By Mansoor Ahmad
LAHORE: Despite increase in car production, orders for local parts from original equipment manufacturers (OEMS) of cars have declined, endangering the existence of highly-developed auto parts industry of the country.
Total production of cars in Pakistan was 30,000 units in 1995-96, which increased more than five times to 161,000 units in 2005-06. The production is expected to cross 200,000 in 2006-07.
The auto parts’ makers were surprised when one major car manufacturer started importing those auto parts, which were available locally, at a high price for its new model. As a result, the car maker’s orders for local parts fell by 80 per cent.
As there was no authority to regulate car prices, the manufacturer increased the price of its new model by 20 per cent to cover the high cost of parts’ import.
However, it is worth noting that the sale of new high-priced models made from imported parts has declined by 50 per cent while that of other brands using local parts has increased.
Apart from the issues related to model change, all OEMs are slashing the number of auto parts’ vendors they have on their portfolio.
Tractor parts’ vendors, in that regard, have not been affected. However, they face the problem of static prices as the tractor manufacturers have simply refused to increase prices due to the government’s cap on tractor rates.
The government is not obliging the tractor manufacturers due to their big cash reserves, which show they are making more-than-expected profits, which can be easily used to ensure vendor price increase.
The motorcycle industry is also in trouble. Though the market is growing, stiff competition has hurt some of the low volume manufacturers. Even the largest manufacturer of Japanese motorcycles halted production a few weeks ago due to sagging demand of its 70cc model.
The government introduced the tariff-based system in 2006 after taking inputs from the Pakistan Association of Automotive Parts and Accessories Manufacturers (PAAPAM) - the representative body of auto parts’ makers.
The policy will prevent the roll-back of the deletion process and will lead to increase in the use of locally-produced technological parts. To achieve this, the auto parts’ vendors are making heavy investments in plant and machinery.
The auto parts’ vendors say the government’s policies are in conflict with the objectives of tariff-based system. It allowed import of used and old cars, reduced tariff on black cabs to zero, abolished duty on the import of tractors and drastically reduced duties on CNG trucks and buses.
Under-invoicing and unregulated imports coupled with misuse of nomenclatures have practically paralysed the tariff-based system since the 50 per cent customs duty on localised parts is really not having the required effect. The PAAPAM’s demand that the government introduce a proper cross-checking mechanism seems to have fallen on deaf ears.
According to the Engineering Development Board, the job multiplier in the auto industry is high and the OEM-vendor ratio of employment is nearly 1:10. A total of 192,000 direct jobs have been created in the sector. Likewise, the ratio of direct employment in the auto industry to jobs created outside the vending and OEM sector would safely be 1:12.
Car sales in the country have increased on the strength of massive financing provided by the banks. Car financing that stood at Rs737 million in 1997-98 rapidly increased to Rs97,000 million in 2005-06.