Local auto industry on the verge of collapse, says PAMA
The auto industry of Pakistan is completely shattered as the situation further worsened with a decline of nearly 50% sales in the month of July 2019. The current circumstances of the local auto sector have matured in the wrong direction and don’t even seem to be coming back on track anytime soon. Under the prevailing policies of the government, the sales figures are expected to drop even further in the coming months which could be disastrous for the industry which is considered as the backbone of the country. The government of PTI has taken several steps in the recent past, which have turned out to be a nightmare for the auto sector itself and other associated small industries. The previous government introduced Auto Development Policy 2016-21 (ADP), offering several tax-based incentives to the new entrants in the country. It contributed immensely towards bringing huge amounts of foreign investment as several European and Korean auto giants made their way into the country by acquiring Greenfield status to assemble its cars at their respective production plants. However, it didn’t take long for the new government to change things dramatically against the existing as well as new players in the market. It imposed several high amounts of taxes and duties on the automobiles that adversely affected the sales. A majority of new entrants have introduced high-end cars to their line-up and as the prices went up for several reasons, selling them became an uphill task.
The high-rising US dollar against the local currency has led to a massive increase in the prices of cars as a lot of parts or raw material used to manufacture them, is imported from other countries. Under the prevailing situation, the industrial efforts of producing 550,000 units annually would only remain a dream. In case of further declining sales, there could be a revenue loss of Rs.225 billion per annum, which is not a good sign either. Employment will be directly affected, and nearly 1.8 million jobs could be at stake. The new players have invested millions to set up their plants for long-term purpose and therefore it’s the responsibility of the government to provide a secure environment to their investment plans through a set of consistent policies.
A sharp decline in local car sales:
Currently, the existing auto manufacturers regarded as big three are also facing the heat of the situation as their sales numbers have dropped significantly. According to the stats revealed by Pakistan Automotive Manufacturers Association (PAMA), the sales of Pak Suzuki went down by 23% in July 2019 as compared to its corresponding period last year. Even its hot-selling model Wagon R witnessed a decline of 70% in the period under review. The sales of Honda Atlas dropped by 66% in July 2019 as it managed to sell only 1694 units against 4981 units in July 2018. The accumulative sales of Honda City and Civic were 1452 units as compared to 4609 units last year with a drop of 68%. Toyota Indus was no exception as it also went into the crisis with a whopping 56% decline in the sales. Toyota Corolla, the highest-selling model of the company, witnessed a decrease of 57% with 1981 units sold in July 2019 as compared to 4566 units in July 2018.
The deadly FED:
Another contributing factor in the declining as mentioned above sales figures is the imposition of Federal Excise Duty (FED) by the government on all categories of locally assembled cars divided into three slabs with a tax rate of 2.5%, 5%, and 7.5% respectively. Previously, 10% FED was applied only on cars of 1700 cc and above engine capacity. However, the government expanded its circle in the recent budget, which turned out to be devastating for the local auto industry.
Automakers halting production:
Combining the FED and rupee-dollar parity, the auto manufacturers are forced to reconsider their production and expansion plans in the country. Nearly Rs.140 billion has been invested by the local auto sector recently, and as far as the new entrants are concerned, approximately $1.3 billion is in the investment process. But the current deteriorating conditions have led them to hold their investment and decrease production due to lower sales in the market. Toyota Indus has already reduced its production days to 5 days a week while Honda Atlas halted its production for more than 10 days in July 2019 due to piled up inventories. It is indeed very disappointing and discouraging for both existing and new players in the market. Especially the new players are not being able to benefit from what they had expected at the time of their investment in the country.
Impact on localization:
It will also directly impact the purchases made locally from the suppliers in the country. Of the total price of a car, almost 50%-60% belongs to the localized parts installed in it. It means that hundreds of local vendors will be affected by such a sharp decline in the sales of the automobiles. It will eventually dent all the hard work done for the localization in the recent past.
A threat to employment:
Apart from the automobile industry, several other associated industries like engineering, plastic, rubber, auto parts, etc. are getting adversely affected by the current economic slowdown process. Consequently, there is a serious threat to employment in the local auto industry, and the downsizing process could be just around the corner. There is direct employment of 0.3 million in the auto sector, which leads to indirect employment of nearly 2.5 million people in the associated industries. The reduction in production days of the auto manufacturers would certainly mean a considerable cut down in the employment.
Loss/loss situation for the government:
The government’s policies are turning horribly-wrong for the revenue collection perspective. A car’s total price has approximately 30%-38% portion of only taxes payable by the consumers. Such a sharp decline in sales means a massive decrease in tax collection. As a result, the government could face a loss of Rs.3 billion per month.
Nonetheless, it’s a loss/loss situation for everyone, including the government, auto manufacturers, linked industries, and obviously, end consumers. The government needs to bring more stability and consistency to its policies related to the automobile industry. The exchange rate shall also be controlled, and the imposition of FED be reversed to help the sector to grow. The policies should be made, keeping in view the Auto Development Policy 2016-21 and the foreign investments be given a secure environment in the country.
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