HAVE THE INDUSTRY DYNAMICS REALLY CHANGED?
VENDORS ARE ALREADY MEETING 200,000 ANNUAL PRODUCTION
SHABBIR H. KAZMI
Sep 14 - 20, 2009
Since beginning of the current financial year auto sales have improved considerably and some of the analysts see the light at the end of tunnel. While the assemblers may have got some breathing space, the outlook for the manufacturers of parts and accessories has not changed really. Since analysts are little skeptical about the recovery, revival of the vendor units still hinges on ifs and buts.
Not to be too pessimistic, analysts believe that achieving monthly sale of more than 10,000 passenger cars and light commercial vehicles still translates into less than 50% capacity utilization of the vendor units. In fact, collectively the vendor units have already reached the capacity to meet production of 200,000 vehicles per annum and were in the process of expanding capacity to meet assembly of 400,000 units per annum.
According to informed sources the vendors units are still reluctant in hiring fresh workers on permanent, contractual, and daily wages basis despite the fact that sales have started improving since April. Some of the key players say they are not planning to increase headcount because recovery in sales is still a little deceptive. At the best, they are inducting fresh workers at the lower but just cannot afford to add people with higher skills and drawing higher remuneration.
According to sector experts, when the assembly was at its peak over 300,000 people were working in the organized vending industry but more than 50,000 lost their jobs on persistent fall in sales due to high prices, rising car financing, uncertain economic, and political situation over the last couple of years.
It seems that vendors have no plans to expand the workforce as the increase in sales is negligible. The cut in car prices following removal of five per cent federal excise duty (FED) on above 800cc in the budget 2009-10 has yet to lure buyers in a big way.
Unless the policy planners understand problems facing vendor units and also take immediate corrective steps there seems no probability of revival of this important segment of the engineering sector. As long as the assemblers enjoy the facility to import CKD kits by paying nominal duty the objective of developing reliable and cost effective local manufacturers of parts and accessories cannot be achieved.
Though, many Pakistani are not happy when analysts try to compare any of the local players with the Indian counterparts yet one just cannot resist. Both the countries became independent at the same time and the level of industrialization was almost the same. However, fiddling with the policies has not allowed Pakistan to achieve comparable growth. While India has a very strong indigenous light engineering industry, even extensions in deletion programs for the assemblers have not allowed Pakistan to become net manufacturer of automobile. The local industry is still dominated by assemblers.
In India, vending industry has developed mainly because of strictly following the deletion program. For decades, India continued to produce 'ugly and outdated' cars but mainly focused on developing light engineering industry. As against this, Pakistan kept on extending deletion programs to facilitate the high-end consumers. On top of this, schemes like Yellow Cabs, Green Tractors and import of CBUs not only caused irreparable damage to the assemblers but also did not allow development of light engineering industry in the country.
The present regime has once again allowed import of tractors by terming that locally manufactured units are incapable of yielding desired results in certain areas. It was also stated that the local manufacturers were not in a position to meet the demand and the only solution was import of CBUs. The decision would not only inflate country's import bill but would promote import of parts of these units.
It is on record that when assembly of light commercial vehicles of Chinese and Korean origin started in Pakistan the vehicles were not very attractive. It is the local vendors who made these attractive and comparable with the Japanese brands but also helped in optimizing cost through economies of scale.
To develop the local manufacturers of parts and accessories the government must facilitate them. To begin with, smuggling of parts has to be stopped. However, putting a ban would not serve the purpose. Smuggling can only be curbed by removing the incentive, high import duty on raw materials.
Assemblers and vendors should also work closely to achieve the objective of indigenization. Improving quality of locally manufactured parts and accessories and cost optimization can help in bring down cost of automobiles in the country.
The prevailing insufficient and highly depleted condition of public transport demands addition of new buses, taxis, and trucks. Entrepreneurs should be encouraged to investing in public transport by abolishing all sorts of duties and taxes on CKD kits used in the vehicles to be used for public transport.
The central bank should also make it mandatory for the financial institutions to offer auto financing. Since public transport constitutes an integral part of the service sector, the central bank should initially fix a target of Rs10 billion, which should grow by 20% per annum, at least.
Last but not the least, the government must encourage export of parts and accessories and also make it mandatory for the assemblers to export 10% of the locally produced units. This will on the one hand help increasing production and capacity utilization but more importantly also stimulate production of international standard.