“Most factories running three shifts until a few months back have been forced to lay off labour and slash the number of shifts to two due to reduction in demand for cars,” Syed Nabeel Hashmi, a leading auto parts maker in Lahore, tells Dawn. “We may soon have to work with one shift alone if the conditions prevail for long.
He estimates that at least 1,50,000 workers have been laid off by the auto vending units in the recent months.
The auto vending industry, when running at full capacity, provide 5,00,000 direct jobs, mostly skilled.
“I cannot give you absolute numbers of lost jobs. But I think nearly 20 to 30 per cent workforce has either already been fired or would be in next few months if the current slowdown in the car industry lingers for long,” says another top auto parts manufacturer, Syed Almas Haider.
The domestic cars sales have dropped by 42 per cent on a year-on-year basis to 7,418 units this July, the first month of the current financial year of 2008-09, from 12,830 sold during the same period last year.
The Pakistan Automotive Manufacturing Association (PAMA) says auto sales fell alarmingly by 58 per cent from 17,583 units sold this June on a month-on-month basis.
“I guess the domestic auto sales would fall by 30 to 50 per cent this year if the existing market conditions don’t change and improve,” says Almas.
“The auto sales are feared to drop to almost 1,30,000 units this year from the peak of around 2,00,000 units a couple years ago,” says Nabeel.
The major factor for the huge decline in demand is said by the industry to be the sharp increase in prices by assemblers to pass on the impact of imposition of the five per cent federal excise duty (FED) and one per cent increase in sales tax to 16 from 15 per cent announced in the budget for the current fiscal.
Moreover, implementation of the fixed rates of withholding tax (WHT) on the purchase of cars in the budget has also added to the cost of cars and other vehicles.
“The total impact of various taxes and fees as announced in the current year’s budget is calculated to be in the range of Rs30,000 to Rs1,25,000 per unit depending on the make and engine capacity of the vehicle,” Almas contends.
He says the assemblers had also raised the prices on an average of 10 to 20 per cent to factor in inflation and increases in their other costs.
“The rising prices of cars, galloping inflation, escalating cost of leasing and imposition of taxes — which will generate little revenue for government but destroy the industry — are responsible for the slowing demand for cars,” says auto parts exporter Tahir Javed Malik.
But the drop in car sales isn’t the only worry for the auto vendors. “We invested in the industry when real interest rates were low, rather negative, and economy was growing rapidly and car sales touched record highs. Now the situation is reversed — economy is slowing down, demand for cars is fast losing momentum and interest rates are going up as inflation moves up making car leasing expensive. That means the auto vending industry is being squeezed both ways as their production falls and their financial charges go up on account of rising credit cost,” says another vendor, who asked not to be named.
He claims that most of the vendors are in trouble. “Even some motorcycle parts makers are also finding it hard to stay in business because their buyers (assemblers) are also in trouble.”
Besides reduction in demand for cars, the vendors’ ability to sell and pass on the impact of the increasing cost of production to domestic car assemblers was severely hampered due to replacement of the deletion programme for the auto industry with tariff based system from the financial year 2006.
“The assemblers either import the components or offers very reduced price to its local suppliers for the same,” the vendor who wants to remain annonymous says.
“Our cost has risen enormously on account of galloping steel and energy prices but assemblers are not ready to absorb that increase,” he says.
Nabeel says the vendors don’t mind in-house development or production of parts by assembers — as in case of Millat Tractors — if and where they are facing availability or capacity issues. But some car makers have gone into in-house production of or importing parts due to tarrif-based system being produced by vendors and thus shunting off suppliers and hurting their business interests, he says. He, however, says the falling rupee is making imports expensive and has begun to injure such assemblers’s sales. “That is a positive development for suppliers,” he says.
“The assemblers must understand that localiastion of components is also in their best interests,” he adds.
Meanwhile, an executive of a car assembler, who refused to give his name, says they were facing quality issues that made them turn to in-house production of some parts and/or imports. Moreover, he says, the assemblers are moving towards consolidation. “That means we are trying to reduce the number of our suppliers and asking some to become second tier suppliers by supplying their parts/components to other vendors who supply to us. That is critical for quality assurance and reduction in cost,” he says.
Nabeel says the auto vending industry has changed a lot in last five years. “We have invested heavily in capacity and technology and need volumes to sustain,” he says.
“The government should understand this fact and help us in our difficult times. The auto industry needs a stimulus to prevent further downturn and to grow at sustainable rate. This isn’t critical for our industry but also for the economy in general. Once we get sick or die the revival will be a hell of a job,” he warns.