MAKING LOCAL ASSEMBLERS COST EFFICIENT

SHABBIR H. KAZMI
(feedback@pgeconomist.com)
Feb 7 - 13, 20
11

Critics are never tired of saying that Pakistan automobile industry is highly cost inefficient and to overcome this issue they suggest import of secondhand cars. However, they completely ignore a fact that no industry in the world can remain competitive if it operates on around 50 per cent capacity utilization. They also forget that any further reduction in capacity utilization could virtually put an end to their operations.

Since assemblers have foreign investment, the government is ready to listen to them but hundreds of entrepreneurs who have invested billions of their own money have either already closed their units or are at the verge of closure.

One can recall that manufacturers of parts and accessories were told to enhance their production to meet the demand of local assemblers estimated to grow to 400,000 units. Pakistan managed to produce above 250,000 units, while the work was going on. But then came the great recession and total sales of automobile plunged to around 125,000 units. On top of this, the government also changed indigenization plan. While the customers got a chance to buy the newer and improved models, sales of locally made components and accessories plunged to the lowest.

Let it be very clear to the policy planners that automobile prices become unaffordable without auto financing. In the recent past, auto sales were high only because financial institutions were more than willing to extend credit for auto purchase. However, due to rising delinquencies and enhanced government borrowing banks seem no longer keen in auto financing. While leasing for corporate is still available, it is next to impossible for individuals to acquire auto financing.

Factors affecting auto financing included rising interest rate, eroding purchasing power and on top of every thing, the attitude of recovery staff of financial institutions. Since sales were on the rise financial institutions became a little reckless in credit approval. However, as the delinquencies rose financial institutions not only became extra careful but also preferred not to entertain the retail customers.

There is often a debate that import of secondhand cars can help in bringing down prices. Ideally, import of secondhand cars should have helped in bringing down prices of locally assembled cars but experience has been contrary. The country has experienced many debacles where both the government and the buyers emerged losers. The government was deprived of revenue and buyers were provided obsolete models.

Historically, smuggling has proved to be the worst enemy of local manufacturers of parts and accessories. Most of the consignments are declared 'scrap'. Replacement market should have been the major buyers of locally produced parts and accessories but the experience is contrary. Since most of the plants operate at nominal capacities neither cost optimization nor could economies of scale be achieved.

Indigenization should have played the key role in optimizing cost by following Indian experience. Since Pakistan has failed in developing heavy as well as light engineering industries, it has remained heavily dependent on imported components. On top of this failure in restricting model change and variants allowed the assemblers to even indulge in 'transfer pricing'. For decades, cars were produced following 'minimum acceptable standards' rather than 'international standards'.

The blame for not following international standards goes to government policy regarding transfer of technology as well as the tariff structure. Often using an imported component is cheaper than buying a locally made one. It may be true that local manufacturers of parts and accessories are not very efficient but the blame has to be shared by the local assemblers.

Historically, car premium has remained a big attraction for the investors. Some of the experts attribute this to connivance of dealers with the assemblers. It is worth noting that despite assembly plants operating at less than 50 per cent capacity utilization delivery period still stretches to more than a month. One could see hundred and thousands of cars parked at the showrooms, being sold with premium. However, assemblers attribute price difference to depreciating rupee.

Exporting cars could help in improving capacity utilization of local assembly units. However, the objective could not be achieved without cooperation of all the stakeholders. Government has to offer incentives, assemblers will have to be more efficient and manufacturers of parts and accessories more quality conscious. The first step for achieving greater synergy is stopping smuggling of parts and accessories under the disguise of scrap'. It should be made mandatory for all the assemblers to export 5 per cent of total output.

Indus Motor Company (IMC) completely refutes the allegations that prices of its products have been increased enormously over the past two year. In fact, IMC has increased its prices by only seven per cent during last two years (from January 2009 till December 2010), this was stated in a statement issued by the company.

IMC spokesman said that reasons for increase in locally assembled cars are known to all and not hidden from consumers, who understand that Rupee has been depreciating and prices of all the commodities are skyrocketing in the global markets.

Comments by some analysts and government officials often present distorted picture, which is causing irreparable damage to the local automobile industry employing thousands of workers. These comments and statements are often misleading and are creating confusion at a time when multi-billion dollar industry is passing through its worst time, he added.

Comparing increase in car prices with commodities of common use, he said that during this period natural gas tariff increased by 13 per cent, electricity by 34 per cent, diesel by 34 per cent and petrol by 20 per cent. In the international market during the same period price of steel has increased by 27 per cent, while rates of polypropylene, aluminum, copper, and lead have gone up by 67, 35, 24 and 45 per cent respectively.

Another impression that allowing 5 years old cars would not affect the local OEMs is incorrect. The statistics show demand has gone down below 125,000 cars annually but production capacity has increased more than 275,000 cars per annum.

Auto industry is already trying very hard to cope up with difficult circumstances to provide jobs and business opportunities to Pakistani citizens and produce world class vehicles at lower prices than its international models produced and sold globally.

According to Pakistan Automobile Manufacturing Association (PAMA) data released for December, 2010, passenger cars sales have declined by 26 per cent MoM to 6,341 units compared to 8,519 units sold previous month. This was mainly due to the year end phenomenon, where sales normally remain dull.

Despite disappointing auto sales performance in December passenger car sales in 6MFY11 was up by 10 per cent YoY to 53,163 units compared to 48,344 units sold during the corresponding period last year. All major auto assemblers posted healthy growth during the period. Both Indus Motor and Pak Suzuki have witnessed improvements in their market shares from 46 per cent and 31 per cent to 54 per cent and 35 per cent, respectively.

Cars in 1300cc and above category posted highest decline of 44 per cent MoM to 2,424 units mainly attributable to "Corolla" sales, which dropped by 46 per cent. Corolla accounts for 67 per cent market share in this segment followed by "Honda City", which holds approximately 15 per cent of the market. Cars under 800cc category registered a rise of 4.4 per cent MoM due to increase in Mehran sales.

Sales of light commercial vehicles registered a rise of 19.2 per cent YoY with 14,440 units sold in 6MFY11 contrast to 12,119 units in the same period last year. Ravi of Pak Suzuki, which normally dominates this category, registered a rise of 17 per cent YoY to 7,225 units compared to 6,160 units sold in the previous year. However, MoM sales posted a mere decline of 1.4 per cent MoM to 2,548 units.

Analysts feared that hike in interest rate would adversely affect car sales but the central bank provided a pleasant surprise to all. However, rising steel prices and strengthening Japanese Yen against Pakistani Rupee is likely to keep assembler margin under stress.

Another positive point is that higher income of farmers due to increase in cotton prices will keep the rural economy robust and some of the surplus cash flow came to auto market.