, Area allocation for Auto Cluster Development, and Statutory backing of Auto Industry Investment Policy.

APMA chairman requested EDB, FBR, MOI&P and others to revisit the SRO 693.

(The writer is chief executive Sitara Auto Impex and chairman of Association of Pakistan Motorcycle & Rickshaw Assemblers)