PROMOTING LOCAL AUTO VENDORS

FOZIA AROOJ (Fozia.arooj@hotmail.com)
Jan 25 - 31, 20
10

Auto vendors industry in Pakistan was developed under a well-planned strategy under the deletion policy of the government. This industry produces auto-parts of international standard for the world-renowned car brands produced in Pakistan. The original brand manufacturers who approve each part produced by these vendors ensure that it is at par with the one they use in their manufacturing facility.

Auto vendors industry is a part and parcel of auto manufacturing assembling and distribution line. The importance of the industry can be gauged from the fact that auto spare parts has been among only a few industries, which continued to attract both local and foreign investment, even when investment climate in the country was not very favorable. But, the vendors have been in trouble due to disastrous decline in the car sales volumes during FY 2008-09.

A large number of small to medium auto parts vendors had poured substantial investment to enhance their production capacities and upgrade technology on the back of a robust annual growth of above 20% in car sales during last six years to the fiscal 2007.

Sudden slowdown in the domestic car industry gave a lethal blow to such vendors. However, gradual recovery of car sales and investment climate is now attempting to rebuild their confidence.

During 2008-09, sharp reduction in demand of cars caused most factories curtail their working hours from three to two or even one shift a day. The auto vendors have retrenched at least 150,000 workers. It is pertinent to relate while running at full capacity the industry provided direct jobs to more than 500,000 skilled workers.

According to Pakistan Association of Automotive Parts and Accessories Manufacturers (PAAPAM) out of total 200,000-225,000 workers in the organized vending industry, some 50,000-55,000 had lost their jobs on persistent fall in sales.

In Bin Qasim area alone 15 vendors invested over Rs3 billion in the last two years in anticipation of Auto Industry Development Plan (AIDP) and future commitments of the government. But, these huge investments are currently unproductive and may cause total collapse of these companies.

PROBLEMS

Mounting interest rates by the banks coupled with stringent credit terms have squeezed the auto vending industry both ways as their production fell and their financial charges went up on account of rising credit cost. The economy moving at sluggish pace is hampering the growth of the industry.

Uncertain political and security situation has also restrained the investors to initiate new ventures. The demand for auto parts is fast losing momentum and inflation is going up.

From the financial year 2006, there has been replacement of the deletion program for the auto industry with tariff based system. This change has relentlessly hampered the vendors' ability to sell and pass on the impact of the increasing cost of production to domestic car assemblers. The problem arises when the assemblers either import the components themselves or offer reduced price to local suppliers for the same. The cost of production for local vendors has increased manifold on account of escalating steel and energy prices but assemblers are not ready to absorb that increase.

Millat Tractors has started in house production and development of spare parts and accessories. Vendors are of the view that assemblers should only enter in the manufacturing of auto parts if they have availability and capacity issues with the local suppliers. Otherwise, it is not prudent to strangulate the allied industry.

But some car makers have also started import of parts due to tariff based system.

However, now the depreciation exchange rate has rendered the imports very expensive and such assemblers have received a hard hit on their business.

The assemblers must understand that localization of components is also in their best interests.

A few years back Pak Suzuki Motor Co Ltd proposed to the Ministry of Commerce change of source of engine and transmission components (not localized) from Japan to India and export of Suzuki Ravi pickup, or its Knocked Down (KD) components, to India. But, Pakistan's automotive vending industry opposed the entry of automotive parts from India for use in the assembly of vehicles. The stakeholders believed that automotive vending industry in Pakistan has the capability of developing and manufacturing these components locally.

The assemblers have pinpointed some quality issues that made them turn to in-house production of some parts and/or imports. Moreover, the assemblers are attempting to move towards consolidation i.e. trimming down the number of suppliers and asking some to become second tier suppliers by supplying their parts/components to other vendors who primarily deal with them.

WAY FORWARD

The vendor industry across the country has invested over Rs30 billion in expansion in view of achieving the AIDP objectives of producing 500,000 cars by 2011-2012 from 160,000 units in 2006-07, 1.7 million motorcycles from 839,224 units, making investment of Rs225 billion from Rs98 billion, increasing share in GDP to 5.6% from 2.8%, enhancing Rs190 billion in indirect taxes from Rs63 billion, and augmenting gross sales turnover to Rs600 billion from Rs214 billion in 2006-07.

Auto vendors have changed a lot in last five years by investing heavily in capacity and technology and needs volumes to sustain. To save the industry from virtual collapse amid low sale volumes that triggered massive layoffs government should intervene and promote local vendors, as they are not getting reasonable volume of orders from the Original Equipment Manufactures (OEMS), the auto assemblers. It needs a stimulus to prevent further downturn and to grow at sustainable rate. This is not critical for this industry only but also for the economy in general.

Government should not legalize the import of banned items like used parts, dumpers, lorries, etc., by payment of redemption fine. Besides, the import of parts that are locally manufactured should be strictly restricted. Reduction in registration charges for locally manufactured vehicles should also be enforced to give boost to the local industry.