AUTO INDUSTRY SHOWS ROBUST GROWTH

SHAMIM RIZVI
(feedback@pgeconomist.com)
June 7 - 13, 20
10

After witnessing a serious decline during the year 2008-09, the auto industry has shown spectacular growth during the first 9 month of the current financial year. According to the data released by the Pakistan Automotive Manufacturing Association (PAMA) total auto sales increased by about 30 per cent to 85300 units during the first 9 months July to March of the current fiscal if compared to the same period in previous year. It is both encouraging and surprising in view of the fact that the prices of all types of automobiles have increased on an average by about 25 per cent during the last few years.

During the year 2008-09, the sales had declined almost by 50 per cent coming down to 82744 units from 164,650 units during the year 2007-8. In the past, robust auto sales were linked with generous auto financing. But lately the bulk of auto sale comprised of cash purchases. However, sales of 1000 CC and lower categories have not picked up so high as the higher models. It is said that increased demand for new and higher ranges cars from government institutions and corporate sector is the main cause for this jump in sales. There is new phenomenon of expansion in the fleet of car pools of law enforcement agencies leading to an increase in the sales volume.

The middle class and the general public which used to buy car of 1000 CC and below are nowhere in the picture. It is because of this factor that a question is generally asked whether the current rising trend is sustainable.

Car makers resent the perception that the prevailing prices of car are high in Pakistan reminding the government and others that despite huge Pak rupee depreciation and tremendous increase in the cost of doing business, the car prices are still lower than Indian. Reacting to the reports of relaxing the conditions to import used cars they said it was an ill advised and a wrong perception that had created uncertainty amongst the car makers who were withholding further investment in their ventures.

A leading member of the auto industry told this correspondent, on conditions of anonymity, that the government should not take such an irrational step which would ruin the industry which was not only providing jobs to the millions of people but paying billions of rupees to government as taxes.

He said that it was a totally wrong perception that the prices of cars and motorcycles were high in Pakistan. Car prices have not increased exceptionally in Pakistan if we take into account the increase in the rates of every thing that is being produced in the country. The rupee has depreciated by over 40 per cent against US dollars and about 60 per cent against Japanese Yen over the last 3 years. During the last 2 years there has been almost 45 per cent increase in the minimum wages from Rs4000 to Rs7000 per month. The other input costs relating to electricity, gas and other material has increased by over 30 per cent in the past one year. How can you describe an increase of about 25 per cent in the prices of cars as exorbitant?

Automakers are appalled by the contradictory government policy of putting pressure on them to reduce car rates while proposing duty measures that would further increase the prices. They contend that the average car price would increase by Rs50,000 if government accepts proposal of the Ministry of Industries to raise the import tariff on engines, transmissions, power steering, starters, alternators and certain other parts from the current 32.5 per cent to 50 per cent.

"The problem with different governments in Pakistan is that they lure foreign investment on high promises and get guarantees from the investors for technology transfer but at the end they forget the promises they made but insist on the investors to fulfil their part of the deal," said a multinational brand car assembler. He said no government in Pakistan has tried to find out as to why its deletion policy in automobile sector has not delivered. They said no investor would shy away from technology transfer in car industry because that would help reduce the cost.

He said that the government obtained promise from the car makers that they would localise the above mentioned parts by 2010-11. At the same time the government in its automobile development programme predicted that the car production in Pakistan would increase from 250,000 in 2007 to 500,000 in 2011-12. In that lucrative scenario the carmakers had no hesitation in agreeing to the government wishes. However, he added, Pakistan's economic decline coupled with global recession resulted in massive decline in car production which tumbled to 1,84,000 in 2007-08, 1,10,000 units in 2008-09 and is expected to increase by the end of this fiscal to 1,40,000. In this scenario, he added, when investment in Pakistan has almost dried down how can government expect the automobile sector to go for further technology transfer and investment? Despite such massive decline in productivity, the automobile sector of Pakistan is still competitive, he claimed.

He said all models of Honda and Toyota produced in Pakistan are 24-68 per cent cheaper than similar models produced in India. He said that one reason for lower prices is that the volumes of these cars have not gone down as steeply as other brands.

"An interesting fact in this regard is that Suzuki Mehran that has the highest level of deletion was three years back much cheaper than the Maruti, its counterpart in India," he added. "The reason was that its volumes in 2007 were very high. Today the volumes have declined and the rates of this brand are now slightly higher than in India. This simply proves that deletion is not the panacea for higher car rates. Volumes are equally important."

Car industry, if properly facilitated, could take Pakistan out of economic crisis because the global automobile market is much bigger than the textile trade. India is now challenging the global automakers by marketing its Nano manufactured by Tata just because of stable auto policy pursued by the Indian government.

Pakistan with 13 cars per 1,000 persons has tremendous potential to expand its car market. In United States 765 persons in 1,000 own cars. In South Africa there are 146 cars per 1,000. If we achieve the South Africa's per capita ratio in 20 years we would require 22 million additional vehicles by 2030 at 1.07 million units per year. This could be achieved if government refrains from abrupt changes in its auto policy.