RECOVERY SEEMS TO BE A LONG PROCESS
FOZIA AROOJ (firstname.lastname@example.org)
Sep 14 - 20, 2009
Pakistan's automobile industry has been suffering from economic recession since last two years. According to the Economic Survey of Pakistan 2008-09, except in case of farm tractors sector in which production went up by 12%, cumulative production of all other automotive vehicles in the country namely passenger cars, jeeps, buses, trucks, light commercial vehicles, and two/three wheelers suffered massive downturn by 30.57% i.e. from 616,964 to 428,335 units during (July-March 2008-09) as compared to the corresponding period of last year.
Car sales during first 9 months of fiscal year 2008-09 dropped by 49% year-on-year , as it stood at 61,185 units as compared to 120,246 units in the corresponding period during fiscal year 2007-08. According to the figures released by Pakistan Automotive Manufacturers Association (PAMA) amongst all the auto manufacturers Pak Suzuki and Dewan Motor were the major losers as both witnessed sales decline of 52% and 76% respectively.
However, after March 2009 until June 2009 the numbers started exhibiting an encouraging trend. Honda Civic sales were 261 in April 2009 rising to 338 in May and 404 units in June. Similarly, Toyota Corolla sales were 3,095 in April as compared to 2,606 in March while in May and June the sales were 3,095 and 3,039 units respectively.
As a matter of fact, a significant and consistent growth of auto industry after 2001 for a couple of years had placed it at a remarkable position in the economy as it formed almost 3% of GDP and 15% of the large-scale manufacturing (LSM). But, the situation started becoming grim on account of various factors. Increased cost of inputs, exorbitantly tightened monetary stance by the central bank, and very expensive consumer financing played havoc with the already tumbling auto industry. Hostile policies by the government and imposition of various levies by the federal board of revenues gave a final lethal blow to it.
The apparently optimistic economic conditions during that period helped the industry survive the adverse impacts for a couple of years. Nevertheless, when the buoyancy subsided in the wake of worldwide economic and financial crunch and further taxes were imposed in 2008-09, like 5% federal excise duty (FED) on locally produced cars, the industry's ability to fight the adverse had lapsed.
An analysis of the situation reveals that host of reasons are responsible for this downturn.
i) Imposition of corrective measures on the car industry in Budget 2008-09 aggravated the situation, as the levy of 5% FED on the cars was a harsh measure.
ii) Substantial depreciation of Pak rupee against major currencies also played a major role in deteriorating the situation.
iii) Imposition of 35% cash margin on import letters of credits made the situation even difficult for manufacturers as it pushed a sharp rise in cost of production.
iv) Continued import of used passenger cars and heavy commercial vehicles also affected the local industry.
v) Increase in the rate of Sales Tax was also a negative factor.
vi) Stringent regulatory measures and high mark up rates for financing of vehicles reduced purchasing power and excess cash with common person.
The reluctance of financial institutions in extending credit for vehicle purchase due to increasing non-performing loans in their portfolios also reduced the car sales.
vii) There was a decline in disposable income due to significant rise in inflation, rise in costs of materials, and general economic conditions.
viii) High rate of inflation has greatly reduced purchasing power of the people in general.
ix) The unexpected destabilization of economy, compounded by political adventurism and the effect of global financial meltdown, has combined to deliver a severe blow to our industry.
With the concurrent weakening of currency and rising inflation, sales suddenly came down to almost half its size with widespread closures and job losses. All these factors have taken away the affordability of the consumer, which is further aggravated by higher interest rates, resulting in lower demand in leasing/financing.
In order to bring the local automobile and vending industry back from the brink of loss, Pakistan Automotive Parts and Accessories Manufacturers seek strict ban on import of used cars and parts. However, All Pakistan Motor Dealers Association (APMDA) is in favor of import of used cars of not more than five-year old. The government increased FED from one percent to 5% in the last budget resulting in considerable increase of the unit price, which is slashed in the budget 2009-10 and compelled manufacturers to bring the prices down.
Economic meltdown has taken its toll on the vending industry also. Out of total 200,000-225,000 workers in the organized vending industry, some 50,000-55,000 lost their jobs on persistent fall in sales due to high prices, rising car financing, uncertain economic and political situation etc, during the fiscal year 2008-09.
The cut in car prices following removal of 5% FED on above 800cc in the budget 2009-10 is yet to lure buyers.
Ease in inflationary pressures and subsequent monetary easing will partly help in revival of automobile sector. However, to achieve earlier momentum of production and to grow further availability of institutional credit for consumer durables, appropriate pricing of domestic automobiles and waiving of full advance and own money are some prerequisites.
Auto industry has to increase its productivity to become competitive and realize the dream of exporting 'Made in Pakistan' cars in near future. The industry is fully poised to serve with the expansion of installed capacity of Car/LCVs Jeeps, Heavy Commercial Vehicles (HCVs), Two/Three Wheelers and Farm Tractors plants which now exceed the demand particularly for HCVs and Two/Three wheelers. More investment, which is likely to increase from present Rs. 25 billion to Rs. 53 billion for the next five years, necessitates adoption of strict measures against import and smuggling of second hand vehicles.
Auto industry recovery seems to be a long process due to various macroeconomic factors, including tight liquidity, and lower credit availability, slower GDP growth rates and current depressed consumer consumption. The government should take more steps and develop long-term policies to arrest the decline of the auto industry. This will pave the way for further investment, technology transfer and employment in the sector.