VENDOR INDUSTRY NEEDS BACKUP
SHABBIR H. KAZMI
Nov 28 - Dec 4, 2011
The data released by the federal bureau of statistics (FBS) shows an increase in overall import of CKD/SKD kits for motor cars to $173 million during first four months (July-Oct) of the current financial year as compared to $154 million in the same period of last year.
Import of CKD/SKD parts for cars during October 2011 rose to $51 million from $48 million in September 2011 and $41 million in October 2010. Airlifting kits from Thailand and other countries also pushed up cost of imports. Seaborne trade is always cost effective. Previously, kits were used to com through sea routes.
There is an apprehension that the assembler may increase price of cars but a formal announcement has yet to come.
Often the local vendor industry is alleged for not producing components of international quality or charging higher price. However, they could not be held responsible alone for the prevailing situation. The blame also goes to the government as well as the assemblers for not following the deletion program.
Most of the components for automobiles, tractors, and motorcycles are produced by small and medium enterprises in Pakistan.
It was only around 2005 that the vendor industry made huge investment but 2008 financial crisis frustrated the plan. Many of the vendors facing bankruptcy were forced to close down the business.
Import of second hand vehicles and rampant smuggling of spare parts added to the woes of vendor units. Local replacement markets are flooded with smuggled parts and accessories. Most of these components are imported under the garb of 'Afghan Transit Trade' and most of the consignments are discharged in Karachi and never cross the border. Added to this is the ongoing racket of import of components under the disguise of 'scrap'.
A fragile light engineering industry in Pakistan is one of the reasons for the week vendor industry. At present, Indian automobile is termed as one of the most robust industry but it has attained this status only because for decades the Indian government focused on developing local vendor as well as assembly units.
Therefore, when the government allowed entry of foreign brands, they enjoyed a strong infrastructure. However, one point must also be kept in mind that light engineering industry in India flourished because of dozens of steel manufacturing units. As against this, Pakistan is still heavily dependent on imported steel. Added to this is the nominal difference between import duty charged on raw material and CKD/SKD kits.
Over the last three years, miseries of vendor industry have been compounded because of extensive load shedding of electricity and gas. While many of the units have installed standby power generation facilities, maintaining heavy-duty generators often prove punitive. As started earlier, most of vendor units fall in SME category operating on standby generators for extended hours.
Higher cost of locally made components is partly because of imprudent duty structure as well as small manufacturing base. It is necessary to highlight a point that tractors manufacturers have achieved almost 100 per cent indigenization and motorcycle manufacturers over 75 per cent.
This became possible only because of achieving economy of scale as well as little change in models over the years. Buyers look for ruggedness in tractors but sale of cars, especially the expensive ones, is often driven by frequent model change, mostly cosmetic rather technological innovation.
Those who have still doubts could establish the authenticity of the statement by finding out technological changes brought out in most of the popular models.
The emphasis has remained on body construction. It is necessary to emphasize the point that Chinese and Korean brands assembled in Pakistan are more attractive compared to the models manufactured in the country of origin. Use of locally made parts have not only improved competitiveness but also made the vehicles more attractive.
If the government is serious in making the local vendors strong to face the competition, the first step needed is controlling smuggling. The most appropriate step will be allowing duty free import of steel plates not manufactured by Pakistan Steel. It is also necessary to make Pakistanís only steel mill efficient and competitive. The key issues faced by the unit are overstaffing, mismanagement, inefficiencies and also the corruption.
Historically, the ruling regimes have used the entity for providing employment to political activists. Often prime quality plates are sold as scrap to the favorites.
The government aims at allowing import of secondhand cars to bring down prices of locally assembled units. However, the policy is likely to hurt the vendor industry the most. While the assemblers have the power to pass on price increase to buyers, vendor units lack this power because of being small and fragmented. Developing a robust and competitive car manufacturing is not possible without supporting the vendor units.