Analysis of Pakistani Automobile Industry – A Report

Introduction

The dictionary says that an automobile is a land vehicle equipped to carry a driver and several passengers, generally moving on four wheels and propelled by an engine that burns gasoline, and the companies that manufacture these automobiles are categorized under the automobile industry. So simple it seems.

 

However, in the real substance, automobiles and the auto sector mean much more than this. It represents mobility, transportation and communication. It represents an industry that has a strong impact on a dozen other sectors may it be steel, vending, petrol or even employment. Hence auto sales reflect not only the basic human desire for mobility but these are also an important economic indicator.

 

The auto sector, like other industries of Pakistan, has its share of problems and issues. This part of the report firstly covers the analysis of the whole industry discussing the various mega environmental factors as well as other relevant issues. Then it will move on to discuss the theoretical companies’ analysis. The whole analysis, industry wise as well as company wise, would form the basis of the financial analysis that comprises of the second part of my report.

 

The companies I have chosen are Pak Suzuki Motors and Indus Motors Company.

The objective of this study, besides to get a good grade in the subject, is to understand the basics of the automobile industry of Pakistan, discuss its pros and cons, find the reasons for its present state, present the future outlook and propose some ideas that might lead to better results.

 

The sources of information primarily include articles from newspapers and magazines, reports from brokerage houses, interviews and some old research reports.
WHAT IS THE AUTOMOBILE INDUSTRY?

The automobile industry in Pakistan includes companies involved the production/assembling of passenger cars, light commercial vehicles, trucks, buses, tractors and motorcycles. The auto spare parts industry is an allied of the auto industry. The auto & allied industry form a major sector in Pakistan.

 

MARKET STRUCTURE

The market structure of the automobile industry in Pakistan is concentrated. In economics term, we could say its an oligopoly, which is characterized by imperfect competition in which the industry is dominated by a small number of suppliers. This is because the auto industry is highly capital-intensive requiring high investments and the products are expensive. Hence the barriers to entry are high resulting in the presence of limited number of suppliers.

Moreover, the market can also be categorized as price-oriented. As cars are luxury items, especially in developing countries (Pakistan being one of them), the demand for them is elastic. Any prices change affects the sales of the company to a great extent.

 

HISTORY OF THE PAKISTANI AUTO INDUSTRY

When Pakistan was established in 1947, there were neither any automobile assembly plants nor any industrial capability available for this important manufacturing of cars, Light commercial vehicles, motorcycles, trucks and buses.

Investment in the automobile industry in Pakistan started in the mid 50s when Kandawallah Industries established its units for assembling buses and trucks. The company’s name was later changed to Naya Daur Motors. National Motors took the challenge to produce locally manufactured automobiles in the 60s and is said to have reached above 80% deletion of the Bedford lorries and trucks before it closed down. Then Kandawallah Motors again made a breakthrough by introducing “Nishaan”, a jeep copied on the pattern of Willeys Jeep of USA used by the Pakistan army. However, the project died out before the commercial production began. Iran used the same blueprint and developed the automobile under a different brand name.

The automobile industry took another turn in the early 70’s when the automobile industry in the country was taken over by the Government and placed under Public sector. Pakistan Automotive Corporation (PACO) was established in 1973 to regulate and supervise the automotive industry in the country. It was not until early 90’s that the industry could have any private participation. Today, Sind Engineering (Pvt) Ltd. is the only public sector enterprise in the automobile sector.

Next in line of indigenization was “Proficient”, a brainchild of a road side mechanic, Khalil ur Rehman. This project died out due to lack of financial resources and an untimely policy of granting concession on the completely built units (CBU) of Suzuki pickups. Suzuki pickup had the same capacity as that of proficient, so the policy hurt the local project very badly.

 

MAJOR PLAYERS IN THE MARKET

There are 12 automobile companies listed on the Karachi Stock Exchange under the sector of Auto & Allied. The car industry in Pakistan primarily comprises of four players, all of which are Japanese. These are Pak Suzuki Motor Company Ltd., Indus Motor Company Ltd., Honda Atlas Cars Ltd. And Ghandhara Nissan Ltd. Amongst these, the first players comprise the major position in the market. Naya daur Motors are the manufacturers of Kia. The market for Buses and trucks include Hino-Pak Motor, National Motor, Ghandhara Nissan Diesal etc. The tractors market comprises of Al-Ghazi Tractors, Millat Tractors. A brief profile of the five major players is given as under:

 

PAK SUZUKI MOTOR COMPANY LIMITED

This company was the first passenger car manufacturer in the industry. It was formed in August 1983 as a joint venture between Pakistan Automobile Corporation Limited (PAC O) and Suzuki Motor Corporation (SMC)-Japan. The former party represents the Government of Pakistan. The company started commercial production in 1984. The company was privatized in September 1992 and SMC progressively increased its equity to 72.8% by acquiring the stake of PACO.

The company today is the largest player in the industry wit over 50% market share and a virtual monopoly in the fastest growing small car market. it represents 47& of the total installed capacity in the passenger cars segment.

 

INDUS MOTOR COMPANY LIMITED

Indus motors is a joint venture amongst the house of Habib (50% equity), Toyota Motor company (12.5%) and Toyota Tsusho Corporation (12.5%) initiated in December 1989 for the assembling, progressive manufacturing and marketing of Toyota vehicles in Pakistan. IMC is also the sole distributor of Toyota vehicles in Pakistan. The company started commercial production in May 1993.

 

HONDA ATLAS CARS LIMITED

Honda Atlas stepped into the Pakistani market in November 1992 as a joint venture between Honda Motor Company, Japan, and Atlas Group of Companies, Pakistan. Commercial production started from July 1994.

 

GHANDHARA NISSAN LIMITED

Ghandhara Nissan was established as a private limited company in August 1981 to import and market Nissan vehicles in Pakistan. It also has been marketing Nissan Diesel Trucks assembled in the country. It was converted into a public limited company in May 1992 to undertake production of Nissan vehicles. The company has a very low market share and its products are not doing so well in the Pakistani market. The reasons to which this state is attributed include lack of financial resources, internal strife in the company, and restructuring efforts. To handle this situation the company is considering to have their loans converted into equity, or to sell the stakes to a new group so that outstanding loans could be paid or rescheduled. The problems of Nissan are further aggravated by stiff competition from the large car market covered mainly by Toyota and Honda.

 

SIND ENGINEERING (Pvt.) LTD.

This company has said to have played a pivotal role throughout the period. The company was incorporated under the Company’s Act in 1963, under the name M/s Wazir Ali Engineering ltd. The company was taken over by the government in 1972 under Economic reform order and was renamed and was placed under the newly formed Pakistan Automobile Corporation (PACO). 100% shares of the company were handed over to PACO. Sind engineering is the only remaining public sector enterprise in the automobile sector which is holding about 72-75% market share of the trucks (Mazda), vans and small trucks segment in the 3.5-6 tons GVW weight range. SEL is presently manufacturing the following brands of vehicles:

  • Assembly of Mazda T3500 Truck chassis
  • Assembly of Mazda T3500 bus chassis
  • Fabrication of bus and truck bodies on Mazda T3500 chassis
  • Import and sale of completely built-up (CBU) Mazda vehicles like pick-up and vans
  • Fabrication of specialized vehicles i.e. dump trucks, refuse van, fire fighter, water bowzer, troop carrier etc.
  • Spare parts and accessories

SEL has offices at Lahore and Rawalpindi with dealership networks through out the country. Till 1998, the company had achieved 45% deletion in Mazda trucks.

 

HINOPAK

Hinopak Motors Ltd. came into being as a result of a joint venture agreement between Pakistan Automobile Corporation (PACO), Al-Futtaim of Dubai, Hino Motors of Japan and Toyota Tsusho of Japan. This company has become a full-fledged member of the Hino and Toyota family as Al-Futtaim Group handed over its 59% stake to Hino Motors and Toyota Tsusho in 1998.

This company has a strong presence in the market of buses and trucks. They have been facing competition from Sind Engineering when they started manufacturing Volvo trucks in 1997. Moreover, import of buses by Daewoo and Mercedes in CBU form served as a setback for the company. However, the brand of Hino is going strong in our country, especially in Punjab and NWFP.

 

NATIONAL MOTORS

This company was established in Karachi by General Motor Overseas Distribution Corporation of USA. In 1953 Lt. Gen. (Rtd.) M. Habibullah Khan Khattak acquired these facilities from General Motors and renamed it Ghandhara industries Ltd.

The Government of Pakisan nationalized Ghandhara industries in 1972 and renamed it National Motors. In 1992, M/s. Bibojee Services (Pvt.) Ltd. acquired it under the Privatization Policy of the Government. The major business activities of the company comprise of progressive manufacture, assembly and marketing of Isuzu truck and bus chassis.

 

PRODUCT LINE OF THE AUTOMOBILE INDUSTRY

Though the high cost for new plants discourages new entrants on the one hand, the average capacity leaves little room for new comer to take their chance on the other hand. The competitive environment has been explained in terms of the different segments of the market. It could be observed that in the upper segment, Toyota is the market leader whereas Suzuki leads in the lower segment.

 

  1. PASSENGER CARS

The passenger cars are divided into 3 more segments.

  • THE 2000 CC DIESEL SEGMENT

This segment includes the various models of Toyota Corolla Diesel cars. The company enjoys a virtual monopoly in this segment as there is presently no other manufacturer in Pakistan. For some time Nissan introduced its Diesel version of the car but it was discontinued as it was not able to penetrate the market successfully.

 

  • THE 1300-1600 CC SEGMENT[1]:

This includes Civic and City from Honda, Baleno from Suzuki, Corolla from Toyota and Sunny from Nissan. Competition exists in the higher segment of the market. This competition is stiff between Honda Civic and Toyota Corolla, while the additional competition comes from Nissan Sunny that had entered the market in early 1997.  However, Toyota is the market leader in this segment and its biggest buyer is the Government. The demand for large cars is about 15000 units per annum. Toyota dominates by 8000 units (53%) while Honda follows with 4000 units (26%). Nissan Sunny has a minute share of less than 6%. Competition from Suzuki in this segment was offered by Baleno, which replaced Margalla in August 1998. Its share is about 2000-2500 units per year.

  • THE 1000-1100 CC SEGMENT[2]:

This includes the Kia Pride motor cars by Naya Daur Motors (under the Tawwakal group) and Khyber by Suzuki. Suzuki enjoys an eminent status in this segment as Kia Pride has been discontinued.

 

  • THE 800-1000 CC SEGMENT[3]:

This segment covers Mehran by Suzuki, which enjoys a monopoly up till now. New entrants in this segment have and are coming in, which will be discussed later in this report. The 800cc-1000cc segment has shown the fastest growth at 5.1 percent per annum from the mid 1980s largely because of economical prices.

The former two can be categorized as large cars, whereas the latter one is known to be the small cars segment.

 

  1. LIGHT COMMERCIAL VEHICLES[4]

In the light, commercial vehicle again the Suzuki’s 800cc pick up ‘Ravi’ is considered to be the best selling while ‘Bolan’ a light van fitted with the same 800cc engine also dominates this segment.

Toyota with its locally produced Hilux pickup and imported Hiace van and Mazda’s T-series pickup fill most of the niche in the larger 1 ton segments. Other major pickup importers are Mitsubishi and Nissan.

 

Hence this segment includes three categories:

 

  • JEEPS:

This segment includes Potohar Jeep manufactured by Pak Suzuki.

  • VANS:

Here again Pak Suzuki enjoys a monopoly by producing Bolan.

 

  • PICKUPS:

This segment involves some competition between Suzuki and Toyota. The products in this section include Hilux (4*4 and 4*2) and Ravi by Suzuki. Both the companies have comparable sales units in these products. However, it can be safely concluded that both the products are catering to two different niches.

 

  1. TRUCKS:

Here the manufacturers include Hinopak, Nissan, Mazda (SEL), Yasoob, Volvo and Isuzu. Hino-Pak led the heavier commercial vehicle segment with its Hino trucks followed by Nissan Diesel, Isuzu and a newly entrant Volvo which commenced operations in 1997.

 

  1. BUSES:

Here again Hino is the market leader followed by Nissan, Mazda (SEL) and Isuzu. Buses market is dominated by Hino, Mazda and Nissan diesel until the end of 1997 when Shahnawaz Limited decided to introduce Mercedes Benz vans and buses in CBU form to the market. In 1998, Daewoo also entered the market with its completely built Daewoo buses that are mostly plying on the Islamabad-Lahore Motorway (M2).

 

  1. TRACTORS:

Two competing companies producing tractors are Al-Ghazi tractors (Fiat) and Millat tractors.

 

  1. MOTOR CYCLES:

In this segment, Honda motorcycles lead, followed by Yamaha and Suzuki.

 

 

AUTOMOBILE INDUSTRY—SOME FACTS

OWNERSHIP AND AFFORDABILITY IN PAKISTAN

One in 205 persons owns a car in Pakistan as compared to 40 persons in Asia, 4 persons in Europe and 3 persons in North America. The ratio of those who can afford to buy a car is much lower—one person in 2900. The analysis is based on a population of 131.4 million, car population of 638,800[5].

SOME OTHER FACTS

  • of motor vehicles registered                        4.278million
  • of motor vehicles on road 3.381 million
  • The aggregate number of passenger cars on road 638million.
  • Total market size for passenger cars 40,000units
  • Demand of Automobiles at CAGR 6-8%
  • Average Capacity utilization of cars industry 47 %
  • Capacity utilization in 1998-99 53%
  • Persons per car in Pakistan 120
  • Irregular imports of cars 75000 units
  • Import of cars under transfer of residence 4000 units
  • Investment in the auto industry 5.344 billion (Rs.1.532                billion foreign equity)
  • Total installed capacity 110000 units
  • Contribution to the Govt. revenue 7.233 billion/year
  • Foreign exchange savings $95.5 million/year

 

Source: Bank of America Research report & PAGE–1999

 

  • MARKET SHARES
TOTAL MARKET SHARES (%)
 199719981999
SUZUKI64.3907962.931081668.4859
TOYOTA22.7400325.4003388522.01676
HONDA11.0724311.122041868.302514
NISSAN1.7967430.5465376841.194827

Source: Calculated from the sales figures of each company. Sales figures from PAMA

MARKET SHARE OF PASSENGERCARS
1999
SUZUKI66.1657
TOYOTA22.18674

HONDA

10.18223
NISSAN1.465339

MARKET SHARE FOR LCV’s (1999)

LCVMarket share
POTOHAR7.290184922
BOLAN48.30488383
HILUX 4X41.161688004
HILUX 4X220.10431484
RAVI23.1389284
KIA CERES0

 

MARKET SHARE FOR TRUCKS

TRUCKSMARKET SHARE
HINO28.48360656
NISSAN26.53688525
MAZDA44.05737705
YASOOB0
VOLVO0.922131148

ISUZU

0

 

 

 

 

MARKET SHARE FOR BUSES

BUSESMARKET SHARE
HINO21.03773585
NISSAN23.77358491
MAZDA55.18867925

ISUZU

NA

 

 

MARKET SHARE FOR MOTOR CYCLES

HONDA68.36364
YAMAHA26.28571
SUZUKI5.350649

DEMAND SITUATION

The demand for automobiles is price-elastic in the short run, as they are durable and expensive goods. Especially in an economy where the disposable income is not very high, the price factor really affects the demand for the product.

The demand for automobiles has been growing at a pace of 6-8%[6] annually between 1990 to 1998. The number of vehicles registered in the country in 1991 were approx. 2.1 million. This number increased to 4.278 million in 1998.

 

YEARNUMBER OF VEHICLES REGISTERED (IN MILLIONS)
19912.1
19922.4
19932.6
19942.8
19953
19963.5
19984.278

Source: BOA research report

 

MARKET GROWTH

The Compound Annual Growth Rate for the auto industry is as follows:

CATEGORYCAGR%
Small Cars7
Large Cars3
Light Commercial Vehicles9
Whole Industry8

Source: BOA research

 

KEY DETERMINANTS OF DEMAND:

  1. ECONOMIC FACTORS
  • PRICE & DISPOSABLE INCOME:

As it was stated before, the demand for cars is price-elastic. The major determinant for the demand for cars is therefore price. If the purchasing power of the people is reduced due to either price increases or disposable income decreases, the demand for automobiles will be strongly affected.

The price increases because of increase in costs. Since the deletion level is low in our country, most of the input material is imported from Japan. Hence any devaluation of Rupee, which is quite frequent, against yen would increase the costs of the auto assemblers in Pakistan. Moreover, inflation would increase the cost of local inputs. Import duties and taxes also influence the costs. The structure of the automobile market is such that it allows the manufacturers to have greater power to influence the prices. Any cost increase as such is passed right on to the consumers, thereby reducing the demand growth for cars. The last few months are marked by price increases by the car manufacturers, due to a number of economic reasons.

Moreover, due to the economic problems like devaluation and inflation, and other problems like higher income taxes, the disposable income of the consumers is shrinking, having a negative effect on the demand of cars, especially the high-priced, larger cars segment.

The price increases and reduction in disposable incomes have resulted in an increased demand for smaller cars that are also more fuel-efficient. The demand for larger cars has though no declined drastically, some effect on their sale can be observed.

The economic issues related to the auto industry will be discussed in detail later in the discussion.

 

  1. FUEL PRICES:

Automobiles run on fuel—petrol. The increase in fuel prices depress the demand for cars, especially larger cars because they tend to become more and more expensive to run. Hence the operational efficiency is greatly reduced. As a result of increase in fuel prices of about 25%, the demand for diesel run cars and smaller, economy size cars is on the rise.

 

  1. CAR LEASING, FINACING:

The growth for car leasing and financing implies a positive demand for cars in the market. The local car producers are benefit from different leasing schemes offered. Due to reduced economic activity in the industrial sector, the leasing companies are offering good incentives to the consumer market in order to have their idle funds utilized. This has had a positive effect on the cars demand. People who do not want to tie up their funds or the salaried class people, who cannot afford to pay a lump sum amount for a car, find this a good option. Car financing through banks is also a viable option for such people. However, leasing sector is catering mostly to the consumers for car financing with only Citibank as a major player in financing car purchases.

 

  1. INSTITUTIONAL DEMAND

The government and the corporate sector as a whole are supposed to be the wealthy parties in any country. Demand for various products come from these institutions and as such they serve as important customers for many industries. Car industry is also such a sector which benefits from institutional sales. However, the slower economic activity, high deficits of the budget and other such factors have lowered the demand for cars coming from these institutions.

 

INDIRECT DETERMINANTS

  1. POPULATION GROWTH

With the population growth of 2.7% per annum and the changing lifestyles of the people, automobile sector has grown in the past.

 

  1. DEMOGRAPHIC SHIFT

Migration of the population from the rural to the urban areas affects the automobile sales indirectly. In cities, the need for travelling longer distances between places of residence and work has created the need for using automobiles. Moreover, urbanization of the country have also contributed to the growth of this industry.

 

 

  1. STATE OF THE TRANSPORTATION SYSTEM

The state of the transportation system also has its remote effects on this industry. The need for cars will be higher in countries where the transportation system is inefficient.

The state of our public transportation is extremely poor, to say the least. Therefore to avoid their use, people prefer having their own cars as soon as their incomes increase. However, the greater effect is on the used car market, as the new cars may still be out if the affordability range of such people. The people who were either motorcyclists or pedestrians and switched to motor cars due to lack of public transportation are known as “first time buyers”. These offer a great potential for the sales of automobiles provided they are affordable.

 

  1. MOTOR INSURANCE SITUATION

Increased thefts and snatching and the high loss ratio are the two primary factors blamed for rendering the motor business highly unprofitable by the general insurance companies in Pakistan. The access to car insurance is therefore very limited. And for the same reason demand is tilted heavily towards the small car market. Details about the motor insurance situation are discussed later, under the major issues heading.

 

SUPPLY SITUATION

Local assemblers, the important ones of which include Suzuki, Indus Motors & Honda, are fulfilling most of the local supply. The high import duties on Completely Built Units (CBUs) ranging from 110-256%[7], and ban on import of reconditioned cars has protected the local industry. The total production capacity of automobile sector (excluding trucks and buses) of the country comprises of 86,000 units. The economy and mid range cars constitute 77% of the total local production while the remaining 33% reside with luxury passenger cars.

 

  • PRODUCTION CAPACITY
COMPANYPRODUCTION CAPACITY (in units)
Suzuki50000 (double shift)
Toyota20000 (double shift)
Honda10000 (double shift)
Nissan6000 (single shift)
  • PRODUCTION
COMPANYPRODUCTION (In units)
 1996-971997-981998-99
Suzuki319083129832805
Toyota7341787410169
Honda392240703926
Nissan599933481

Source: PAMA

The total demand is less than the installed capacity, as a result of which the manufacturers are operating at a lower capacity.

 

  • CAPACITY UTILIZATION
  199719981999

COMPANY

Capacity(In units)

Production(In units)

Utilization

(%)

Production(In units)

Utilization

(%)

Production(In units)

Utilization

(%)

Suzuki500003105562.13129862.5963280565.61
Toyota20000734136.7787439.371016950.845
Honda10000407040.7407040.7392639.26
Nissan600059910.093315.554818.016667

Source: calculated from the production figures from PAMA

 

In units199719981999
Total capacityTotal production

Total utilization(%)

Total production

Total utilization(%)

Total production

Total utilization (%)

860004306550.14417551.36627914938057.4186

 

RECENT CHANGES IN THE MARKET—NEW ENTRANTS

The competition in the 800 to 1000cc segment is all set to increase. The new entrants are:

(Sources of this information: BOA research, Invest Cap research of 2000)

  • DAIHATSU MOTORS:

Daihatsu plans to launch Cuore in March-April 2000. This is a joint venture between Toyota, Japan (Indus Motors, Pakistan), Toyota Tsusho and house of Habib. The initial investment amounts to Rs.2 billion. The segment in which this car will enter is the 850cc cars. Their production plan for this year is around 10000 units. This project will result in increased capacity utilization of their plant and will create additional jobs in vending industry. The existing network of dealers will be used. Their project cost is around $15 million.

  • HYUNDAI MOTORS:

Hyundai has already entered the market by forming a joint venture with Dewan Farooq Motors as their local partners. They have launched a 1000 cc car named Santro. They also plan to introduce a medium size van by the name of Grace and have already started production of a 2600cc pick-up named as Shezore. The project cost is approx. $20 million with a capacity of 1500-3000 cars.

  • DAEWOO MOTORS:

They plan to assemble an 800cc car, Matiz at the Ghandhara Nissan plant in the year 2000. Their project cost is $12 million, with the capacity of 10000 cars.

  • FIAT MOTORS

This is a proposal by the Italian car manufacturing company, Fiat, which plans to make a huge initial investment of $50 million. Fiat will produce a 1000cc car (Uno) in a joint venture with the Raja Group of Industries. The capacity is 21000 cars per annum. The company has agreed to start manufacturing units with 30% deletion program, which it plans to raise to 45% within 15 months.

 

REASON FOR INCREASE IN SMALL CARS

  • Saturation in the larger segment
  • Price increases of the larger cars & eroding incomes

The new entrants, according to the government policy will have to start at the present level of localization with a minimum deletion level of 30% and achieve 64% deletion within three years of entry. This may be a deterrent for the new entrants.

These new entrants will also end the dominance of Japanese companies as Korean and German carmakers are entering the industry.

 


AUTOMOBILE INDUSTRY OF PAKISTAN (source: PAMA)

PROD.PROD.Prod.SalesProductionSalesPROD.PROD.Prod.SalesProductionSales
Jul’96Jul’97JULY, 1998 TOJul’99 toMonth ofJul’99Month ofJul’96Jul’97JULY, 1998 TOJu’99 toMonth ofJul’99 toMonth of
to June’97to June’98JUNE, 1999Jun’2000JAN’00Jun’2000JAN’00to June’97to June’98JUNE, 1999June’2000JAN’00June’2000JAN’00
PASSENGER CARSTRUCKS
1300 – 1600 CCHINO1,1642402612782664226236
CIVIC3,9224,0703,9283,7942,0653102,178378NISSAN795483251259836862
BALENO3,7143,0742,4122,0452,14992,08185MAZDA7379504864301502120633
COROLLA5,1645,6518,3698,2675,1217864,683614YASOOB179500nilnilnilnil
SUNNY599933481546330657VOLVO4112859oo330
1000 – 11000 CCISUZU4160nilnilnilnilnilnil
KIA PRIDE1,1200000000TOTAL2,9201,8501,0839764996958771
KHYBER6,2805,0196,9916,7682,7143792,859376
800 CC
BUSES
MEHRAN13,48214,93616,50115,8414,9016084,645321HINO2061862582232884228848
NISSAN79108266252740906
TOTAL34,281 33,683 38,68237,261  16,9832,092 16,5111,781MAZDA33546005855249148768
ISUZU4442NANANANANANA
P.S : Baleno prod. Started in Aug’98, previous product was MargallaTOTAL36239011241060886133865122
LIGHT COMM.VEHICLES
 
JEEPS
TRACTORS
POTOHAR7926576226151923924643
FIAT4939628812198122721060814559480925
VANSMF547878561444615142990410009665940
BOLAN441149924245407514652251631224
10417141442664427414205122455191451865
PICK UPS
HILUX 4X41133011998100310
HILUX 4X220642193168116964496841639
MOTOR CYCLES
RAVI237626202034195267310367731HONDA68637634635963960536311804575304395006
KIA CERES85351000000YAMAHA38160250402343523276128832200127332186
 SUZUKI44754430473823813972494354
GRAND TOTAL44,89044,22647,38345,69719,7722,52719,5122,118106797929788750488550464447172456667546

 

KEY ISSUES FACED BY THE INDUSTRY

 

  1. GOVERNMENT REGULATIONS—PROTECTION FOR THE INDUSTRY

The major government regulations that have a direct impact on the automobile industry include the import duties on CKDs, law regarding the CVT, import duties on the import of cars and deletion policies.

 

THE DUTY STRUCTURE

  • DUTY ON CBU’s

Import duty on CBU’s ranges from 110-265%[8] depending upon the make and engine capacity of the car. Such a high duty protects the local industry from foreign competition. New cars can be imported under the gift scheme as well. In the 1999-2000 budget however, these rates were replaced with a lump sum amount depending on the engine size of the imported car. The new duty structure was as follows. However, the % duty on CBU is said to have been re-imposed in the same year again ranging from 110-256%.

DUTY STRUCTURE

ENGINE CAPACITYVEHICLES OTHER THAN 4×4 (AMOUNT LEVIED IN US$)4X4 VEHICLES(AMOUNT LEVIED IN US$)
80050005000
801-10001000010000
1001-13001500015000
1301-16002000020000
1601-19003200025000
1901-23005500030000
2301-28008800040000
2801-350012000050000
3501-420015000060000
4200+17500070000

Source: DAWN

This import duty structure still discouraged import of foreign cars and commercial vehicles and the protectionism of the auto industry will continue.

 

  • There is a ban on the import of reconditioned cars:

In order to provide protection to the local industry the import of used cars stands banned since 1994. The import of second hand cars was allowed under the Personal Baggage Scheme. However, in 1994, on a summary submitted by the Ministry of Industries, Economic Coordination Committee (ECC) of the cabinet decided to impose a ban on the import of more than 2 years old cars under the Personal Baggage Scheme. The import of such cars was restricted to only import under the Transfer of Residence Scheme (explained in detail later). The Transfer of Residence Scheme allows overseas’ Pakistanis to import cars to Pakistan by producing at least one year old driving license of the country of the export of the car. But nevertheless, tariff protection will continue to be provided to the local manufacturers against the import of Completely Built Units (CBU)[9].

 

ADVANTAGES OF PROTECTION

EMPLOYMENT CREATION:

The automobile manufacturers as well as the vendors and other related industries provide employment to tens of thousands of people. Protecting the automobile industry would mean protecting the jobs of these thousands of people.

 

TAXES TO GOVERNMENT:

The automobile producers have contributed a substantial amount in duties and taxes to the government. In 1997-98, Honda contributed Rs.829 million to the exchequer in sales tax, income tax, customs duty and other charges which formed 30% of its net sales. Suzuki contributed a revenue of Rs.2.57 billion in duties and taxes in 1997-98. It has contributed Rs.10.86 billion revenue in duties and taxes between 1993-94 to 1997-98. Indus Motor contributed Rs.125 million in corporate tax in 1997-98, which totaled Rs.297 million since 1993-94 and much more in duties and taxes.  Twenty seven % of the retail prices of each Toyota car and truck relates to the government revenue. Approximately Rs.200000per unit is contributed in the form of taxes and revenues[10].

 

DISADVANTAGES OF PROTECTION

CUSTOMERS ARE THE SUFFERERS

Discouraging imports has benefited the local auto industry at the cost of buyers. The absence of competition and choice forces have created a monopoly of the local producers to control the prices and market anyway they like. This fact has manifested itself in prices increases especially in the small car segment in which Suzuki had a virtual monopoly (prices discussed in detail in the later parts of the discussion). In addition, this situation has led the car assemblers to fall back on their commitments to the government about two things—increasing their production volumes by 20% annually and to follow a deletion program by cutting the annual imports of parts by 30% per year. Moreover, the lesser imports of used cars have increased the prices in the local used car market. Here again, the customers are the sufferers.

 

INCREASE IN SMUGGLING

The smuggling of motor vehicles across the Pak-Afghan border received a boost when the ban was imposed by the government on the import of used cars of over two years.

(Facts discussed later in the major issues presented later).

 

LOST REVENUE TO THE GOVERNMENT

The import of used automobiles can result in generating revenue of Rs.16 billion[11] in two years for the government. Moreover, the lost revenue due to smuggling will also be discouraged.

 

  • DUTY ON CKD’s

Import duty of 35%[12] on CKD’s: Completely knocked down  (CKD) Kits are the main input item for the auto industry and constitute major portion of the total cost.  CKD kits are imported while few of their components are procured from the local vending industry for assembling in the country. The cost of completely-knocked down (CKD) kits account for 65% of the total manufacturing cost for a car.

In order to boost auto production and sales, in the first week of January 98 the government reduced the import duty on CKD from 40% to 35%.

 

CKD COST AS % OF TOTAL PRODUCTION COSTS
INDUSTRY65%
PAK SUZUKI62%
INDUS MOTORS75%
HONDA ATLAS67%

Source: BOA research

The cost of the CKD is strongly affected by the Rupee/Yen exchange rate fluctuations. This factor is discussed in the later part of this report.

 

  • CAPITAL VALUE TAX HAS BEEN WITHDRAWN

The Federal Government has announced exemption from payment of capital value tax ranging from 3.75% to 7.5% from Jan 24,1998[13], on the purchase of new cars manufactured in Pakistan. This exemption has been announced in accordance with the incentive policy given to the car industry in Pakistan. By granting these incentives, government has made an effort to reduce the car prices and to provide some relief to the consumers. This would also result in an increase in demand on the consumers’ side.

 

AUTO PACKAGE 1998[14]:

The main points of the auto package industry announced in 1998 are:

  • An import duty of 35% on all imported CKD’s.
  • Withdrawal of the CVT.
  • The corporations were allowed accelerated depreciation on cars, which leads to tax benefit. The maximum depreciation ceiling was raised from 600000 to 1 million.
  • The deletion policy was made incentive based.
  • An export rebate scheme was introduced.
  • A technology transfer fund was established to help indiginization.

 

 

 

BUDGET1999-2000

In this budget has not only increased the personal tax rates but has also imposed a tax on perks or fringe benefits[15]. This will erode the disposable income of the consumers, affecting the demand adversely. As cars are luxury and price-elastic goods, their sale are expected to be affected adversely in the long run.

The duty structure was though changed from a %age to a lump sum amount, it still serves the purpose of protecting the local industry. The new duty structure has been given a few paragraphs above.

The withdrawal of CVT and 5% reduction in the import duty on CKD’s (to 35%) also goes in favor of the industry. Their impacts have been discussed earlier.

DUTY STRUCTURE (COMPILED FROM VARIOUS SOURCES)

1990-911991-92
EngineCustomSales CustomSales C.V.T.
CapacityDutyTaxC.V.T.DutyTaxC.V.T.( I.T. )
        
Passenger Cars (CKD)
Upto 999 cc30%10%0%30%10%0%0%
1000 – 1300 cc30%10%0%30%10%0%0%
1301 – 1600 cc30%10%0%30%10%0%0%
1600 & above
Passenger Cars (CBU)
Upto 999 cc100%12.50%0%100%12.50%0%0%
1000 – 1300 cc150%12.50%0%150%12.50%0%0%
1301 – 1600 cc235%12.50%0%235%12.50%0%0%
1600 & above435%12.50%0%435%12.50%0%0%
2000 cc+435%12.50%0%435%12.50%0%0%
Commercial (CKD)
LCVs30%0%0%5%0%0%0%
Commercial (CBU)
LCVs40%12.50%0%20%12.50%0%0%
4×4 Jeeps80%12.50%0%110%12.50%0%0%
Vendor Parts
Raw Material
Sub-Comp.
Comp. – Cars
 ” – trucks etc.
Import Duty and Sales Tax onPublic Transportation Scheme (Yellow Cab)
LCV’s was reduced to zerostarted.
percent from November 1990 to
March 199110% import surcharge levied.

 

1992-931993-94
EngineCustomSales C.V.T.CustomSales C.V.T.
CapacityDutyTaxC.V.T.( I.T. )DutyTaxC.V.T.( I.T. )
Passenger Cars (CKD)
Upto 999 cc40%12.50%0%0%40%5%5%0%
1000 – 1300 cc40%12.50%0%0%40%5%5%0%
1301 – 1600 cc40%12.50%0%0%40%5%5%0%
1600 & above
Passenger Cars (CBU)
Upto 999 cc110%12.50%0%0%70%15%5%0%
1000 – 1300 cc160%12.50%0%0%90%15%5%0%
1301 – 1600 cc160%12.50%0%0%90%15%5%0%
1600 & above245%12.50%0%0%130%15%5%0%
2000 cc+445%12.50%0%0%250%15%5%0%
Commercial (CKD)
LCVs5%0%0%0%5%15%5%0%
Commercial (CBU)
LCVs30%12.50%0%0%30%15%5%0%
4×4 Jeeps95%12.50%0%0%95%15%5%0%
Vendor Parts
Raw Material
Sub-Comp.
Comp. – Cars
 ” – trucks etc.
Automobile industry deregulated newPublic Transportation Scheme (Yellow Cab)
entrants allowed without any restrictionsdiscontinued.
and sanctions.
CBU duty reduced to 75% and
Fixed Sales Tax @ 2% levied on Tax paidsubsequently enhanced to 90% on
value on CKD.passenger cars.
CKD Sales Tax at the retail stage was
enhanced to 15% and later reduced to 5%
on passenger cars.
Rupee devalued by about 10% against
US$.
Capital Value Tax impose @ 5%.
ECC Package granted upto June 30, 1995
in Feb. ’94 which included reduced of import
duty on CKD to 10% and Sales Tax to 5%.
Restriction on import of used cars.

 

1994-951995-96
EngineCustomSales C.V.T.CustomSales C.V.T.
CapacityDutyTaxC.V.T.( I.T. )DutyTaxC.V.T.( I.T. )
Passenger Cars (CKD)
Upto 999 cc22%15%5%0%32%15%5%0%
1000 – 1300 cc22%15%5%0%32%15%5%0%
1301 – 1600 cc22%15%5%0%32%15%5%0%
1600 & above32%15%5%0%
Passenger Cars (CBU)
Upto 999 cc100%15%5%0%100%15%5%0%
1000 – 1300 cc120%15%5%0%120%15%5%0%
1301 – 1600 cc120%15%5%0%120%15%5%0%
1600 & above150%15%5%0%150%15%5%0%
2000 cc+265%15%5%0%265%15%5%0%
Commercial (CKD)
LCVs20%15%5%0%30%15%5%0%
Commercial (CBU)
LCVs60%15%5%0%65%15%5%0%
4×4 Jeeps110%15%5%0%110%15%5%0%
Vendor Parts
Raw Material
Sub-Comp.
Comp. – Cars
 ” – trucks etc.
Sales Tax revised to @ 15% from 5%.From October 1995 10% Regulatory duty
imposed.
Fixed Tax increased from 2 ~ 4% on all
imports.Pak. Rupee devalued by 7%.
Diesel Prices increased by Govt. of Pak.
from Rs 6.48 to Rs 7.44.

 

 

 

 

 

1996-971997-98
EngineCustomSales C.V.T.CustomSales 
CapacityDutyTaxC.V.T.( I.T. )DutyTaxC.V.T.
Passenger Cars (CKD)
Upto 999 cc40%12.50%5%40%12.50%0%
1000 – 1300 cc40%12.50%10%2%40%12.50%3.75%
1301 – 1600 cc40%12.50%12.50%4%40%12.50%6.25%
1600 & above40%12.50%15%6%40%12.50%7.50%
Passenger Cars (CBU)
Upto 999 cc100%12.50%5%0%100%12.50%0%
1000 – 1300 cc120%12.50%10%2%120%12.50%0%
1301 – 1600 cc150%12.50%12.50%4%150%12.50%0%
1600 & above265%12.50%15%6%150%12.50%0%
2000 cc+265%12.50%15%6%265%12.50%0%
Commercial (CKD)
LCVs30%12.50%5%0%30%12.50%0%
Commercial (CBU)
LCVs60%12.50%5%0%60%12.50%0%
4×4 Jeeps110%12.50%15%6%110%12.50%0%
Vendor Parts
Raw Material20%12.50%0%0%10%12.50%0%
Sub-Comp.30%12.50%0%0%15%12.50%0%
Comp. – Cars40%12.50%0%0%25%12.50%0%
 ” – trucks etc.35%12.50%0%0%25%12.50%0%
CVT imposed on Income Tax Payer &CVT rates reduced and become
Increased on Non-Tax Payers.adjustable against Wealth Tax
liability.
10% Regulatory Duty continue on all
Imports.The distinction of Tax Payer and
Non Tax Payer for CVT purposes
Sales Tax revised to 18%.discontinued.
Mini BudgetDuty on P.C CKD reduced
Pak. Rupee devalued by 8.5%from 40% to 35%.
against US$.
Petrol Prices increased by 10%.
Fixed Tax increased from 4% to
5% on all imports.
Sales Tax reduced to 12.5%.
Regulatory Duty discontinued on CBU &
CKD. However, 10% R.D. merge in CKD.

 

 

1998-991999-00
EngineCustomSales CustomSales 
CapacityDutyTaxC.V.T.DutyTaxC.V.T.
Passenger Cars (CKD)
Upto 999 cc35%15%0%35%15%0%
1000 – 1300 cc35%15%0%35%15%0%
1301 – 1600 cc35%15%0%35%15%0%
1600 & above35%15%0%35%15%0%
Passenger Cars (CBU)
Upto 999 cc100%15%3.75%100%15%3.75%
1000 – 1300 cc120%15%5%120%15%5%
1301 – 1600 cc150%15%5-6.25%150%15%5-6.25%
1600 & above150%15%7.5%150%15%7.5%
2000 cc+125%15%7.5%225%15%7.5%
Commercial (CKD)
LCVs30%15%0%30%15%0%
Commercial (CBU)
LCVs60%15%7.5%60%15%7.5%
4×4 Jeeps125%15%7.5%110%15%7.5%
Vendor Parts
Raw Material10%15%0%10%15%0%
Sub-Comp.15%15%0%15%15%0%
Comp. – Cars25%15%0%25%15%0%
 ” – trucks etc.25%15%0%25%15%0%
Advance I/T of Rs 2000 andDepreciation allowance
Rs 3000 imposed on 1600cc andon used CBUs reduced from
 2000 cc P.Cs 50% to 30%.
Duty rate on 1800 cc CBUWealth tax imposed on 1500 cc
reduced from 265% to 125%.and above P.C
Duty rate on 4×4 CBU$ Duty imposed on imported
increased from 110% to 125%.CBU and 4×4.
CVT imposed on CBUs at% Duty re-imposed on imported
import  stage.CBU and 4×4.
Sales Tax rate increased fromDepreciation allowance on
12.5% to 15%.used imports increased to 60%.
 Since  1991-92, there have been 36 changes in policies relating to Automobile  industry in Pakistan.

 

 

 

  1. INCONSISTENT GOVERNMENT POLICIES[16]

The performance of the automotive industry in Pakistan is greatly affected by the inconsistent Government policies and regulations. So far 36 changes have occurred during the last six years in policies relating to auto industry. Such frequent fluctuations greatly affect the forecasting ability of the manufacturers, thus, restricting the smooth functioning and growth of the industry. A few examples of this irregularity are:

 

  • The Yellow Cab scheme:

The Yellow Cab Scheme of the government adversely affected the automobile sector. As it depressed the demand in the automobile retail market of Pakistan for the next four years bringing the local sales growth much below the target.

The aim of the yellow cab scheme of the Prime minister was the induction of an efficient and modern transport fleet to existing facilities. Under the scheme the Government allowed the duty free import of cars of mass distribution as Taxis in the local market. The prospective buyers had to make a down payment of 10% of the car price while the local nationalized banks guaranteed the rest. The local assemblers were made unwilling partners of this scheme. They had to stop the regular assembling and diverted the facilities towards producing Taxis. Nissan Sunny, Hyundai and Daewoo were imported while Suzuki, Mehran and Khyber were produced by the local automobile sector. The last Transport Revamping Scheme proved to be disastrous and depleted the country’s liquid foreign currency reserves by about a billion dollars.

  • A noteworthy example of killing a plant in its infancy was observed in 1993 when the import duty on CBUs (completely build units) of higher cc cars was drastically reduced. It threatened the closure of Indus Motor Company. In the period of the revival of the free market this loss of efficiency was absolutely disastrous.
  • Another case was the import of 678 luxury cars in1998. The controversial reduction in import duty on luxury cars from 400 to 125 percent in the federal budget 1998-99 was nothing more than a one-time concession. Interestingly enough, the federal government slapped on a 100 percent regulatory customs duty on luxury cars above 1800cc on July 21,just a week after the 678 luxury cars had been imported into Pakistan.  The dealers who imported the cars automatically made a 100% profit in just seven days.

 

  1. SMUGGLING[17]

Smuggling is a common trait in the automobile industry. Though the exact number of smuggled cars is not available but sources in the car industry put it at 50,000. Of these 30,000 are already in use while the rest will eventually find there way on the roads through legalization. These smuggled cars include those on roads with fake registration numbers or without any registration at all and those piled up in and around Pakistan’s border, especially with Afghanistan, in Balochistan and NWFP.

Seventy per cent of these cars comprise of Toyota Corollas and 12-15 seater commercial Hi Aces. They also include Pajeros. Dubai is dubbed as the sole outlet of the smuggled vehicles into Pakistan. While the import of used cars was banned under personnel baggage scheme in 1994 return if Pakistanis were allowed to bring in a car under TR scheme provided they had lived abroad for more than two years and has a valid driving license of the foreign country.

The government proposed a scheme to legalize these 50,000 smuggled vehicles through tax rebates and waiver scheme by the CBR expiring on May 1998. Every car smuggled before May 31, 1998 was proposed to be legalized. Under the scheme, the smuggled cars will be allowed to be registered on payments of the normal duty and the Capital Value Tax (CVT), each of which will depend on the power of a vehicle. The 100% fine had been totally waived.

This one-time legalisation of the smuggled cars was as damaging to the car industry as the Yellow Cab Scheme which brought on to the roads some 24,000 vehicles virtually duty free.

According to eye-witnesses the only major city where the smuggled cars ply freely is Quetta. Fake registration for the smuggled cars by the rich is not a problem in Pakistan.

The smuggled cars that are seized and confiscated are disposed of through

  1. Release to the owners on payment of duties and taxes and redemption fine.
  2. Sale to the government department through Cabinet Division on pre-determined prices.
  • Through open auction.

When the first option fails, the third one remains the most commonly used by far.

The escalating tariffs on imported auto-parts also encourage smuggling of these components that has been damaging to the car industry.

 

  1. VENDING INDUSTRY

Vending industry is a component of the automobile industry. The auto parts comprises of 750 various sized industries; large, medium and small. It provides jobs to half a million people, of which 100,000 are direct employees and 400,000 indirectly with a local investment of Rs.20 billion[18].  The industry operates 95% on self-help basis. The units are in three types which include the original equipment manufacturers (OEM’s), independent manufacturers and ancillary industry producing small parts. The OEM’s supply their products for assembling purposes to the local industry, instead of selling in the retail market.  The industry manufactures auto parts[19] such as:

  • Pistons
  • Engine valves
  • Gaskets
  • Shock absorbers
  • Wheels
  • Bumpers
  • Instruments and instrument panels
  • Gears
  • Radiators
  • Auto air conditioners etc.

This industry is directly affected by the government’s deletion policy. According to Mr. Yusuf Shirazi, the chairman of Honda Atlas, 30% of the vending industry, which comprises about 400 units, is operating at just 30%[20] of capacity. The reasons for low capacity utilization include lack of appropriate fiscal and other policy support of the local engineering industry with its share in meeting country’s demand declining from 42% in 1981-82 to 31% in 1988-89. The share is now stagnant at around 24%. As a direct consequence, the share of engineering goods in total imports rose up to 42% over the last 8 years which consumed on the average about 50% of the country’s export earnings. This also culminated low share of private investment in the engineering sector accounted for only 11.5% during the 6th five-year plan and 6.3% during the 7th five-year plan[21].  The import of used auto parts is allowed @ 125% of value plus a redemption fine.

The main threat to the vendor industry is the WTO movement for free deletion, which means no monitoring over the imports of spare parts and components. Besides this, the dealers in the second hand market have become another challenge.

By the end of 1998, Honda had 54 vendors supplying over 673 locally manufactured parts. Suzuki had over 200 active vendors while Toyota had 70.

The engineering and vending industry of Pakistan is not very well developed due to the following reasons[22]:

  • Use of incorrect material.
  • Unavailability of proper material, surface treatment and protection.
  • Lack of quality control measures.
  • Lack of technological guidance and access to sources of modern technological know-how.

Realizing the importance of the engineering sector, the government decided to constitute an Engineering Development Board (EDB) with the aim of providing an instrument for policy support and direction for further broadening of the engineering base for the country. The Board has also constituted some sub-committees. One of the committees suggested assemblers of cars up to 800cc engine capacity should upgrade themselves to 60% and work their way up to 76% by the year 2000. Likewise, the cars of capacity between 801cc and 1200cc capacity are to attain 65% deletion by 2000. Cars 1200cc and above are expected to attain 50% deletion by the year 2000. In addition to that, in monitoring for the assemblers was worked up whereby each assembler will complete an annual review and submit the report to the committee by December of each year.

As for new entrants, there is a standard that will be supervised by the committee before the government grants any license of operation. This is discussed in detail in the section on deletion.[23]

The exports of auto parts go to US, Germany, England, France, Italy, Turkey, Middle East and the SAARC countries.

 

  1. DELETION

A major reason for providing protection to the local automobile industry was to help encourage localization. This objective is yet to be achieved as we still remain dependent on imported CKD’s.

The auto industry’s production costs have remained high because of low capacity utilization and low deletion levels. The deletion levels of the major car manufacturers are as follows:

 

DELETION LEVELS

Auto industry45%
Pak Suzuki48%
Indus Motor31%
Honda Atlas29%

Source: BOA

Low deletion levels make a company vulnerable to adverse movement in the exchange rate since the cost of CKD depends on it. In the case of Indus motors CKD costs comprise of 75% of total manufacturing cost, for Honda and Pak Suzuki they are 67% and 62% respectively.

When the Suzuki company commenced one of its first international joint ventures in Pakistan about 15 years ago, a pre-condition of the government approval was that the cars produced would achieve about 84% deletion in about 6 years. Since then, the schedule has been revised time and again, with the result that the highest deletion achieved so far has been 64% for Suzuki Mehran.

The industry has to achieve a 50% deletion by the year 2001[24]. This is imperative as this will not only create more jobs, but will also save the country lots of foreign exchange.

The localisation is not only highly capital intensive but is also seen as economically un-viable due to insufficient volumes as the vendor industry is utilising only 30% of its capacity.

Pakistan has a Rs.30 billion market for auto parts out of which only 20% is served by local manufacturers, 20% by legal imports and 60% by smuggled counterparts[25].

POLICY FOR THE NEW ENTRANTS

The new entrants have the option to either start at 75% of the existing industry deletion level achieved in the previous year, or fixed deletion levels, whichever is higher. The fixed deletion levels are:

Cars up to 800cc45%
Cars up to 800-1200cc35%

Source: BOA

The car manufacturing industries have been asked to improve the deletion program by 4% to 5 % every year, for which the incentives and concessions have been linked with the reduction in the prices by manufacturers, to facilitate and benefit buyers of small cars.

To increase indigenization of high-technology parts, a technology transfer fund will be established which the government and the vendors will fund mutually.

Suzuki has achieved the highest deletion level in the economy cars. This is because of its strong presence in the market for thirteen or so odd long years as compared to deletion in the luxury cars segment by Honda and other manufacturers. Indus, despite having been established recently managed to achieve higher deletion, since they were compelled as per the government policy to start their production with the prevalent deletion level.

 

AIM OF DELETION POLICY

  • To reduce the auto industry’s reliance on imported components. This will lead to saving of foreign exchange, less vulnerability to exchange rate fluctuations, and lower costs for the companies leading to lower prices and high profit margins.
  • To increase self-reliance on our engineering sector ensuring transfer of technology, and liaison between various segments of the industries.
  • To give a boost to the local vending industry.

 

ADVANTAGES OF DELETION

  • It encourages long-term investment
  • Creates technology momentum that can be diversified later into other fields.
  • Keeps the prices of cars relatively low.
  • It creates job opportunities for many. Increase in the deletion level by just 1% creates 200 new jobs[26].

The government has been accused of implementing inconsistent deletion policies that have been unable to alleviate the problem of low capacity utilization faced by the vendors.

 

  1. EXCHANGE RATE POLICIES—RUPPEE/YEN DISPARITY:

Profits in the auto industry are determined to a large extent by the movement in the rupee/yen parity. This is because all the local assemblers import their completely Knocked down (CKD) kits from Japan; after paying duties and taxes. Any adverse movement over here basically has a direct impact on costs, which move in the same direction as the Yen. It is quite obvious that any change in the costs over here has a substantial effect on the operating profits.

The automobile industry in Pakistan benefited from the depreciation of Yen against the green back in 1998. Yen depreciated by 31%[27] against the Rupee as a result of this. This trend, however, did not continue much longer. The Japanese economy continues recovery strongly and the Yen has appreciated against other currencies touching a new high against the Pakistani Rupee.

Since July 1999 till January 2000, Pakistan has experienced a more than 12.3%[28] depreciation of the Rupee against the Yen.

This means that the Pakistani manufacturers are paying much higher prices for the Japanese goods. This has led to increases in selling prices of Japanese origin products, automobile being one of them.

From Rs.0.33 per Yen in July 1998, the Rupee has fallen to currently around Rs.0.4868[29] (on Friday, March 10, 2000). This has added to the costs as a large part of the components are imported, with the CKD’s accounting for 65% of the total cost of production.

 

 

 

  1. IMPORTS

The imports related issues for the auto industry are:

  • Import of cars, used or new.
  • Import of component parts for cars.
  • Import of raw materials for the local manufacturing of component parts.

Allowing car imports into the country will paralyze the local auto industry. Therefore the ban on import of used cars will continue to provide protection to indigenous car manufacturing industry. However, various import policy measures have been taken to promote car-manufacturing industry to encourage vendors and to benefit the consumers of cars by reducing customer duty on import of raw material. Duty on sub-components and components will remain the same & duty on CKD has been reduced from 40% to 35%. Also a concession has been made for those who want to import machinery for the sector, by allowing 90% depreciation allowance for the rapid development of the sector.

 

There is high duty on the import of CBU. In the budget of 1999-2000, the government replaced the %age duties with a lump sum amount depending on the engine size of the imported car, which was later replaced again by the % duty. This ranges from 110% to 256%.

The Completely Built Units (CBU) can be imported under the following main heads which are: –

 

  • Transfer of Residence Scheme
  • Gift Scheme.
  • Foreign embassies can import cars for diplomats free of any duty.

 

TRANSFER RESIDENCE SCHEME[30]

The import of cars under the Transfer of Residence Scheme are subject to the following conditions:

  1. The Pakistani national is transferring residence from abroad after a continuos stay of 2 years;
  2. He makes declaration on his arrival in Pakistan that he intends to import the car or vehicle under the Transfer of Residence Scheme;
  • Concession is available to cars or vehicles which are transferred from a country where the said Pakistani national resides, and
  1. The importer shall have valid driving license and registration documents of the vehicles duly attested and stamped by the concerned Pakistani embassy or Pakistani Consulate.

Hence this policy is quite restrictive. However, to ensure that very old cars do not come into the country, two additional conditions can be imposed:

The cars imported under this scheme should not be more than five years old and it should have been registered in the name of the concerned person for more than six years

This scheme has compounded the smuggling problem. Moreover, the reports are that the cars imported are bought from Japan and are brought to the Gulf countries, from where they are brought under this scheme to Pakistan in the names of overseas Pakistanis in the Gulf countries. Hence this has also become a regular, though illegal trade.

According to the Federal Bureau of Statistics, the number of used cars imported under the transfer of residence program (TR) has gone down from 5269 units in 1995-96 to 3122 units during 1996-97 period. As a result of this the prices of the used cars are also going up. This is because the demand for used cars is high as most of the population cannot afford new cars. The price increases in the used cars market is also attributed to inflation and the rising prices in the new car market.

Currently Japanese cars of 1000 cc and 1300cc cars are being imported in Pakistan at present.  These include Toyota, Nissan Datsun, Honda, Charade, Mazda, Mitsubishi,  Ford of Japan etc. Recently, some British, German, Italian and Korean cars have also been imported.  Among the luxury cars mentioned above Mercedes, Honda Accord, Nissan, Toyota Corona, Mazda 626, Fiat, Mitsubishi, BMW, Toyota Crown etc. are also available in the local market. Threat from imports remains the most potent adversary for local industry and adverse policy change over here can be disastrous for local assemblers[31].

Due to ban on imports of assembled and re-conditioned cars, the import rate has declined over the years and they plummeted to Rs.9.70 billion in 1997-98. This has encouraged smuggling of automotive parts on a large scale.

 

 

JAPAN-THE MAIN EXPORTER TO PAKISTAN

Automobile industry in Pakistan is dominated by the Japanese. The assemblers in Pakistan import CKD’s from Japan and Korea and assemble them locally.

IMPORT (FROM JAPAN)

YEAREconomy & Mid range CarsLuxury Cars
19914501,504
19929313,978
19935,489852
199412461
19951210
199622,807
Total6,8859,812

Source: Senior’s report (MFS)

 

Explanation : A large number of import of economy and mid range cars in the year  1993 as depicted in the table shows the time period when the cars under the yellow cab scheme were imported  on country- wide scale.

IMPORT OF AUTOMOBILES AND PARTS  FROM JAPAN

In Billion Rs

YearVehicles And Parts
1991     7.994
19929.682
199323.202
199412.976
199510.884
199611.284
199712.732
19989.696

Source: IRS 1998

Explanation:

During 1993-94 there was an upsurge in the import due to introduction of yellow cab scheme. Subsequently in the later years the demand for imported vehicles slowed down.

 

  1. PRICES

Existence of a small number of players and protection from the imported cars has given the car companies a virtual monopoly in the market. As a result of this there has been frequent price increases.

How does Suzuki keeps on improving its financial performance from a financial loss of Rs.119 million in 1993 to an operating profit of Rs.358 million in 1998[32] when its sales in units have went down from 34714 to 32601 during the same period. Observers say that drastic price increases during the last five years is the major reason for the profits of the company.

Suzuki has increased prices five times between April 1998 to July 1999, Honda six times between June 1998 and July 1999 and Toyota six times between July 1998 to July 1999. In April 1997, car assemblers reduced their prices as the government reduced the duty on CKD’s from 40-35%. But the prices increased later[33].

Suzuki has increased its prices from September 1998 to July 1999 by an average of 11.7%, Indus Motors by 14.5% from July 1998 to July 1999, Honda by 12.9% during June 1998 to July 1999 and Nissan by 10% from August 1998-July 1999. The main reason for increased prices was the instability in the economy leading to inflation, devaluation of Rupee against Yen especially after the sanctions imposed after the nuclear blast in May 1998[34].

The increasing price trend in addition to a sluggish economy and a declining purchasing power are the major factors blamed for the slowdown of automobile sales in the country.

Not only that, it has also had its impact on the ‘used cars market’ as any increase in new cars also results in prices of used cars. About six years ago a five-years used Mehran could be bought for under Rs.100000. In 1999, the same couldn’t be bought for less than Rs.150,000[35]. So it can be seen that the used car market is directly related to the prices of new cars. It does not only hurt the sales of new cars but also discourages purchase by those who want to replace the older models with the new ones. On their part, the automobile producers blame the constant devaluation of local currency, the uncertain Rupee-Yen parity, increasing costs of production and the absence of economy of scale to benefit from the purchase of parts and raw materials needed in bulk quantity and at concessionary rates to reduce the prices. They also cite internal policies, discouraging the sales, resulting in massive under-utilization of capacity in the automobile industry.

The Monopoly Control Authority, MCA, has decided to take action against car manufacturers under section 19(1)[36] of the Monopolies and Restrictive Trade Practices Ordinance, 1970. MCA felt that frequent price hikes by the carmakers were unjustified and they were taking advantage of the concentrated car market, which gives them some monopoly power. MCA sent a questionnaire to all four carmakers and asked for a complete cost break down, giving them 25 days to reply. This didn’t work out though. MCA had asked for the following:

 

  • Cost of raw material and components
  • Manufacturing expenses
  • Royalties and technical fees
  • Inventory adjustment
  • Selling and distribution expenses
  • Government levies
  • Details of profit and loss

The prices of the cars are directly related to their costs. The major cost drivers in the automobile industry are:

 

THE COST DRIVERS

  • CKD kits, which represent 65-70% of the total manufacturing costs.
  • Rupee-Yen exchange rates.
  • Deletion levels. High deletion levels mean more local components, which are cheaper and pose less threat from the adverse exchange rate movements.
  • Import duty. A flat rate of 35% on all CKD’s and high duties on vehicles imported in CBU form (110-265%).
  • High administration expenses and overheads, especially when a new model is launched.

 

Price Movement Analysis (PAMA) 1999
19992000
ModelsJanuaryFebruaryMarchAprilMayJune%age IncreaseJulyAugustSeptemberOctoberNovemberDecember%age Increase%age IncreaseJanuary
Jan-JuneJuly- DecJan- Dec
Toyota                
 COROLLA XE679,000679,000679,000679,000676,500676,500-0.4%689,000689,000709,000709,000709,000709,0002.8%4.2%729,000
 COROLLA XEG719,000719,000719,000719,000716,500716,500-0.3%729,000729,000749,000749,000749,000749,0002.7%4.0%769,000
 COROLLA GL809,000809,000809,000809,000804,000804,000-0.6%829,000829,000859,000859,000859,000859,0003.5%5.8%889,000
 COROLLA GLi (M/T)919,000919,000919,000919,000909,000909,000-1.1%939,000939,000969,000969,000969,000969,0003.1%5.2%989,000
 COROLLA GLi (A/T)999,000999,000999,000999,000989,000989,000-1.0%1,019,0001,019,0001,049,0001,049,0001,049,0001,049,0002.9%4.8%1,069,000
 COROLLA GLi (S.E) M/T999,000999,000999,000999,000999,0000.0%1,019,0001,019,0001,049,0001,049,0001,049,0001,049,0002.9%4.8%1,069,000
 COROLLA GLi (S.E) A/T1,079,0001,079,0000.0%1,099,0001,099,0001,129,0001,129,0001,129,0001,129,0002.7%4.4%1,149,000
 DIESEL 2.0 D819,000819,000819,000819,000794,000794,000-3.1%829,000829,000859,000859,000859,000859,0003.5%4.7%879,000
 DIESEL 2.0 DG859,000859,000859,000859,000844,000844,000-1.8%869,000869,000899,000899,000899,000899,0003.3%4.4%919,000
 DIESEL LIMITED929,000929,000929,000929,000914,000914,000-1.6%939,000939,000969,000969,000969,000969,0003.1%4.1%989,000
 DIESEL Special Edition1,035,0001,035,0001,035,0001,035,0001,035,0000.0%1,055,0001,055,0001,085,0001,085,0001,085,0001,085,0002.8%4.6%1,105,000
 4X2 S/C729,000729,000729,000729,000729,000729,0000.0%729,000729,000799,000799,000799,000799,0008.8%8.8%849,000
 4X4 S/C999,000999,000999,000999,0001,029,0001,029,0002.9%1,029,0001,029,0001,029,0001,029,0002.9%
Honda
 CIVIC EXi  (M.T)846,000846,000846,000846,000846,000846,0000.0%846,000846,000846,000846,000846,000846,0000.0%0.0%846,000
 CIVIC EXi  (A.T)889,000889,000889,000889,000889,000889,0000.0%889,000889,000889,000889,000889,000889,0000.0%0.0%889,000
 CIVIC VTi  (M.T)969,000969,000969,000969,000969,000969,0000.0%969,000969,000969,000969,000969,000969,0000.0%0.0%969,000
 CIVIC VTi  (A.T)1,049,0001,049,0001,049,0001,049,0001,049,0001,049,0000.0%1,049,0001,049,0001,049,0001,049,0001,049,0001,049,0000.0%0.0%1,049,000
 CIVIC VTi  (M.T) Oriel1,006,0001,006,0001,006,0001,006,0001,006,0001,006,0000.0%1,006,0001,006,0001,006,0001,006,0001,006,0001,006,0000.0%0.0%1,006,000
 CIVIC VTi  (A.T) Oriel1,090,0001,090,0001,090,0001,090,0001,090,0001,090,0000.0%1,090,0001,090,0001,090,0001,090,0001,090,0001,090,0000.0%0.0%1,090,000
 CITY EXi (1.5)753,000753,000753,000753,000753,000723,000-4.1%723,000723,000723,000723,000723,000723,0000.0%-4.1%
 CITY EX  (1.3)  FL669,000669,000669,000669,000669,000669,0000.0%669,000669,000669,000669,000669,000669,0000.0%0.0%680,000
 CITY EX  (1.3)  SL710,000
 CITY EX  (1.3)  FL (A.T)730,000
Suzuki
 MEHRAN PLUS Std293,000293,000293,000293,000293,000293,0000.0%293,000293,000293,000304,000304,000304,0003.6%3.6%319,000
 MEHRAN PLUS A/C328,000328,000328,000328,000328,000323,000-1.5%328,000328,000328,000339,000339,000339,0003.2%3.2%355,000
KHYBER Std397,000397,000397,000397,000397,000397,0000.0%397,000397,000397,000407,000407,000407,0002.5%2.5%427,000
 KHYBER A/C434,000434,000434,000434,000434,000434,0000.0%434,000434,000434,000444,000444,000444,0002.3%2.3%466,000
KHYBER (Special Edition) Std412,0004250004250004250003.1%3.1%446000
KHYBER (Special Edition) A/C449,0004620004620004620002.8%2.8%485000
 POTOHAR Std538,000538,000538,000538,000538,000538,0000.0%538,000538,000538,000558,000558,000558,0003.6%3.6%585,000
 POTOHAR A/C591,000591,000591,000591,000591,000591,0000.0%591,000591,000591,000611,000611,000611,0003.3%3.3%641,000
 BOLAN Std325,000325,000325,000325,000325,000325,0000.0%325,000325,000325,000335,000335,000335,0003.0%3.0%351,000
 BOLAN A/C381,000381,000381,000381,000381,000381,0000.0%381,000381,000381,000391,000391,000391,0002.6%2.6%410,000
 PICK-UP274,000274,000274,000274,000274,000274,0000.0%274,000274,000274,000284,000284,000284,0003.5%3.5%298,000
 BALENO (GTi)-1.6755,0000.0%755,000755,000799,000799,000799,000799,0005.5%5.5%799,000
 BALENO (Ei) (STD)499,0000.0%499,000499,000529,000529,000529,000529,0005.7%5.7%
BALENO Eli580,000580,000580,000580,000580,000
 BALENO (GLi) P619,000619,000619,000619,000619,000605,000-2.3%605,000605,000629,000649,000649,000649,0006.8%4.6%669,000
 BALENO (GXi)704,000704,000704,000704,000704,000704,0000.0%704,000704,000704,000729,000729,000729,0003.4%3.4%729,000
 BALENO (EiP)599,000
Nissan Sunny
 SUNNY FE DSL STD 2.0785,000785,000785,000785,000820,000799,0001.8%799,000799,000799,000799,000799,000799,0000.0%1.8%799,000
 SUNNY EXs-2.0D895,000895,000895,000895,000930,000919,0002.6%919,000919,000919,000919,000919,000919,0000.0%2.6%919,000
 SUNNY EXs Petrol A/T838,250838,250838,250838,250855,000845,0000.8%845,000845,000845,000845,000845,000845,0000.0%0.8%845,000
 SUNNY EXs Petrol M/T787,000787,000787,000787,000806,000795,0001.0%795,000795,000795,000795,000795,000795,0000.0%1.0%795,000
 SUNNY FE  Petrol STD674,200674,200674,200674,200690,000680,0000.9%680,000680,000680,000680,000680,000680,0000.0%0.9%680,000

 

 

The above given table clearly indicates that during the first half of the year 1999, price increases were either very low or negative. However, in the second half the situation was altered a little bit. This was mainly because of the Rupee devaluation against the Yen.

 

  1. THEFTS AND SNATCHINGS

Car is the second biggest investment that a person makes after the house. The drastic increase in auto thefts and snatching is also blamed as one of the factors discouraging the sales of new cars in the urban city especially Karachi. On any given day over 20 cars[37] are being stolen/snatched in Karachi, majority of them latest or less than two years old. The rampant thefts and snatching have forced many affluent to adopt a forced austerity not to replace their cars with new ones to decrease chances to lose their newer cars at the cost of the producers.

 

  1. EXPORTS

This industry has great export potential. This potential comes from the excess capacity installed with not enough domestic demand to fill the gap. However, high costs because of the reasons already discussed, availability of better quality products at competitive prices in the market, and lack of proper export policies have let us to ignore the growth of auto exports.

The passenger car exports are not substantial in Pakistan.  The country entered into the export market with the delivery of first export order of 12 Suzuki vehicles to Nepal. Nepal imported motor cars worth Rs.2.888 million in 1997-98. The order was for 40 Suzuki Khyber cars. Suzuki has plans to export its pick-ups to Bangladesh and to other countries like SAARC members. Till July 1999, 93[38] units have been exported to Nepal and Bangladesh. This step has been and is being taken to utilize the excess capacity on hand. The continuous devaluation of the Pak-rupee worsened conditions and resulted in an increase in the input cost during 1997-98.

Pakistan has been exporting cars, two wheelers, buses and trucks since last few years but the quantity is peanuts i.e. (2% – 4%) of the total production of units. The local car and two wheeler assemblers have virtually failed to make headway in exports as they feel that it is not commercially viable. Only 1000-2000 units[39] had been exported to Nepal, Bangladesh, Sri Lanka, Nigeria and Dubai. Suzuki and Honda both hold the opinion that delay in sales tax refunds problems and perennial problem of devaluation as main bottlenecks, making their products non-competitive in the global markets.

Indus Motors, makers of Toyota Corolla, have exported 2-4 units of Corolla to Sri Lanka, Bangladesh and Nepal in the last two to three years on trial basis but could not make a breakthrough in these markets as it is not economically feasible.

EXPORT EARNINGS FROM VEHICLES (source: BOA)

YEARVALUE (IN MILLION RS)
1993-9424.871
1994-9532.537
1995-9660.349
1996-9779.121
1997-98 (UP TO MAY 1998)85.550

Car assemblers are receiving orders from various countries but they cannot utilise the potential, as it is not cost effective. This is due to the fact that the industry is facing a number of changes in composite rate to 20-80 ratio from 50-50 ratio which is set to increase the landed cost of raw materials, making price hike imminent.

The local auto parts industry exported $4.52 million of auto parts.

Pakistan has the right target market and potential to match new product development, innovation and global strategies of the world auto-makers for Asian market. Pakistan’s government needs to take a positive step towards creating a long-term industry friendly policy to encourage local production. Joint ventures are taking place between Pakistan, Korean and Singaporean companies to undertake ‘Urban Planning’ and handle ‘Traffic’ problems. This will help auto industry to develop on sound lines.

 

  1. EMPLOYMENT OPPORTUNITIES

The industry has potential for providing employment to many workers. Suzuki, Honda and Toyota provide direct employment to over 1600 people[40]. The vendors and other ancillary industry that is covered under the auto allied industry is also said to create many jobs in the country (It provides jobs to half a million people, of which 100,000 are direct employees and 400,000 indirectly). According to a report by the Bank of America, it is estimated that if the deletion level goes up by 1%, 200 jobs are created in the local engineering industry. The current level of deletion level in the industry is an average of 48%. So it can be deduced that a 100% deletion will result in a creation of 10000 jobs.

 

  1. EFFECT OF NUCLEAR BLAST

After the nuclear blast economic conditions in Pakistan became extremely volatile. The freezing of foreign currency accounts dealt a severe blow to the Industry, as the purchase of CKD kit in foreign currency became difficult for the local assemblers. The most significant was the change in SBP regulations regarding usage of foreign exchange. The government imposed 30% advance margin on opening of letters of credit because of which the foreign car manufacturers insisted on endorsement by foreign banks but the foreign banks were reluctant to open the L/C. The introduction of dual exchange rates, has made imports of all non-essential items more costly. Devaluation of Rupee coupled with a stronger Japanese Yen also resulted in a higher purchase price for CKD’s. The above factors resulted in an increase in car prices.

It was feared that the future sales of the automobile industry might be affected since Japan was in the forefront with America on sanctions for nuclear explosion. As the Pakistan industry is all Japan-based this was a disturbing factor.

But in spite of all these negative effects, the overall profitability of auto manufacturers was not hampered so greatly, as was feared. Whereas in reality, against the expectations, the automobile industry was least affected by the explosion. Since all three major areas of investing activities like foreign currency accounts, real estate, stock exchange were badly hurt and automobiles were the only safe option left with consumers to utilise their liquid cash savings.

 

  1. CTBT[41]

The CTBT has a direct bearing on the automobile industry. As Japan is all for the idea that Pakistan should sign the CTBT, a contrary decision might create trouble. We know that our automobile industry is too much dependent on Japan, with the CKD’s and other input materials coming in from that country. The general effect of this controversy would be the Rupee/Yen disparity. However, the more direct impact would be if Japan imposed any sanctions on us as a result of not signing the document. This issue is still a moot point and its outcome is yet to be evident.

 

  1. COMPARISON WITH INDIA

Automobile industry in Pakistan is not in a position to compete with India. The industry in India is sophisticated and better placed.  In India those who want to enter automotive industry have to start with 50 million dollars of investment up front and to achieve 60% deletion in the initial year of production with 75% in coming years and then up to 90% in the subsequent years. The engineering sector of India is also more developed and supportive of the automotive industry by providing needed spare parts and essential raw materials.

In Pakistan there is no ceiling limit for starting a unit and it has to start with prevalent deletion figures as set by the government. But concessions are granted to various manufacturers on political and other grounds.  Due to high cost of production Pakistan’s automobile Industry is not in position to compete with India.

Pakistan produces about 40000 cars per year. India however, produces between 150000 to 200000 passenger cars and over 2.1 million motor cycles of numerous models per year. The automotive sector in India is a net foreign exchange earner and the country exports billions of rupees’ worth of vehicles.

 

  1. CAR LEASING AND FINANCING

Car finance has not been fully patronised by the finance companies and has not proven effective. This is because of the main problem faced by banks is getting the required security, resulting in a select group of people who qualify for the car loan. Thus the loans are generally granted only to very high-ranking civil servants or senior employees of multinational companies. The provision of this facility to common man is quite limited and there is a potential to increase this facility to them to increase their purchasing power.

 

The different leasing schemes, however, are benefiting the car producers as well as the consumers. Such schemes make it possible for the salaried class people to afford buying a new car. Vehicle leasing, still in its infancy, is more or less growing faster than the car loans from banks. It is a hire-purchase sort of scheme, whereby the vehicles are hired for a monthly fee, and ownership is transferred when all the payments are paid. With the slow down in economic activity, it seems like a better option for the leasing companies to target the consumer market. From February 1999, the inception of Askari leasing, to July 1999, the company had financed the leasing of over 670 new locally assembled cars. Majority of these cars was 800-1000 cc Suzuki cars[42]. The company charges an interest rate of 13.5 % per annum, the down payment of which depends on time schedule for payment like 30% equity for three-year payment plan; 35%for four years and 40% for five years. Other parties include Pilcorp, Citibank etc. Co-branding has also started taking place, with a particular scheme leasing a particular brand of cars only.

At present the wholesale car financing market is almost entirely catered by the leasing industry. This is because the demand of wholesale purchases of vehicles is primarily for Corporate and Public (Govt./Semi-Govt.) sectors. The leasing industry is well positioned to cater to this sector as auto leasing forms a part of their total lease package (primarily made up of machinery and office equipment).

 

  1. MOTOR INSURANCE

According to the Pakistan and Gulf Economist, out of 37 million registered vehicles of all types only 161000 were insured by the members of the Insurance Association of Pakistan in 1997[43]. The insurance association of Pakistan is the representative body of fifty-eight local and foreign general insurance companies. Increased thefts and snatchings resulting in high loss ratio are rendering the business unprofitable. To compensate, the insurance companies take high premiums which limit the access of the common man to this facility. As compared to the total premiums of Rs.2.25 billion written, the IAP members paid a total claim of Rs.725.8 million which amounted to 32% of the total premiums. With administrative expenses, commission and taxes the loss ratio adds up to 70%.

Although, according to the law, no vehicle is allowed to come on the road without insurance, majority of people only buy insurance when it is absolutely necessary to fulfill a legal obligation. The fact that only 4% of the vehicles were insured in 1997, qualifies this statement.

There exist unscrupulous insurance sellers that form the parallel illegal insurance sector. This is also hurting the business of the insurance companies.

Basically there are three types of insurance covers available in Pakistan for motor vehicles:

  • COMPREHENSIVE: This covers loss of both the property and personal injury for self and others. Its tariff rates are the highest.
  • THE THIRD PARTY: This offers limited coverage for the claims of human injury as well as damage to property other than self.
  • ACT ONLY: This is similar to the Third party, except that it covers only the human injury.

In 1997, IAP members wrote total motor insurance premiums of Rs.2.259 billion over 99% of which came from the comprehensive business. The bulk of this came from private cars amounting to approximately Rs.2.011 billion[44].

 

  1. INSTITUTIONAL SALES

Sources in the market indicated that most of the government departments have suspended car purchase ‘till further” notice, an action which is likely to affect Pak Suzuki Motors more than other assemblers in the market.

Suzuki has become the largest supplier of cars to the government after the latter has regulated the capacity size of cars that its staff could use and Suzuki was the only assembler that produced the range of cars that was needed. The institutional sales are going down posing a threat to Suzuki. About 9% of its sales in 1997 went to GOP & the corporate sector. This was 20%[45] in 1996.

The purchase from the government sector went down by about 75 % in 1997[46] as compared to that of 1996 due to what is said to be government is minimizing in spending. Besides government organizations, the private organizations are said to be cautious about the spending during the year and the purchase of the car by the sector has been very low.

The banking sector which is the biggest client for the car assemblers, embarked upon what a security analyst called ‘restructuring’ towards the end of the year, and brought their restructuring hammer on the cat industry before anything else.

 

  1. SEASONAL TREND[47]

The boom in car sales industry is observed during the months of May and October-November when the purchase is galvanised by impending Budget and increase in cash flows after cotton crop harvest respectively. The expected changes in government policies regarding taxes and duties in the budget lead to increase in car sales during May and slump in July.

 

  1. LACK OF INFRASTRUCTURE

The transport system of our country, if it could be described as a system, is coupled with a lot of its malaises. The ever-growing vehicle population, increasing at a rate of 10% per annum[48], is completely topsy-turvy in the face of corrupt traffic police, dilapidated roads with poor infrastructure and transport mafia which altogether have literally turned the country into a traffic mess. Congestion & traffic jams, pollution and other such problems are increasing with the increasing population of cars. This poses a threat to the future of the automobile industry. You need roads to run cars. With the present scenario, it seems that there would be more cars than the roads can sustain.

 

  1. RECONDITIONED CARS

At present, there is ban on the import of reconditioned cars. The TR scheme (transfer of residence) is also applicable to the import of second hand or reconditioned cars, provided the car has been in use of the concerned expatriate in the country of his stay and has been shipped from there. No relief has been provided in customs duty on used cars.

It is alleged that reconditioned cars are being smuggled into Pakistan and through many devices. The market share of such cars is 25% in Pakistan. The increase in prices of the locally assembled cars have become very high, which is promoting the smuggled reconditioned cars. When the government decided to ban the import of reconditioned cars, it was only after the promise made by the local assemblers to bring the prices of their products in line with the purchasing power of the buyers. Contrary to this, the prices have been on the rise, rendering this decision unprofitable for the government itself.

 

SECTOR PERFORMANCE in 1998-99

The automobile industry in Pakistan recorded tremendous growth in the year 1998-99. Approximately 47000 cars[49] were produced showing a 7-8% increase. This was mainly because of abolition of capital value tax (CVT), rationalisation of duty structure entailing a reduction in CKD duty from 40 to 35%, depreciation of Yen and sufficient liquidity.

 

The sale in Rupee of the four listed car manufacturing companies increased by 17.8% in the first half of 1999 compared to last year’s sale in the same period. The sales increased due to intensive marketing by the major companies as evident from a significant increase in their selling expenses. Moreover, the favourable auto-package 1998, as discussed earlier, gave a boost to sales.

 

In 1998-99 Japanese Yen depreciated by 31% against the rupee. This depreciation was because of the weakness of Yen against US Dollars. This trend however has not continued in the year 1999-2000.

 

AUTO INDUSTRY*1998-1999 (Rs. in million)1996-1997 (Rs. in million)% Change
Sales184331641812.3%
Gross Profit1742132931.7%
EBT107891817.4%
PAT7216628.9%

 

*based on 3 listed companies

source: IP Securities

CHANGES IN 1999-2000

From July 1999 to January 2000, the yen appreciated by 12.3% against the Rupee. Moreover, the liquidity factor has subsided as well. The continuing economic recession, increase in fuel prices and the expected entrance of new players is expected to dent the demand in this year. Anticipating a fall in sales volume and an increase in costs, car prices have gone up already.

 

TREND

It is expected that the trend would move towards buying smaller cars as they are less expensive and more fuel efficient. The entrance of new players in this segment manifests that the industry is all set to take advantage of this trend.

 

 

INDUSTRY ATTRACTIVENESS ANALYSIS

THREAT OF NEW ENTRANTS

The threat of new entrants is high for the small car segment. This has strong implications for Pak Suzuki which was enjoying a virtual monopoly in this segment up to now. However, the threat is over all neutral for the whole industry.

  • The capital costs for entry are high. This fact is clearly visible from the project costs of the new entrants in the market. It ranges from approximately $12-50 million[50]. This is a great barrier to entry.
  • The capacity utilization of the existing plants is very low, approximately 50-55%[51]. This means that the demand is less than the supply. This leaves little room for new entrants, especially in the existing segments of the market. Only the small car segment characterized by low prices and fuel-efficient cars offers an attractive opportunity which has already been noticed by the car manufacturers.
  • The cost of existing plants is high because of low deletion levels, approximately 45%, and fluctuating exchange rates. This leaves little attractiveness for newer entrants.
  • New planned projects are all in the small segment and are not expected to affect significantly the large cars segment.

THREAT OF COMPETITION

  • The main threat is from the imports. If the government changes its policy of protectionism, the local industry would be completely damaged.
  • Changes in the policy regarding the ban on reconditioned cars also poses a threat.
  • Smuggling and illegal trade are damaging the auto market.
  • Competition is fierce in the large market segment.
  • Suzuki has lost its monopoly in the small cars segment.
  • The structure is concentrated and only four major firms are operating.

BARGAINING POWER OF CUSTOMERS

FAVORABLE:

  • The customers have few alternatives available, as the import policies are strict. So they have low negotiating powers.
  • The dealers, as customers, are chosen themselves by the companies. This reduces their bargaining power to a great extent.

UNFAVORABLE

  • The customers have the used car market as an available market. Moreover, cars smuggled in the country and resold also offer a good opportunity for the customers.
  • The demand of cars is highly price-elastic as they are luxury goods.
  • The institutional sales are declining as a result of austerity measures, both by the Government and by the corporate sector.

THREAT OF SUBSTITUES

FAVORABLE

  • Bad shape of the transportation system, as explained earlier, means that it does not offer a good substitute to owning ones own car.
  • Large family sizes, pollution, bad transportation system etc. prevents the use of motor cycles as a reasonable substitute. Only people who cannot afford to buy a car will go for them.
  • High import duties on imports of new cars and ban on the import of used cars saves the industry from formidable competition.

UNFAVORABLE

  • Smuggled goods offer a good substitute as they are cheap as well as of international quality.
  • Used cars market is the greatest threat as substitute to new cars.
  • As trade barriers decline, the threat of lifting the current ban on import of new and reconditioned cars stands high and mighty on the industry.

BARGAINING POWER OF SUPPLIERS

  • As far as local vendors are concerned, the industry is suffering from under utilization. There are more than 400 vendors and the number is increasing. This dilutes their bargaining power.
  • The imported parts including CKD’s are supplied by the parent companies on favorable terms. The only threat in this case is the exchange rate fluctuations.

 

AUTOMOBILE EXPORTS—WHAT NEEDS TO BE DONE!

 

CURRENT SCENARIO

As we mentioned earlier, this industry has great export potential. This potential comes from the excess capacity installed with not enough domestic demand to fill the gap. However, high costs because of the reasons already discussed, availability of better quality products at competitive prices in the market, and lack of proper export policies have let us to ignore the growth of auto exports.

 

The passenger car exports are not substantial in Pakistan.  The country entered into the export market with the delivery of first export order of 12 Suzuki vehicles to Nepal. Nepal imported motor cars worth Rs.2.888 million in 1997-98. The order was for 40 Suzuki Khyber cars. Suzuki has plans to export its pick-ups to Bangladesh and to other countries like SAARC members. Till July 1999, 93[52] units have been exported to Nepal and Bangladesh. This step has been and is being taken to utilize the excess capacity on hand. The continuous devaluation of the Pak-rupee worsened conditions and resulted in an increase in the input cost during 1997-98.

 

Pakistan has been exporting cars, two wheelers, buses and trucks since last few years but the quantity is peanuts i.e. (2% – 4%) of the total production of units. The local car and two wheeler assemblers have virtually failed to make headway in exports as they feel that it is not commercially viable. Only 1000-2000 units[53] had been exported to Nepal, Bangladesh, Sri Lanka, Nigeria and Dubai. Suzuki and Honda both hold the opinion that delay in sales tax refunds problems and perennial problem of devaluation as main bottlenecks, making their products non-competitive in the global markets.

Indus Motors, makers of Toyota Corolla, have exported 2-4 units of Corolla to Sri Lanka, Bangladesh and Nepal in the last two to three years on trial basis but could not make a breakthrough in these markets as it is not economically feasible.

 

 

EXPORT EARNINGS FROM VEHICLES (source: BOA)

YEARVALUE (IN MILLION RS)
1993-9424.871
1994-9532.537
1995-9660.349
1996-9779.121
1997-98 (UP TO MAY 1998)85.550

 

Car assemblers are receiving orders from various countries but they cannot utilise the potential, as it is not cost effective. This is due to the fact that the industry is facing a number of changes in composite rate to 20-80 ratio from 50-50 ratio which is set to increase the landed cost of raw materials, making price hike imminent.

 

The local auto parts industry exported $4.52 million of auto parts.

 

Pakistan has the right target market and potential to match new product development, innovation and global strategies of the world auto-makers for Asian market. Pakistan’s government needs to take a positive step towards creating a long-term industry friendly policy to encourage local production. Joint ventures are taking place between Pakistan, Korean and Singaporean companies to undertake ‘Urban Planning’ and handle ‘Traffic’ problems. This will help auto industry to develop on sound lines.

 

 

HOW TO INCREASE EXPORTS—A COMPARISON

 

 

The two major problems that are hindering our exports are high costs and average quality. As mentioned earlier, the high costs are because of the low deletion levels in the country due to which we have to import CKD’s. Since our currency is not stable at all, it becomes all the more dangerous for us and makes us more susceptible. As a result of this our cars are very costly that makes them non-competitive in the international market.

 

It is a known fact that the automobile industry is supposed to be a major foreign exchange earner in most of the countries.

 

Following are some of the points that can improve the export position of our country:

 

  • RESTRICTING THE AUTO ASSEMBLERS

The auto assemblers import CKD’s from their parent company very easily. They get it on subsidized rates. However, this practice has hampered our export growth. We need to have a check on these import activities, as in India, to ensure long-term commitment from these assemblers.

 

Import Policy in India says:

 

SKD/CKD Imports:

 

Some of the joint ventures in the passenger car sector envisage initial import of cars in SKD/CKD kits. Import of cars in SKD/CKD kits require a license from the Directorate General of Foreign Trade (DGFT). While Government have decided to grant the required license in the case of joint ventures approved in the car sector, the joint ventures are required to give details about import program, indigenisation planned and export possibilities and sign a memorandum of understanding (MOU) with DGFT in this respect. The underlying idea for this is to discourage screw-driver technology and to have an assurance that the joint venture partners have long term commitments to the projects.”

 

Can’t Pakistan adopt such measures to restrict the automobile manufacturers and assemblers to show a long-term commitment to the country. If this step is implemented in the real sense of the word, it would not be so difficult to achieve long-term growth in this sector.

The proof is the success of the Indian automobile industry as an eminent exporter:

 

EXPORTS (Quantitative) of Indian Automobiles

 

Introduction of new generation vehicles with improved quality and performance, the Indian vehicles have been finding ready acceptance in world markets. Globalisation and foreign collaboration tie-ups have also helped this growth process immensely. Export of all kinds of automotive vehicles have been increasing over the last five years as can be seen from the following statements:-

 

1992-931993-941994-951995-961996-97
Cars13,55916067203762882837161
LCVs3,4686509813877637670
MCV & HCVs43435884781385606606
Scooters948716538231732300626639
Motor Cycles651916273315094859650353
Mopeds2812544298584434226948139
3 Wheelers592011085248713221421973
Multiutility Vehicles24702853374324702044

 

Percentage of Growth of Exports

1993-941994-951995-961996-97
Cars18195029
LCVs8726-4
MCV & HCVs353210-23
Scooters7440014
Motor Cycles15011241.4
Mopeds5038-2714
3 Wheelers6415530-32
MUVs1235-34-17

 

It would be observed that during 1996-97 the rate of growth of export of cars and multi utility vehicles has gone up considerably by 22%. The increase in two/three wheeler segment in percentage term is negligible & the export of commercial vehicles declined by about 12.5% because of heavy domestic demand.

 

EXPORTS (Value)—INDIA

In value terms export has gone up from RS 532.20 Crores in 1992-93 to RS 1542.40 Crores in 1996-97. The performance is as under:-

(RS Crores)

1992-931993-941994-951995-961996-97
Cars and Multi Utility vehicles219.56281.32454.59608.77849.41
Commercial Vehicles224.92142.13251.42301.18363.64
Two and three wheelers87.72156.49223.49307.03329.35
Total532.20479.94929.501214.981542.40

 

While vehicles are exported to all parts of the world, the main destinations/ area as under:-

 

a) CARS :Egypt, Kenya, Nigeria, Somalia, Tanzania, Afghanistan, Nepal, Turkey, Hungary, Greece, Italy, Netherland, Spain, Australia, Malta etc.
b) Commercial : Egypt, African Countries, Nepal, Srilanka, Jordan, Vehicles Kuwait, Hungary, Russia, France and Brazil.
c) 2-Wheelers: African countries, Bangladesh, Srilanka, Turkey, UAE, Paraguay, UK, Germany, Argentina, Mexico, Australia and Hong Kong.

 

  • COST REDUCTIONS, IMPROVED PERFORMANCE

Following the footsteps of the Japanese automobile manufacturers. We should concentrate on improved performance of our cars due in part to the rising technological level of parts manufacturing, competitive pricing made possible by cost reductions accompanying mass production, and the long-term market development strategies.

 

Here the main point is DELETION. This term entails less reliance on imports while improving performance through technology transfer. Without these measures our industry can never compete with the international counterparts. No matter how many restrictions the government imposes, unless the indiginization plan is implemented in the strict sense of the word, successful export growth is impossible.

 

By doing all these things, the Japanese have excelled in this area:

 

JAPANESE EXPORTS
The annual volume of Japanese four-wheeled motor vehicle exports (cars, trucks and buses) first passed the 100,000 mark in 1964, but this was still the lowest level of automobile exports among the six leading industrialized countries (the U.S., the U.K., France, Italy, West Germany and Japan). During the next 10 years, however, Japanese automobile exports were to increase at a precipitous rate.

 

In 1970, Japanese four-wheeled motor vehicle exports reached the 1,090,000 mark, surpassing Italy, the U.S. and the U.K. (in that order) and making Japan the world’s third largest automobile exporter. In 1971 Japanese exports surpassed those of France, and in 1974, with a total of 2,620,000 export units, Japan moved past West Germany to become the largest exporter of automobiles in the world. In 1965 exports accounted for less than 10% of total production. By 1975, that figure had grown to 38.6%.
The growth of the Japanese automobile export market between 1965 and 1975 was led by passenger car exports, reversing a pattern of truck-dominated exports up until 1965. For cars, a 51.9% share of the export market in 1965 rose steadily to a 73% share in 1971. Passenger car exports in Japan’s total automobile production output rose from 10.4% in 1965 to 40% in 1974, with unit figures rising from 100,000 in 1965 to 1,827,000 in 1975, when Japan again surpassed West Germany to become the world’s largest exporter of passenger cars.

 

Whereas Southeast Asia and, to a lesser extent, Africa and Latin America had been the main markets for Japan’s truck-dominated exports, the rapid expansion of passenger car exports beginning in the mid-1960s soon established the United States as Japan’s top export market.

 

The huge growth in passenger car exports at this time can be attributed to various factors, including the improved performance of Japanese cars, due in part to the rising technological level of parts manufacturing, competitive pricing made possible by cost reductions accompanying mass production, and the long-term market development strategies of Japanese manufacturers.

 

Beginning in 1965, for example, overseas sales distribution systems were set up through mergers or 100% ownership, in contrast with the previous trend of distributorships contracted with local companies. Also, manufacturers were meticulous about meeting specifications for particular export markets: complying with the requirements of the Muskie Act in the United States after 1968, or meeting the specific demands of cold-climate markets (Canada, Scandinavia), for example. Expanding the after-sales service networks in export markets was another priority, and subsidiary companies and factories were set up for that purpose in Europe and North America.

 

 

WE SUGGEST

Technology transfer will not only solve the high cost problem for the auto assemblers but also for the vending industry. This is because, currently they are facing low economies of scale because of lack of demand. Once the technical capability increases, the auto assemblers will increase their local parts demand. Moreover, due to reduced cost as a result of increase in local components in the vehicles, exports of automobiles will increase. Exports of auto parts will also get a major boost. This will further increase the economies of scale for the auto parts manufacturers.

 

AREA OF                  SUGGESTED MEASURES

CONCERN               FOR RECTIFICATION                  Remarks

 

  1. Government

Policies

 

The checkered  1.     Automobile policy requested          Engineering industry has long

History of the        for a minimum of 7 years.        Gestation period, it is imperative

Automobile           Specially, under the present     to have long term policy to increase

Manufacturing       WTO scenario                         investor confidence.

Industry of

Pakistan has      2.             Necessary SRO be issued        SRO No. regarding penalty on

been scared            regarding Penalty on                Assemblers not achieving deletion

with frequent         assemblers failing to adhere     targets has expired.

policy changes.      to deletion programs.

 

  1. PAAPAM understands that     The government must investigate

                             annual registration of               this and make a break-up of

vehicles is nearly double          no-locally made vehicles registered.

that of local production.

 

  1. Government should declare

Auto-parts industry as a

“vital industry” and

 

  • Provide loans at

reduced rates of interest.

 

  • Revive Technology Fund as

approved earlier.

 

Engineering       1. EDB should be placed

Development        Under ministry of Industries

Board                     to improve working.

 

  1. PAAPAM representative to     Despite repeated verbal assurances

Be on EDB’s board.                This has not materialized.

 

  1. EDB to invite suggestions       Case of not being able to achieve

and propose a policy                deletion targets due to vendor failure

regarding cases of vendor        are on the increase.

failure as reported by

assemblers.

 

  1. All components deleted by Estimated increase of 12% in

any assembler in a                   deletion of Cat 3 vehicles.

particular category be              FOREX saving of USD 32.5 mln/yr.

placed in “CAT A”- ie. To

be deleted by all

categories.

 

  1. An immediate increase of FOREX savings of USD 21.7 mln/yr

5% deletion in all categories

of vehicles over and above

current targets.

 

  1. High technology parts to be    Insure increase in deletion by

jointly selected for deletion     improving economies of scale.

by assemblers, to insure

economies of scale.

 

  1. Policy of 25% rollback for

new entrants be removed.

 

  1. Removal of misconception Vendors have developed many

that Basket “C” consists of     basket C parts.

“not to be deleted parts.”

 

  1. Immediate revision of ISDP PAAPAM team is once again

to remove anomalies.              Available for this job.

 

  1. Appointment of new Present Chairman has lost

Chairman of Sub-committee   PAAPAM’s confidence.

On indigenization.

 

Increase in               As suggested by PAAPAM’s       Since this is a high priority area,

Exports of                working paper to Ministry of      PAAPAM has issued a seperate

Auto-parts                Commerce and Industry.            Document with recommendations.

 

Recommendations  1.  Custom Duty on RMs to

For immediate             reduced to 0%, 5% and 10%

implementation

  1. Custom Duty on commercial

imports of auto-parts

increased to 55%

 

 

Implementation of the above suggestions are expected to save the Government of Pakistan an estimated USD 500 million / annum along with increase of exports as mentioned in our export document.

 

 

 

FOREIGN EXCHANGE SAVINGS WITH INCREASE IN DELETION

 

Car Category                Average           Average Cost   1% Deletion    1% Deletion

Annual                   (Rs.)             Value(Rs.)      Value USD

Production

 

Cat 1                            15,000             300,000           45,000,000      865,385

Cat 2                            10,000             400,000           40,000,000      769,231

Cat 3                            20,000             700,000           140,000,000    2,692,308

                        225,000,000    4,326,924

 

 

 

 

 

 

 

 

 

THE MASS TRANSPORTATION SYSTEM OR THE AUTOMOBILE INDUSTRY?

 

Many people are of the opinion that the government should concentrate more on the mass transportation system of the country rather than the protection of the automobile industry. Let us first clarify that the presence or prosperity of the automobile industry is not at the expense of the absence of a mass transportation system, therefore first of all this conclusion is to be made in valid. The two sectors are distinct though related at some stage of economic development at which the country is. The users of a mass transportation system and customers of automobiles are not same. The usage may differ. Therefore, it is concluded that one is not at the expense of the other, thus both can be successfully developed simultaneously, without any loss.

 

Whereas for auto manufactures what they need is a consistent policy framework, and there is no direct sudden impact of mass transportation on car sales. Because a car’s demand as per target market is determined by a lot of factors in which mass transportation comes very late. Further, in the developed countries which have excellent mass transportation system no one has witnessed any negative impact on car sales and never will because these two service serve two different markets, provide different merits and are not to be confused.

 

This was when we think of the auto manufacturers. When we consider the general public of our country, we can definitely conclude that the mass transportation system should be paid more attention. Why not the car industry? This is because the bulk of the population can’t afford to buy a car due to low economic development. For long term economic development, we need infrastructure. The mass transportation system of any country is a major component of the infrastructure and the government is the only source of providing it. Therefore the more benefit would be to pay more attention to the mass transportation system and it is government’s sole responsibility.

 

The state of our transportation system requests for itself to attention to it…

 

TRANSPORT IN BAD SHAPE

Over 12 million people live in the Karachi that need to commute on a daily basis. This has lead to a vehicle growth of 10% per annum, which is increasing in the face of corrupt police, poor quality roads and even worse traffic. The travelling conditions are simply pathetic because of the transport mafia that only looks after its own profit making opportunities.

 

According to official figures, the total number of registered vehicles in Karachi is estimated to be 985, 818. These include cars, motor cycles, auto rickshaws, taxis, buses, trucks, tankers and tractors. The 10% growth rate is adding to the existing burden on the city roads, which have already reached a saturation point.

 

Mass Transit Plan

Z.A.Bhutto was the first to realize the significance of the growing rate of vehicles. An 8-kilometre underground “Metro” was to be set up between Liaqatabad and Tower. Japanese experts had visited Pakistan and completed feasibility reports in 1976. Yet, the project was never implemented like most others of its kind since the 60s. However, the government has decided to revive the old plan with a few modifications after evaluation arranged by the World Bank.

 

Recently, Nawaz Sharif had announced a special transport package, which included reactivating the Circular Railways, building a motorway between Karachi and Hyderabad, and construction of a 68-km Northern Bypass to ease the traffic flow of container trawlers and oil tankers. It is to be seen if this plan will actually be implemented after Nawaz Sharif’s exit from the government post.

 

Traffic Engineering Bureau

The Traffic Engineering Bureau (TEB) has launched two plans to improve the traffic flow of the city. The two plans are Low Cost Traffic Management (LCTM) and Capital Cost Traffic Management (CCTM). The greater emphasis has been placed on LCTM due to financial constraints. The plans is to widen the roads, construct link roads, control vehicle operating costs by reducing excessive fuel consumption, and improve the traffic flow at major intersections.

 

Congestion and Traffic Jams

The center of the city consists mainly of Saddar, Empress Market and M.A.Jinnah road; all areas that have the worst traffic jams in Karachi. Therefore, it is difficult to comprehend why the authorities have allowed inter-city buses in these areas that arrive at the rate of 8 to 10 buses per hour creating a lot of traffic themselves and due to the passengers waiting for them. Another problem is the number of small shops on the footpaths in these areas. Since they occupy certain part of the street, traffic flow cannot be maintained. And these cannot be done away with as they provide steady income for the area police.

 

Flyovers

Under the capital-intensive projects, flyovers have been planned at the identified intersections where frequent traffic jams have become a great nuisance. Some important flyovers have already been completed whereas others have been delayed due to liquidity problems. However, contractors have been directed to accelerate the pace of work and complete them at the earliest.

 

Pollution

The smoke emitting vehicles have converted Karachi into the most polluted city in the country. According to a survey, every litre of petroleum consumed by an automobile releases 2.2 grams of carbon dioxide into the air spreading different kinds of diseases.

 

Responsibility for poisoning the air, which is the common property of the people, also lies on the vehicle fitness department that is allowing misfit vehicles to operate by issuing unmerited fitness certificates after accepting bribes.

 

Conclusion

We feel that the following are the bottlenecks hampering the improvement and growth of transportation system in Karachi:

  • Non-availability of financing facility for public transport.
  • Absence of insurance facility for public transport.
  • Money extortion (Bhatta collection) by the police.


OUR COMMENTS

 

The automobile industry would also thrive if the economy thrives. The increase in the standard of living of the people is an essential determinant of the demand for new automobiles and other vehicles. Hence more economic activity is desired.

 

The controllable factors that may lead to improvements in the industry, though difficult to implement, are nevertheless not impossible.

 

The incomes of the people are low, the industry faces low capacity utilization, the export market of automobiles is weak, the vendor industry underdeveloped and the costs high.  These problems and many other are inter-related. Hence their solutions will also be inter-related. If the local vendor industry is promoted by transfers of technology and regulatory barriers, the costs of manufacturing cars would be lowered. This will reduce prices, increasing not only domestic demand but also making our vehicles internationally competitive. This is very important at this stage, as the protection of the local industry may not be possible for long because of the globalization policy of WTO. We need to make our industry cost-efficient and strong enough to compete with international products to protect the local market as well as to explore the export potential. The government should be consistent and wise in its policies. It needs to curb smuggling of automobiles. Also, instead of just giving deletion targets, the govt. should take steps to implement them.

[1] PAMA

[2] PAMA

[3] PAMA

[4] PAMA

[5] PAGE-July 1999

[6] BOA research & Invest Cap research report

[7] DAWN (17-12-99)

[8] DAWN (17-12-99) & PAGE

[9] PAGE (Feb 23-March 1, 1998)

[10] PAGE (July 19-25, 1999)

[11] PAGE April 26-May 2, 1999

[12] IP Securities

[13] BOA & interview

[14] BOA, Invest Cap & PAGE

[15] Interview

[16] IRS Sept. 1998

[17] PAGE Feb 23-March 1998, & interview

[18] PAGE Jan 31-Feb 6, 2000

[19] BOA

[20] PAGE July 19-25, 1999

[21] BOA

[22] IRS, 1998

[23] BOA

[24] PAGE July 1999

[25] PAGE July 1999

[26] BOA

[27] IP Securities Analysis

[28] Pakistan Observer-Islamabad, 14th January 2000

[29] Current DAWN

[30] PAGE Feb 23-March 1, 1998

[31] Senior’s report (MFS students)

[32] PAGE July 19-25, 1999

[33] PAGE July 1999

[34] BOA

[35] PAGE July 1999

[36] BOA

[37] PAGE July 1999

[38] Annual report 1999

[39] Senior’s report (MFS)

[40] PAGE July 1999

[41] Interview by IMC manager

[42] PAGE July 1999

[43] PAGE November 2-8 1998

[44] PAGE Nov 2-8, 1998

[45] Pakistan Compendium-HSBC, 1998

[46] Report from an MIS student

[47] Interview from IMC

[48] PAGE January 18-24, 1999

[49] PAMA

[50] BOA

[51] Calculated

[52] Annual report 1999

[53] Senior’s report (MFS)

 

 

Quality Reports on Pakistan’s Economy and Business Sectors for Students

 

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6 Responses

  1. WHY PAKISTAN HAS FAILED TO DEVELOP AUTO- INDUSTRY
    The Automobile Parts manufacturing vending industries plays vital role in the development of any country in all areas of life. It is the only sector which constitutes over four thousands different technologies. You name any product this industry will provide you. Pakistan has badly failed in her economic growth because of her bad Automobile policy and has become consumers market. The Pakistan nation is carrying huge debut of over 20000 Billion Rs; and every year our import bill is mounting to over 45 Billion US$ and exports reducing to 20 to 21 Billion US$ having trade deficit of 23 to 24 Billion US$ every year. Our debut interest rate has mounted to 1480 Billion Rs; in FY-2016-17. Not only this much we consume immigrants large amount of foreign exchange sent by them every year, which is expected to over 19 Billion US $ this year.
    Our neighboring countries India and China emphasized on the development of their Automobile Parts manufacturing sectors. Their economic growth is mainly based on their Automobile consistent and constructive right policies. Pakistan had better opportunities/ priorities by investors from European countries than China and India in the past, in all areas i.e. human resources, technology and environments. We have badly failed in this area because of western interest, dishonesty, Non-consistent and wrong Automobile policies and ultimately converted to consumers market particularly JA PAN took over in auto sector. Pakistan has become their colony.
    If we look in to the Chinese future Auto policies, we find that in its 12th Five Year Plan, implemented in March 2012, China designates “new-energy” automobiles and their components as one of the seven “strategic and emerging industries” targeted for massive increases in government support. The Chinese government will invest $1.5 trillion in their seven industries over the next five years. China will dedicate more than $18 billion in the new-energy automotive sector by 2020, and it aims to become the world’s leading producer of electric and hybrid vehicles, Chinese Support Programs For automobiles and Parts under the 12th Five Year Plan. The Law Offices of Stewart details the support policies of the China Government deploying to move up the value chain of auto parts production, increase its exports of complete autos/ parts, and promote its indigenous automotive brands and intellectual property around the world. The report was released on January 31; 2012.This is how the China will take over the world Automobile and their parts industries. China has displayed in Automobiles grand exhibition last month, their most indigenous popular cars and their own brands for the world attraction.
    India did not allow the imports of vehicles from 1947 to1984 and only emphasized on indigenously produced” Ambassador” vehicles. They only concentrated on strengthening vending base of Auto parts manufacturing during this period and protecting their industry through Tariff based protection. The Indian automotive industry has emerged as a ‘sunrise sector’ in the Indian economy. India is emerging as one of the world’s fastest growing passenger car markets and second largest two wheeler manufacturer. It is also home for the largest motor cycle manufacturer and fifth largest commercial vehicle manufacturer. India is emerging as an export hub for sports utility vehicles (SUVs).
    The global automobile majors are looking to leverage India’s cost-competitive manufacturing practices and are assessing opportunities to export SUVs to Europe, South Africa and South-east Asia. India can emerge as a supply hub to feed the world demand for SUVs. India also has the largest base to export compact cars to Europe. Moreover, hybrid and electronic vehicles are new developments on the automobile canvas and India is one of the key markets for them. Global and Indian manufacturers are focusing their efforts to develop innovative products, technologies and supply chain.
    Indian Automobile industry has played its role in her industrial development. Automotive Industry, globally, as well in India, is one of the key sectors of the economy. Due to its deep forward and backward linkages with several key segments of the economy, automotive industry has a strong multiplier effect and acts as one of the drivers of economic growth. Indian automotive industry produces a wide variety of vehicles: passenger cars, light, medium and heavy commercial vehicles, multi-utility vehicles such as jeeps, scooters, motor-cycles, three wheelers, tractors and other agricultural equipment etc.
    India is also an emerging economy which has witnessed unprecedented levels of economic expansion, alongside China, Russia, Mexico and Brazil. India is a cost effective and labor intensive economy, and has benefited immensely from out-sourcing of work from developed countries, and has a strong manufacturing and export oriented industrial framework. Since initiating its economic reform in 1991, India has continued its transition from a closed and planned economic policy toward a path of liberalization. As a result India has achieved stable economic growth averaging 6% annually, gradually enlarging its presence in the world economy. Now, India is one of the major recipients of foreign direct investment FDI. According to UNCTAD (2008), India has emerged as the second most attractive destination for FDI after China and ahead of the US, Russia and Brazil.The policy of reforms followed by Government of India in the post, 1991 period has increased inflow of foreign capital in the industrial & economic development of the country. Foreign capital inflow is encouraged not only as source of financial capital but also as a tool of knowledge and technology transfer. Since initiating reform in 1991 India has continued its transition from a closed and planned economic policy toward a path of liberalization. Cumulative amount of FDI in India from April 2000 to April 2011 has reached to 198 Billion US$.
    India will take over not only Pakistan automobile sector because of their strong and organized vending base having large volume production. Their costs of doing business are quite low and self-sufficient in energy sector. They are highly competitive. Their government has introduced the export incentive policies to make their exporters most competitive in the international markets. They will also take over Afghanistan, Iran. Turkey and central Asian states markets after our MFN status to India and land rout. It will badly affect the exports of Pakistan to these countries.
    Lastly it is to be noted that officially Suzuki of Japan has 73.2 % shares in Pak Suzuki and 54.2 % in Maruti of India. All Japanese companies have decided to make their base camps in India to capture the surrounding markets of Asia and make use of Indian low cost of production having large volume production .It will badly effect the Pakistan Auto parts manufacturing industries.
    It is suggested that:-
    The Government needs lot of additional revenue to reduce deficit. Therefore no reduction in import duties. The import duties should be increased to promote local industries and discourage the imports.
    A:- We quote you an example regarding lope holes in custom tariff regarding miss-declaration besides under invoicing for one type of Auto part as a test case i.e.; Plain Shaft Bearings and Bushes in which govt; has lost import duty for about 116.35 Million Rs; during last 9 months only on one item. The population of vehicles of chapter 87 are 99.77 % and their import valuing 1.387 Million US$ for the period July 2015 to June 2016 (HS Code 8483-3010) having import duty 35 %. These goods are miss-declared under the classification of “Others” having duty 20%. The population of other vehicles are just 0.23 % and its imports values are !5.2 Million US$ (HS code 8483-3020 & 3090) The uniform i.e. as per principal heads the import duties may be applied on all OTHERS; heads of tariff to avoid mis-declaration. In this particular case the duty may be fixed to 35% instead of 20% on the heads of “OTHERS”. The import duties on all CKD may be subjected to minimum 35% import duties. There is no option left except to increase import duties on all finished products to discourage imports miss-declaration and generate more revenue.
    B:-(i)Pakistan economy is mainly based on agriculture. The cultivated area is reducing every year because of urbanization, non-mechanization and availability of water in rivers. The per acre yield is also reducing. The tractor industry play vital role in mechanization. The per hector horse power in 2013 was 0.9 HP and government has plan to increase it to 1.5 HP by FY-2015-16. Whereas India has 2.5 HP per hector, China 3.88 HP and Japan 7 HP per hector. Pakistan will have severe food problems in the coming years. If Punjab and Sind provincial governments provide 5 Billion Rs; each per year subsidy. The average subsidy for each tractor sale will be one Lac eighty five thousand Rs. This way every buyer of tractor will get its benefit. There will be no political bribery. The market forces will make its way and the prices will be stabilized.
    (ii):-The tractor sold under this scheme should not be sellable/ transferable for 5 years. Its monitoring should be certified through ZTBL officer physical verification. The Agriculture loans should be on Zero interest rate and imports on normal rate of duties.
    (iii):-The subsidy should be only available for the locally assembled tractors having minimum 70 % localization of its value. No subsidy should be given to imported or CKD tractor assemblers.
    (ix):-If this scheme is implemented in letter and spirit, it will have positive effect on agri produce, cultivated area and new job creation. It will also increase per Acre yield and cut down the cost of production. It will also eliminate the political adverse impact and intervention. The subsidy scheme for tractors should be immediately launched.
    C:-It is submitted that Indian in Budget 2012-13,has increased import duty on (CBU) cars from 75% to 100% and on motor Cycles from 60 to 75 % and on Schedule one items to 100% and Excise duties from 27% to 30% to protect their home industries.
    China has disallowed the imports of CBU motorcycles and its special approval is required and is subject to 100% import duty. It is also to be noted that USA imported solar cells/panels from China worth 3.1 Billion $ in 2012 and has imposed anti-dumping duties to 250% and revised import duties from 23.75% to 31% for protection of their home industries in spite of WTO signatory. All imported items which are sufficient to meet our requirements should be subject to R.D.
    D)- No due Tariff protections have been provided as per Pakistan Automobile Policy 2006. The TBS protection was introduced and has not been implemented in true letter and spirit. The (TBS) SRO- 693(I)/2006 dated 1st July 2006 is mainly based on the parts deletion list of 1998 prepared by assemblers. No farther additions of locally produced items have been made. Please also look in to the latest amendment in SRO 693 (I) 2006 vide SRO 1403 dated 30.11.2012 .It contains the same list of “Keel Kanta” as per 7 years back. Many hundreds of parts and assemblies were produced locally after 2006 and are used by OEM,S but are not the part of TBS (SRO), hence no protection to indigenous manufacturers even after 7 years of government commitments. All recommendations by EDB were disposed of in dust bin for the last 4 years by MOF and FBR. All OEM approved parts and assemblies produced and manufactured in Pakistan should be included immediately in SRO 693(I) 2006.
    E)-The EDB should demand list of locally produced and supplied parts/assemblies to OEM,s from the vending industries. The assemblers should be mandatory asked to submit the list of their imported parts/ assemblies with imported cost. They should also be asked for list of locally manufactured parts purchased by them with cost. It is also in the larger interest of consumers/ buyers. The EDB should ménage to arrange their manufacturing through Vending Industries as per OEM,s specifications.If the vendors are not capable to manufacture only than it should be allowed to import at normal import duty. All imported items by assemblers with drawings and import prices should be available on Net for assessment and indigenous manufacturing as in INDIA.
    F)-Mainly the medium size Vending Automobile/ Engineering Industries purchase their raw materials from local market which include all taxes, duties, profits of the importers and there in no export incentive for their manufactured goods exports. Our neighbouring markets INDIA and CHINA are providing substantial export incentives to their Automobile Parts exporters. The export incentive policy may be introduced immediately to be competitive and fair play. It is to be noted that India is providing up to 30% export incentives on Engine bearings and Bushes and China 17 %.

    G:- The Tractor parts/ accessories and assemblies are importable by Tractor assemblers on Zero import duty which are not the part of SRO 693(I)2006. The SRO may be up dated and all parts locally produced and consumed by the OEMs may be inducted in it. The lists are available with the EDB. The lists from assemblers may also be demanded.
    H:- The Cars, Vans, Buses, Trucks assemblers are allowed to import parts /accessories and their assemblies on Zero / reduced / concessional import duty. All concessional SRO,s like No; 656(I)2006 dated 22.06.2006 and 565(I)2006 dated 05.06.2006, 655(I) 2006 dated 22nd June 2006 may be abolished as promised by the Finance minister and only raw materials may be allowed to import on zero tariff.
    I:- There is no level playing field for the vender’s. The Vending engineering industry has to compete the duty free import of parts/accessories and assemblies. It is very clear that the Pakistan policies are to encourage foreign manufacturers and penalizing the home engineering industry. It is requested that parts and accessories/ assemblies Importable on concessional duty all SRO,s may be abolished to promote the local industry and increase of revenue collection.
    J:- In case government wants to subsidize the farmers, it should be borne by the government directly not at the cost of vending industries. It will help to promote the local industry. The local industry will prosper and will become most competitive with foreign products resulting reduction in imports and trade deficit. It will promote the local assemblers and a step toward to self-reliance. All OEM approved parts and assemblies produced and manufactured in Pakistan should be included immediately in SRO 693(I) 2006 dated 1st July 2006/ SRO 1403 (I) 2012 dated 30.11.2012.
    K:-The imports of 2nd hand, variety of vehicles are creating big loss to the nation. We are importing junk from producing countries and because of none and poor maintenance these vehicles become scrape in few years. It is creating big economical loss and loss of indigenous job opportunities. Therefore it is requested that the import of 2nd hand cars and tractors may be disallowed.
    L:-The Provincial Governments has been announcing GREEN TRACTOR SCHEMES to subsidize farmers for purchase of Tractors to the tune of two lacs to three Lacs Rs; per tractor to promote mechanized agriculture. This scheme is excellent but the process has badly affected the market prices of tractors. Because there are many non-serious influential farmers who purchase tractors on loans get subsidies and sell tractors in the open market at low prices. It badly disturbs the local industrial production schedules resulting their high cost due to low volume production and no demand in the market. Thus the local vending industry goes for halt. To overcome this problem it is requested that the subsidy should be directly paid through assembler by tax adjustment mechanism and they should provide tractors to all farmers at government controlled reduced rates. The subsidy should be restricted on purchase of local tractors. No subsidy should be given on imported tractors. The tractors should be nontransferable for five years. The locally produced tractors should not be allowed to import on zero duty. It will help to promote the local industry, reduce unemployment and increase in local collection of revenues.
    M:-The Government is promoting imports of tractor parts/ in kit forms and assemblies for assemblers at Zero rated or concessionary import duties vide SRO No; 656(I)2006 dated 22nd June 2006 and SRO. 565(I) 2006 dated 05.06.2006.The indigenous industry is badly suffering due to unhealthy competition and unfair level playing field. Therefore they should be only allowed imports on payment of normal duties. It is to be noted that local vending industries pay all taxes including income tax, sales tax, excise duty etc; and local employment to our labor. The Government should not provide free lunch to all vehicle assemblers and they should pay all types of taxes and duties to import CKD,s. The Government should pay subsidies to all farmers without any discrimination to provide them cheap tractors. Please note that the imports vide Chapter 84.00 is 3.252 Billion U.S $ and Chapter 87.00 is 1.384 Billion U S $ in the period July 2015 to June 2016 and Government would generate fair amount of revenues.
    Mian Iqbal Hassan
    Ex-President,
    Multan Chamber of Commerce & Industry

  2. Ravi Magazine says:

    Thank you Iqbal for such comprehensive analysis.

  3. Mark22 says:

    Hi, do you allow guest posting on ravimagazine.com ? 🙂 Please let me know on my email

  4. Ravi Magazine says:

    yes, we accept guest posts.

  5. Daud says:

    Can I talk to the person who wrote this article.I need some guidance.Thankyou

  1. 29th June 2019

    […] Analysis of Pakistani Automobile Industry – A Report […]

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