SUSTAINING THE REVIVAL OF AUTO INDUSTRY
AROOJ ASGHAR (firstname.lastname@example.org)
Jan 25 - 31, 2010
During 2008-09, the auto industry was experiencing an unprecedented decline in sale of automobiles. The sales declined almost 50% to 82,844 units from 164,650 units during the year 2007-08. However, the market fundamentals improved substantially at the outset of current fiscal year (2009-10) and the first half has seen robust sales and improvement in volumes. There has been a 22% boost in car sales between July-September 2009.
According to a study by Competition Commission of Pakistan, there is total of $1.5 billion investment in this sector that provides 192,000 jobs, and has paid around Rs 63 billion in taxes.
The capacity of car assemblers was also increased to 200,000 units during 2006-07, which has now again declined to 120,000 per annum. As a matter of fact, the auto sector is not necessarily out of trouble but there are encouraging signs that profits will return in 2010 and strengthen each year till 2014. However, it is pertinent to relate that the projected car production target for 2012 is 500,000 units per annum, which are quite improbable to achieve owing to unstable conditions in the sector. Nevertheless, the stressed and struggling auto industry is poised for a slow but steady turnaround in 2010 that will usher in an era of profitability and job growth after a span of decline.
Lower base-effect would also persist during FY10. Therefore, a 25% YoY growth in car sales to 104,000 units in FY10 is expected.
Carmakers reduced prices by 5-10% in June 2009 after the government had removed 5% federal excise duty on car sales as a part of this fiscal year's budget incentives to revive industrial production. A declining trend in auto loans between July 2008 and July 2009 lends credence to the view that retirement of auto loans outpaced release of fresh loans. Outstanding auto loans stood at Rs105 billion in July 2008 which declined progressively to Rs77 billion in July 2009.
Auto demand from the government institutions and corporate sector is supporting the auto sales. There is a new phenomenon of expansion in the fleet of car pools of law enforcement agencies leading to an increase in sales volume. Since the start of this fiscal year, police and other law enforcement agencies have bought hundreds of cars for their officers who use them while patrolling the streets in cities and towns.
The automobile industry has been facing multiple problems including low volumes, under utilization of capacity, late delivery, and slow transfer of technology. Besides, slump in the domestic economy caused by international financial crisis, recession and worsening internal structural imbalances dried up the liquidity in the form of surplus funds with the consumers.
Major issues prevalent in the industry are the escalating raw material/commodity prices. The prices of steel were increased by 50% in June 2008 causing a corresponding rise in price by manufacturers. One percent increase in sales tax to 16% from 15% also increased the prices.
Moreover, implementation of the fixed rates of withholding tax (WHT) on the purchase of cars in the budget has also added to the cost of cars and other vehicles. Rising currency rates, strengthening of dollar/yen against Pak rupee, rising inflation and trade deficit, declining forex reserves and the increase in fuel prices are the factors inhibiting the growth of Pakistan's automobile industry.
The fluctuation in interest rates directly affects the growth of the industry because of car leasing and financing activities. During the year 2003-04 till 2006-07 the auto industry was thriving by leaps and bounds because of low to moderate mark up rates coupled with flexible terms of lending. The car financing was increased to Rs 120 billion in 2006-07 from less than Rs 1 billion till 1999-2000. The average 10% fall in interest rates increases sale of cars by 8.9% on per annum basis.
The escalation in car prices also has a correlation with devaluation of exchange rate in terms of depreciation of rupee against the dollar. In FY 2009-10, local assemblers of Toyota and Honda have raised the prices of their products by 2-4%. Auto analysts link it to appreciation of Japanese yen against the rupee. Yen has appreciated 9% against the rupee since the start of this fiscal year.
Another fact is that the marketing staff of car manufacturers in close nexus with the dealers creates artificial shortages in the market to secure premium on ready delivery from end consumers.
The State Bank has strictly prohibited banks from adding 'premium for timely delivery' into car prices calculated for advancing auto loans. But, people complain that car dealers continue to charge extra money for timely delivery, which is not documented.
In 2007-08, auto industry was making tremendous progress, with a contribution of $3.6 billion to the GNP besides providing direct employment to some 192,000 people. Later, industry exhibited a declining trend causing a substantial loss to the national exchequer. There are signs of recovery and improvement but the crisis can be managed by improving financial condition of the country and making innovations in the auto industry.
Buyers can be allured by offering changing models, improved fuel efficiency, cutting the manufacturing cost, and enhancing the user comfort without compromising on quality.
According to CCP, government should allow imports of both used and new cars of all categories on competitive import duty into Pakistan to promote competition in the auto sector. The auto industry is required to comply with the international standard to manufacture secure and safe. There is a need for the regulators and the government to be able to appreciate the needs of the auto sector to ensure that this crucial component of the engineering and LSM industry remains growth-oriented.
The government should ensure that an enabling environment is generated to sustain the upcoming revival.