AUTO ASSEMBLERS UNDER PRESSURE

INDUSTRY NEEDS A COMPREHENSIVE, COHERENT, AND CONSISTENT POLICY.

SHABBIR H. KAZMI
(feedback@pgeconomist.com)

May 16 - 22, 2011

Auto assemblers as well as producers of parts and accessories have always remained under the extreme pressure from importers of secondhand cars. The hype gains momentum particularly before the announcement of the federal budget. It is true that car prices are relatively higher in Pakistan but allowing import of secondhand cars just can't bring down prices of locally assembled vehicles. One of the suggestions for bringing down prices of locally assembled cars is achieving economy of scale and not the import of secondhand cars.

An effort to explore the possible reasons for high cost of automobile production in Pakistan indicates: 1) poor capacity utilization, 2) high cost of CDK kits and locally produced parts and accessories, 3) rising cost of steel in the global markets, 3) high cost of utilities and 4) prolonged electricity and gas outages. Unless these issued are not resolved brining down cost of locally assembled cars will not be possible. Import of second hand cars can only add to the woes of assemblers in general and vendor industry in particular.

During the eras of last government economy was prospering, disposable income of individuals was on the raise, auto finance business was thriving. Contrary to this, economy is in dismal condition because of political uncertainty and war on terror being fought within Pakistan's territorial boundaries. Added to this is ongoing energy crisis which has crippled the economy. On one hand the disposable income has gone down, and on the other hand financial institutions are not keen in undertaking auto finance business. In a nut shell overall sales haves reduced to half. No industry, which operates on less than 60 percent capacity utilization, can remain economically vibrant for long.

Higher cost of CKD kits and locally made components is partly due to depreciating Pak Rupee and partly because of failure of the government to reduce duties and taxes. In fact both the factors are not unique to automobile industry but plaguing the entire economy. However, the issue of 'premium' has to be resolved. It looks that the industry suffering from poor capacity utilization, under the pressure of car dealers is not ready to rollout more vehicles. As long as supply remains short dealers are able to extract more money from the buyers who want immediate delivery.

However, it is also necessary to distinguish between dealer and investor in vehicle trade. Dealer and investor may be the same, but often the trade is controlled by a few large investors. They belong to the category of 'elite of the society' that include feudal lords, industrialists, traders and politicians enjoying access to power corridor. They also influence policies of the government of Pakistan.

Some experts say that only the government can be held responsible for the present dismal condition of the automobile industry. The conditions were even when assembling was done in units operating under state control. The vehicles were sold under 'minimum acceptable standard' and waiting time used to more than 18 months. Now the vehicles are made according to 'international standards' and the waiting time has also reduced.

Assemblers often allege that the quality of locally produced parts and accessories is low as compared to the international standards. However, the blame must go to the government for failure in implementing the deletion program, assemblers for not helping the vendor industry in improving quality and the vendor industry for not making the right investment.

India is far ahead of Pakistan in automobile industry because it has huge steel production, its heavy and light engineering industry being very strong and its government following an elaborate program rather than allowing deviation from the original program agreed between the industry and the government. At some stage Indian assemblers were also full of complaints of vendor industry but were told in plain world, either prepare the vendor industry to meet you benchmarks or pack up and leave the country. Naturally, the assemblers had no choice but to make the vendor industry vibrant. One may raise a question, if India could achieve the target why can't Pakistan? The reply is simple that in India long term policies are prepared in consultation with all the stakeholders and then these policies are followed in letter and spirit. As against this the successive government has been following myopic policies, which were often governed by the pressure groups.

Various attempts have been made by the present as well as the previous governments to pave way for the entry of new assemblers. However, there has been least realization that if the existing plants can't operate at optimum capacity utilization what would happen when more plants are established?

Ironically, all the governments have failed in convincing the local assemblers to undertake export from Pakistan. One of the proposals has been that local assemblers should export up to 25 percent of the total installed capacity. This will not only improve the quality of local production but would also help in optimizing cost of production.

If the government is serious in improving capacity utilization, it should also encourage auto financing. For revamping public transport, the financial institution now mostly operating in the private sector, must come up with easy financing facilities. The success of CNG rickshaws in Karachi now demands expanding it taxis, mini buses and long chases vehicles.

The government should abstain from reviving 'circular railways on Karachi and focus on introduction of CNG operated long chassis vehicles. This can help in containing vehicular traffic as well as containing POL/CNG consumption. The added advantage will be lesser pollution.