LEW Veraldi, the father of the Ford Taurus, was once quoted as saying of the car trade: “This is an emotional business. If you’re not emotional, there’s something wrong with you.” He might as well have been speaking of Pakistan’s automobile industry where highly strung car makers defend their monopolistic practices, vociferous car importers lambaste them, beseeching auto part vendors plead for survival, enervated authorities tip toe around and dog-tired consumers all but give up the fight for their rights. In the past several months, this five-door auto has skidded through some pretty rough terrain. Here’s what’s at the heart of the quandary: Plentiful car financing at low rates of interest has encouraged more people to buy cars.
Because of a sudden leap in demand over the last four years or so, local auto assemblers have been unable to keep pace. So, consumers are waiting six months to get their cars.
Meantime, black marketers have sprung from within the industry’s ranks, booking several cars and then charging cash premiums of up to Rs200,000 for immediate delivery.
The assemblers say they’ve shifted into high gear, tripling production to meet demand. But car importers see nothing but a flaming Ferrari red. They say if the government would liberalize imports, demand would easily be met and consumers would be presented with greater variety, lower prices and better quality as competition takes root in a protected industry.
This sends local auto part makers into a tailspin. They say as a small-scale industry, they rely solely on serving assemblers and if less local cars are sold, vendors will go out of business.
In the past year or so, the industry has grabbed more than its fair share of headlines. As demand pressures bubbled, and premiums went into turbo drive, the government set up a committee last year to examine the causes of mammoth time lags.
The industry was threatened with the liberalization of imports of both used and new cars but even though premiums fell sharply for a brief period following the government investigation, they quickly rose again to previously high levels where they remain today.
The other major issue at play during the year was the onset of the WTO regime, According to agreements with WTO on Trade Related Investment Measures (TRIMs), the deletion program in the auto industry was to end in 2003 but Pakistan requested a three year extension seeking continued protection for the vendor industry from more cost-efficient foreign auto part suppliers.
It now appears this extension will not be granted and the deletion program will come to an end, leaving assemblers free to use foreign components. Deletion levels have reached 71 per cent for cars up to 800 cc, 64 per cent for cars between 801 cc and 1200 cc and 59 per cent for cars over 1200 cc, according to the auto parts trade group.
Additionally, post-WTO, the government will also remain under pressure to reduce import duties on new cars—now ranging from 50 per cent to 100 per cent—to bring them closer to the 35 per cent duty charged on completely knocked down kits used to assemble local cars.
Analysts forecast that the government will limit duty cuts in the forthcoming budget to about ten percentage points per category since more drastic cuts were made last year before which duties ranged from 75 per cent to 150 per cent. Moreover, they expect the government to replace the deletion system with a tariff-based system for auto parts, modeled on Malaysia and Australia. “Vendors are working under great pressure,” says Shafiq Siddiqui, an automobiles consultant. “They have outdated facilities, low quality and face the non-availability of raw materials like aluminum and dyes. This industry is a small-scale industry and needs support.”
The auto parts industry has been in a winning position over the last few years, towed by the auto assemblers which have ramped up production. Mehdi Ali Rizvi, chairman of the Pakistan Association of Automotive Parts and Accessories Manufacturers says revenues have grown 40 per cent in the first half of the ongoing fiscal year from full year sales of Rs 28billion in the 12 months ended June 30, 2004.
He says employment in the industry has grown 25 per cent in the last year to 160,000 people and Rs 10billion will be invested in the industry every year over the next five years. “Modernization in the auto parts industry can only be volume driven and will happen as car production rises,” he says.
“If a policy is laid down for the next five years, we can programme ourselves accordingly. But if there is suddenly a radical change in import tariffs, then we will be in a fix.” The industry hopes to export $36 million worth of parts this year and the association sees the potential for exports from this sector at $100 million.
But industry players only expect to see those figures if local volumes rise. Data from the Pakistan Automotive Manufacturers Association shows that production in the first eight months of the ongoing fiscal year rose 25 per cent from 59,496 units to 74,073 units. Production is expected to touch 120,000 by June, analysts say, against a demand for 250,000 cars and last year’s production of just over 112,000 cars. Moreover, analysts say demand for cars will continue to grow by 25 per cent a year until 2008.
That means that even though Indus Motors which assembles Toyotas and has a 26 per cent market share and Pak Suzuki which dominates the market with a share of over 51 per cent will not be able to keep pace even though they’re operating double shifts.
Similarly, although Honda Atlas with a 12 per cent market share plans to launch a new model this year and has enhanced capacity from 12,500 units in 2004 to 30,000 according to Taurus Securities, demand will continue to outstrip supply.
“Until the demand-supply gap doesn’t go, black marketing won’t go either,” says H.M. Shahzad, chairman of the All Pakistan Motor Dealers Association. “The government should open up all imports on a one-time basis for six months and see how the black marketing vanishes.”
Since a measure of liberalization last year, between September 2004 and mid-March 2005, the dealer’s association estimates some 8,000 used and 6,000 new cars have been imported. If the government frees up the import regime, 70,000 cars will be imported, Shahzad forecasts.
Car importer Sarfaraz Dhanji of Aristocars says a more open regime will send local car prices downhill by 30 per cent to 50 per cent. “TRIMS will have a colossal impact on the auto sector,” he says, adding that Indian, Chinese and Korean made cars will pose stiff competition for locally assembled cars. He is expecting the 1000cc Indica made by the Indian Tata Motors which sells for Rs 325,000 and the Chinese Cherry retails for Rs 400,000 to start arriving in May in lots of 500 each.
Car importers recommend that customs clearance, which takes about four days should be made more efficient, the requirement of import permits should go to allow three to four year old cars to come in and import permission should not be restricted to overseas Pakistanis. They also say the transfer of residence issue should be simplified. Under current rules, a car can only be imported if it has been registered in the importer’s name for one year.
But government authorities are unlikely to make any dramatic moves to liberalize imports. “If we allow reconditioned cars to come in, the incentive for new assemblers to enter will be gone and Pakistan will become a junkyard for used cars,” says Dr Ashfaque H. Khan, the government’s chief economist who maintains that market-based competition does not exist in the automobile industry worldwide.
Maybe. But as Khalid Iqbal, head of research at Invest Capital & Securities, a local brokerage put it: “Other countries may be protected but that doesn’t mean you don’t want your own industry to improve efficiency and besides no one waits six months for a car in those countries.”
Moreover, with years of protection, assemblers have grown into an inefficient, lazy industry where innovation and quality have taken a backseat. Variety appears an endangered species with new models being launched only rarely and quality sliding.
Prices, meantime, refuse to budge. To the contrary, Invest Capital notes, Honda raised the prices of its City and Civic models by Rs 40,000 each and Suzuki upped its rates by Rs 5,000 to Rs 20,000 last month.
Now, whether imports are allowed or not, the hope is that competition in some shape or form will help weed out the inefficiencies and complacency in the sector. “The more competition there is among the original equipment manufacturers the better off consumers will be,” says Dr Ishrat Husain, governor of the State Bank of Pakistan.
New assemblers like Renault and Audi are considering entering the Pakistan market which will help diversify from purely Japan-based assemblers to those of European origin, dealers say. And that means more growth in the months and years ahead.
Analysts say auto sector shares, with a price-earnings multiple of six times, have lagged the KSE-100 index which is trading at a multiple of 15 times (excluding OGDC). Most are bullish on the sector, with expectations of a 15 per cent profit growth this year.
Faiza Naeem, auto sector analyst at AKD Securities says 60 per cent of car purchases come through car financing, compared to 85 per cent in India. She also says car penetration in Pakistan is 5.5 per 1,000 people compared to 8 per cent for India and 15 for China. “We expect a breakout in this ratio and if it rises to 10 per 1,000, about 40 per cent growth will come from this avenue. Until then, consumers will be hoping the industry keeps its wheels turning but doesn’t run them over altogether.
