RAPID DEVALUATION OF RUPEE HITTING AUTO INDUSTRY

LONG-TERM POLICIES ARE NEEDED FOR THE INDUSTRY.

AMANULLAH BASHAR
(feedback@pgeconomist.com)
June 27 - July 3, 20
11

While the automobile industry are blooming in our neighbourhood where global auto giants are willing to make a big push in the Indian market, the auto industry in Pakistan is confronted with a number of issues threatening to its survival.

On one hand increasing prices of cars on account of rapid decline of rupee against international currencies especially US dollar and yen have made the imports a costly affair while the high cost of financing as well as fuel prices at domestic level are threatening the commercial viability of this vibrant sector of the past on the other.

Meanwhile, Mr. Hiroshi Oe, Ambassador of Japan in Pakistan who visited Indus Motor Company last week assured assistance of government of Japan to request Pakistani government to firm up long term policies for local auto industry.

During the visit, he was given a detailed presentation by the Indus management team followed by a tour of the manufacturing facilities wherein he closely examined the plant and reviewed the company's progress. He commended Indus Motor and Toyota Motor Corporation for bringing the latest automotive technology to Pakistan and contributing towards its progress.

Mr. Hiroshi Oe noted notable contributions made by auto industry particularly IMC in transfer of technology, localization, increasing employment, etc. and acknowledged the challenges faced by the local auto industry.

Mr Ali S Habib, Chairman, IMC thanked Mr. Hiroshi Oe and appreciated Japanese government role in supporting IMC and Pakistan, both in becoming a major automobile manufacturer as well as a significant contributor to the economy of Pakistan.

RUPEE DEPRECIATION

The government in fact needs to control the rapid devaluation of Pak Rupee, especially against U.S. Dollar and Japanese Yen as a bulk of raw material and parts are being imported against Yen and Dollar by Pakistan's auto industry.

In this respect, the auto customers' hopes might be dampened as automakers due to heavy increase in input costs may not be able to pass on complete benefit of duty withdrawal announced in the recently announced budget to them.

The ever-increasing input costs and constant devaluation of rupee from last two years against the major currencies worsened the situation for manufacturing sector of the country, which is already passing through tough times due to economic instability..

The auto industry contributes more than three percent to the GDP while it has achieved up-to 60 percent localization; however, they have to import critical engine and transmission parts along with other parts from Japan.

Auto sector is among the worst hit sectors due to skyrocketing costs of raw material and rupee devaluation against Japanese Yen and U.S. Dollar.

It will not be out of place to mention that the rate of U.S. dollar increased 5.19 per cent against the rupee from June 2009 till May 2011 while the rupee was depreciated 25.2 per cent percent against Japanese Yen during the same period increasing the cost of imported parts used in locally made vehicles.

According to details, the rate of steel increased by 27 per cent from $586 to $746 per ton while the rates of polypropylene, aluminium, copper and lead increased by 67, 35, 24 and 45 percent respectively in international market during last two years. Diesel prices, heavily used for power generation at bigger industrial units due to frequent power failures, increased by 66 per cent since 2009 till May 2011. The car making units require heavy voltage electricity for at least two of their units i.e. welding plants and press shops, two basic manufacturing units heavily contributing to localization of cars.

Moreover, the rate of natural gas increased by 13 percent, electricity by 34 percent, diesel by 34 percent and petrol by 20 percent during the same period. Under the given circumstances, the abnormal increase in auto components including cars as well fuel price, it seems that the only segment of the society having undocumented income will be left on the consumers list of the auto industry.

VENDOR INDUSTRY

The local Original Equipment Manufacturers (OEMs) have sought long-term and consistent policies in order to devise their market strategy and investment plans in the challenging business environment of the country.

The market players of the automobile and its allied industry have asked the government to chalk out a development plan for local engineering sector with strong commitment towards its implementation enabling them to devise production and expansion plans after taking foreign and local investors on board.

The government should devise a balanced-policy protecting local manufacturers and giving tax and investment incentives to new entrants instead of deviating from AIDP so that a level playing field is ensured, an official of the local automotive manufacturer said.

The confidence of foreign investors has been badly shaken when the government took U-turn in its policy, agreed in Auto Industry Development Plan (AIDP) and relaxed the age of imported cars up-to five years.

The automakers have recommended one-point agenda "continuity of policies and existing tariff systems" but with only one guarantee that the policy will be formulated for long-term and no deviation will be undertaken, an industry source said.

The OEMs have informed the government that based on continuity, the industry expects the production capacity of new cars to reach around 380,000 annually by 2017 against the current capacity of 300,000 units. The auto industry is at a critical stage now and it's up to government to decide its bright future with continuation or devastation by changing the policies.