June 27 - July 3, 20

During financial year 2010-11 (FY11) automobile sales are expected to surpass 150,000 units, which will be still low capacity utilization. In fact both the assemblers and the vendor industry was busy in expanding capacity prior to 2008 global financial crisis and getting ready to produce nearly 400,000 units per annum.

In fact, when the crisis surfaced most of the expansion work had been done after investing billions of rupees. As the world faces double dip recession, Pakistan can't remain immune. However, higher commodity prices have improved earning of rural population, which has helped in improving car sales, despite devastating foods of August 2010.

However, a report by AKD Securities provide some respite that despite many odds the performance of automobile industry in Pakistan is not as disappointing as being perceived by many. Automobile Manufacturers Association (PAMA) has released auto (cars and LCVs) sales number for 11MFY11, depicting 11 per cent growth in sales on YoY basis. On a sequential basis, overall auto sales declined by 5 per cent MoM to 13,126 units in May 2011. Car sales has grown at 11 per cent whereas LCVs at 14 per cent YoY basis. PSMC's smaller low cost vehicles lead the growth with 56 per cent market share. Together with HCAR registering 19 per cent growth, PSMC outperformed the industry by reporting sales growth of 18 per cent YoY during this period. Sales were driven by Swift variants.

Analysts expect auto sales to remain subdued during June 2011 due to reduction in GST to 16 per cent effective July 01, 2011. PSMC is likely to benefit from a Punjab government plan to provide 20,000 cabs during the next financial year. While HCAR and PSMC sales grew by 19 per cent and 18 per cent respectively, INDU posted a dismal growth of 2 per cent only. Increasing popularity of Swift (up 92 per cent) along with growing volume of Mehran (up 18 per cent) and Alto (up 20 per cent) enabled PSMC to improve its market share to 56 per cent from 52 per cent. Similarly, sales of HCAR grew by 19 per cent due to increase in sales of City and Civic models.

During 11MFY11 tractor sales were 62,251 units, a marginal decline of 3 per cent. This decline was mostly attributed to lower sales of AGTL, down by 10 per cent due to last year deluge affecting its major markets Sindh and Khyber Pakhtunkhwa. As against this MTL recorded flat volumes of 37,071. On a sequential basis, MTL and AGTL posted volume growth of 185 and 9 per cent respectively on MoM basis. This growth stemmed from substantial increase in farmers' income and effective marketing by tractor companies in lower penetration areas. However, both the companies face a potential threat from imported tractors, as some of the brands have attraction for customers despite prices being higher. Likely failure of financial institution in meeting agriculture loan target for the FY11 offers an opportunity to finance tractors in the next financial year.

A closer look at the sales of PSMC, MTL and AGTL reveals that those models which have achieved higher indigenization have remained high. However, introduction of new technologies in cars does not allow the local vendor industry to improve their sales. Only the policy planners can be held responsible for the dismal state of affairs. Pakistan has not been able to formulate policies which can help in indigenization. The worst has been happening because the policy planners have been acting against the advice of the local assemblers and the vendor industry. They should have learnt the lesson from the Indian competitors.

Some of the groups having vested interest have been soliciting for the import of secondhand cars. According to an industry insider the prices of 3-year old models is likely to remain high mainly due to Japanese Yen getting stronger against rupee. Interestingly, local assemblers also oppose import of secondhand cars, which is taken as pressure tactics. However, if one analyzes the situation the factors responsible for the hike in cost are universal and in case of Pakistan, the impact is harsher because of poor capacity utilization. The permission to import secondhand cars may allow the traders to make money but would certainly cause losses to assemblers as well as the vendor industry.

Japanese companies have invested huge amounts in Pakistan and are still ready to make automobile industry vibrant. It is in the larger interest of Pakistan that irritants must be removed at the earliest. However, the objective can't be achieved without making vendor industry economically vibrant. The process of indigenization must be completed at the earliest.

To strengthen the local vendor industry, the government must curb smuggling of parts going on under the umbrella of Afghan Transit trade. This trade can be discouraged by bringing down duty rates on basic raw materials to zero. The move is being opposed on the pretext that it would hurt revenue collection. Let one point be very clear that making the automobile industry is more important than collecting duty on raw materials. Higher automotive sales would automatically usher higher revenue.

It is heartening to note that Punjab government is keen in financing 20,000 cabs. The CKD kids for the cabs must be declared duty free and loans should only be extended for the purchase of locally assembled units. In nineties, the government has allowed financing of imported cars which had proved disastrous for the automobile industry as well as the borrowers.

The other three provinces should also finance public transport. Not only that it will increase automotive sales but also create new job opportunities. At present, Pakistan has highly depleted public transport system, which often results in fatal accidents.