Pakistan Automobile Industry Essay

Automobile market is one of the largest segments in world trade. In a fast globalized world, this industry is facing huge challenges like cutting cost, upgrading models, improving fuel efficiency and enhancing customers comfort without compromising quality. I categories automobile industry of Pakistan in different phases. In first phase, automotive assembling of Bedford truck followed by ford perfect, ford Cortina and Dodge Dart started in 1950s in Pakistan. By the end on the 1970’s the assembling of vehicles came to a freeze due to the low quality value of locally produce vehicle parts but continued the assembling of Bed Ford trucks. By the end of 70s practically all assembling ceased in Pakistan. In 1983, second phase of automobile assembling started with the introduction of Suzuki FX 800 CC car. And with in six years Pak. Suzuki changed the model of FX 800 CC with Mehran 800 CC. Pak. Suzuki there after introduced Khyber 1000 CC and Margalla 1300 CC in 1992. But in more than ten years, level of participation in development was not significant. From 1993, Pak automobile industry moves toward development when Indus motors company Ltd. Karachi introduced Toyota Corolla and Honda atlas cars Ltd. , Lahore introduced Honda Civic having 1300 CC engine capacity. Smaller cars also introduced by Indus motors, Pak Suzuki and Deewan Farooq motors in 2000. I. e. Cuore 850 CC, Cultus 1000 CC, Santro hundai 1000 CC. Automobile industry in Pakistan can be broadly divided into following segments: †¢ Cars & Light Commercial Vehicles. †¢ Trucks and Buses. †¢ Tractors. †¢ Vendor Industry. It is the industry which operates under franchises and technical cooperation agreements with Japanese, European and Korean manufacturers. †¢ Two and Three Wheelers Public companies that are traded on Pakistani stock exchanges. Automobile assembler †¢ Ghandhara Industries †¢ Ghandhara Nissan †¢ Hinopak Motors †¢ Hyundai Motors. †¢ Indus Motors Company †¢ Master Motors †¢ Millat Tractors †¢ Pak Suzuki †¢ Sigma Motors †¢ Volvo Pakistan Limited †¢ Al-Ghazi Tractors †¢ Atlas Honda †¢ Dewan Farooque Motors (BMW Pakistan) †¢ Ghani Automobile Industries Pakistan Automobile industry at Present: The automobile industry has been strugglers ever since its creation. Although long time has past since its establishment, it has not been able to make a mark among the very stars of the automotive world. Although it has tried and made significant advancement towards the production of locally produced vehicles transfer of new technology has become a major weakness of the industry. Another reason for the low progress of the industry is due to the high cost of fuel in Pakistan. People have made adjustments to their vehicle by changing their fuel preferences from petrol to CNG, just to get by in their lives. The Pakistani industry has so far being unable to adopt the GLOBALLY GREEN notion and safety standards. Most cars in the country rely on dual fuel systems. Moreover Pakistani industry is still relying on car models which have long been stopped producing in other super power countries. Pak Suzuki has gained almost complete monopoly in the segment of producing small cars and faces almost no competition at all. The government policies and regulation of the state bank of Pakistan too contribute a great deal of being a wall between the Pakistani automobile industry and its success. By increasing the interest rate on car financing the industry has suffered a huge shift towards downfall. SWOT ANALYSIS Strengths: Increasing Demand for Cars: In Pakistan context there are 9 cars in 1,000 persons which is one of the lowest in the emerging economies which itself speaks of high potential of growth in the auto sector and more so in the car production. Rising per capita income with changing demographic distribution and an anticipated influx of 30 to 40 million young people in the economically active workforce in the next few years provides a stimulus to the industry to expand and grow. Resale of Local Assembled Cars: Resale of locally assembled cars is better due to availability of spare parts and after sales services and warranty Used imported cars have been selling below their cost at the showrooms for the last six months but consumers are not inclined to buy because of their low re-sale value and problems in parts availability. Quality of local cars Initially when the import of cars was liberalized the quality of local assembled cars was unsatisfactory so the people of high income level group started buying imported cars and the sales of the local assembled cars started decreasing so the local assemblers started enhancing the quality of their vehicles so we can say that the quality of local cars is becoming the strength of the auto industry. OEM: The local OEM of Pakistan is well equipped with enough advance technology and skilled labor to produce parts according to the desired quality of any foreign company. CNG kit The advantage of buying local assembled cars is that they comes with factory fitted CNG kits at the times when the prices of fuel rising at higher pace internationally. Mechanics: For local assembled cars mechanics are readily available in market and much cheaper so the buyer has not to worry about any problem that can occur in the car in long term whereas the availability for imported cars is a bigger issue for the owners and if somehow they are able to find one then the mechanics charges much higher than actually it should be charged. Weakness: WTO—Deletion program: THE World Trade Organization (WTO) has rejected Pakistan’s request for the extension of the deletion program which enabled it to lay down the condition of the local content requirement (LCR). Under LCR, the automobile and other engineering industry was required to use locally manufactured parts and accessories in terms of government’s deletion policy. The condition of the LCR was an aberration to the Clause 5. 2 of the WTO Agreement on Trade Related Investment Measures (TRIMs), Article III–-National Treatment under the GATT, 1994. WTO’s decision for not extending its deletion program / LCR condition has varied impact on Pakistan’s vendor industry, automobile assemblers, car users and the government. Input Cost In Pakistan as the inflation is increasing so as the input costs and for manufacturers it is becoming harder to produce at lower cost. Increasing cost of energy and its unreliable and inconsistent supply adds up the cost of manufacturing and wastage of resources. It is estimated that by the year 2012, auto industry consumption of electricity will cross 500 – 600 MW from around 250 – 300 MW, as of now. Protection level: Before the TBS was introduced the auto industry was well protected by the government but now as the import of CKD and CBU is liberalized the protection level to industry by government is decreased. Lack of skilled manpower for modern machinery In Pakistan conventional machines are not able to meet the precision manufacturing and the available labor is not familiar with modern technology it caused by lack of coordination and linkages with Government/Semi Government Supporting Bodies and Technical Training Institutes. Scarcity of raw material especially steel Through previous years the world prices are rising and causing costly inputs and Pakistan has left with scarce Steel and Iron left, so manufacturers are facing difficulties in producing cars with low prices. Opportunities: Import German technology and skills EDB wanted to build a Pakistan-German automotive supply network, providing opportunities to Pakistani automotive vendor enterprises to benefit from the German know-how and technology to improve quality, productivity, developing and marketing of value-added products. Foreign Investment and setup production facilities China National Heavy Duty Truck Corporation (CNHDTC), one of the largest heavy duty truck manufacturers in China, has shown interest for investment in the automobile sector of Pakistan. The study is required to attract players from Germany as well as from other countries to develop business with the Pakistani counterparts. Baggase Fuel As the fuel prices are rising in world Pakistan should switch to Ethanol Fuel as Brazil is using. Ethanol Fuel is produced by Molasses. Pakistan is one of the country which produces good quantity of molasses but the engines of the local cars do not support ethanol so Pakistan should acquire the Technology to produce ethanol compatible cars. In Brazil they use 90% Ethanol and 10% petroleum whereas Pakistani cars with default engines can afford only 3% Ethanol. Global spare part market The annual gross sales turnover of the auto industry, at present, stands at Rs210 billion while export of auto parts are estimated at $35 million. As such, the increase in production turnover is projected to increase by 185 per cent while the exports of auto parts would make quantum jump. Threats: WTO—Parts indigenization Smuggling of auto parts The auto industry is generally faced by multiplicity of taxes; the presumptive tax regime has led to increase in prices of imported inputs and the finished goods. Component manufacturers are struggling to compete with under-invoicing, miss declaration and smuggling. Import of used parts is still continuing at a large scale. Smuggling, under-invoicing and dumping of auto parts. Competition from import cars Auto industry is facing a threat from the import of cars which is already liberalized further it is said that government will cut about 15% of duties till 2011 Fuel prices According to the authorities the fuel prices which currently are Rs 68. 8 and are going to increase by more Rs. 6 by the end of 3-Jun-08. Decreasing tariff structure: For localized parts of CKD cars, the tariff would reduce from 50 per cent to 45 per cent in 2008-09 and further to 35 per cent in the next two years. The tariff for CKD non-localized parts would be reduced from 35 per cent to 32. 5 per cent in 2007-08 and would keep on decline by 2. 5 per cent every year to 25 per cent in 2010-11. The rate for CBU cars up to 1500cc, the tariff would be reduced from 50 per cent to zero next year (2007-08) and to be kept at that level thereafter. For CBU cars between 1500-1800cc, the current rate of 65 per cent would be reduced at the rate of five per cent annually to 50 per cent by 2010-11. For CBU cars exceeding 1800cc, the applicable rate of 75 per cent would be reduced at the rate of five per cent per annum to 50 per cent in 2010-11. For LCVs, the tariff on CKD kits would be reduced from 20 per cent to 15 per cent at the rate of one per cent every year. However, the tariff for CBU LCVs, the rate would be reduced from 60 per cent to 50 per cent in a phased manner by 2010-11. For two-wheelers, the tariff on CKD kits would be reduced from existing 30 per cent to 20 per cent in phased manner to 2010-1. Similarly, the tariff on CBU two wheelers would reduce to 60 per cent by 2010-11 from existing rate of 90 per cent. For localised CKD parts of tractors and heavy commercial vehicles, the existing tariff of 35 per cent has been proposed to be reduced to 25 per cent in 2010-11. For prime movers (up to 280 HP) the tariff for CKD would be reduced from 10 per cent to five per cent next year and then kept at that level onwards. Similarly, the tariff for CBUs would be reduced to 25 per cent next year and then kept at that level for the next five years. The tariff for prime movers (above 280HP) and would remain unchanged, while it would be reduced for trucks from 10 to five per cent and from 30 to 25 per cent next year.