LATENT POTENTIAL IN AUTO SECTOR
June 27 - July 3, 2011
In Pakistan, there are estimated 10 cars for 1,000 persons which is one of the lowest in the emerging economies, which itself speaks of high potential of growth in the auto sector and more so in the car production.
Apart from potential of growth, the auto sector is also facing manifold challenges due to high input cost, power load shedding, depreciation of Pak rupee, security situation, and stiff competition.
Local automakers are facing higher input costs due to non-availability of metal sheets in the country, industry sources said. The immediate impact is seen on the cost of production of cars, which is increasing, as the local original equipment manufacturers (OMEs) are compelled to import metal sheets, mostly from Japan, at higher prices. These sheets are perforce imported as locally produced metal sheets do not meet the required quality and specifications for manufacturing of cars. Importing any commodity always costs higher than the commodity produced locally and, in the current scenario when the value of Pakistani rupee is rapidly depreciating, it is adding to the woes of the OMEs as their input cost is going up and up, the sources said.
It may be noted that prices of major metals have gone up by 60 percent, on average, from 2009 till May 2011, clearly indicating that the input cost has risen and is causing financial losses to the local automakers. Statistics show that during the last couple of years in the international market the rate of steel increased by 27 percent from $586 to $746 per ton, while the rates of polypropylene, aluminum, copper and lead increased by 67, 35, 24 and 45 percent respectively. Besides, the rate of US dollar increased 5.19 percent against the rupee from June 2009 till May 2011, while the rupee depreciated 25.2 percent against Japanese yen during this period, increasing the cost of imported parts, including metal sheets used in locally made vehicles.
Auto sector contributes 16 per cent to the manufacturing sector which is 19 per cent of the total GDP. It is expected to increase to around 25 per cent in the next 5 to 7 years. Auto industry's present contribution to GDP stands at 2.8 per cent which is expected to reach 5.6 per cent.
The assemblers of vehicles are mostly located in and around Karachi and Lahore. The car and HCV assembly is mostly based in Karachi while the 2-wheeler/ 3-wheelers and agricultural tractors are located in Lahore. The same is the case with the vendors of such vehicles except that many vendors of car/ LCV are based in Lahore as well.
The vehicle assemblers play a pivotal role in development of vendors through knowledge transfer, supply chain management, products and processes development. The way the auto industry is becoming highly competitive world over and in Pakistan, focus has been shifted to not carry the cost of inventory and to supply on Just in Time concept.
Critics of auto sector believe that three major players are dominating the market and dictating prices due to the absence of competition in the local automobile manufacturing industry.
Car prices have been increasing continuously since 2006 and new cars are out of range of the middle-income group. Car sales fell on a yearly basis in 2008 and 2009 but prices showed an upward trend with Honda Atlas, Indus Motors and Pak Suzuki increasing their prices thrice in 2008.
Most carmakers have been announcing plans to increase production volumes over the next few years but these plans have yet to come to fruition and the problem of late delivery of cars remains unchanged as a source of dissatisfaction among buyers.
As per Economic Survey of Pakistan for 2010-11, Pakistan's manufacturing sector posted 1.7 percent growth during July-March 2010-11 against the estimate of 4.9 percent. The main reasons for the low growth were frequent power outages, high crude oil prices, huge cut in development budget and lower domestic demand. Production of cars, LCVs/jeeps and two/three wheelers grew 16.4 percent, 20.5 percent and 12.6 percent, respectively, during 2010-11 (July-March).
The Auto Industry Development Programme laid down a five year tariff plan under which tariff was to be reduced by five per cent on all cars above 1,000cc starting from 2009-10. However, the plan that was deferred by the government for one year, is yet be implemented.
Pakistan Automotive Manufacturers Association viewed that the arrival of the imported vehicles and rising interest rates situation decelerated the over all sales figures of the automobile industry which is considered as a large scale-manufacturing sector of economy.
The vast import of used cars affected demand of locally manufactured automobiles. The only way forward for the assemblers is either by expansion in their production capacity along with brand extension or through inclusion of updated and better quality vehicles in their trading portfolio, it said.
In today's fast globalizing world changing models, improving fuel efficiency, cutting costs and enhancing user comfort without compromising on quality are the most important challenges of the industry. Following international trends, the auto industry in Pakistan is also quickly evolving and may soon begin materialize the dream of achieving economies of scale, however, still there is a long journey.
Pakistan auto industry has been a star performer of industrial sector during the last 6 to 7 years, and registered impressive annual compound growth, surpassing other sectors of the economy. The Pakistan auto industry has potential to become a global choice for outsourcing, off shoring and becoming part of the global supply chain.
Industry people are of the view that increasing cost of doing business, rising fuel costs and interest rates are challenges for the local industry.
The auto industry is overall considered as the mother of all industries and an engine of growth, technology transfer, and job creation. If government policies remain unstable, then this vital sector of engineering and large-scale manufacturing (LSM) industry would remain inactive and there would be no contribution to national exchequer, no technological advancements, no employment generation and no affordable mobility to people in the country. And, in case the current situation worsens, both consumers and employees would be affected-employees on account of job losses and layoffs, and consumers in terms of the cost of purchase of automobile or spare parts.
Auto manufacturers say that economic recovery, political stability, and security situation played important roles in sales performance during the previous fiscal year as well as current fiscal year and continuous depreciation of Pak rupee against major currencies and higher interest rates exerted pressure on margins of local original equipment manufacturers (OEMs).
They said that it is essential for the government to effectively address the challenges concerning consolidation of macroeconomic stability, mitigating the effects of the global economic crisis, in particular on manufacturing and exports, implementing tax policy and administration reforms and managing the security issues engulfing the nation. They hope that the government would provide stable policies and would take proactive steps to encourage growth of the local automobile sector, which has made healthy contribution to the national exchequer, created thousands of jobs, enabled technology transfer for localisation, provided affordable mobility to people and businesses and above all, contributed heavily to economic prosperity of the country.