Analysis of Pakistani Industries: Report on Deletion Process in the Automobile Industry

The auto industry of Pakistan, which is in the growth stage, consists of a few major players, namely Pak Suzuki Motors, Indus Motors and Atlas Honda, in the car range; Millat and Fiat Tractors; and Yamaha and Suzuki Motorcycles in the motorcycle range.

 

Although the automobile industry, on the whole, has a production capacity of approximately 100,000 units, current production levels hover at about 40,000 units. The auto industry has been blaming the government policies for the slow growth and the high rate of duties and tariffs. These include the duties put on the imported CKD kits and other parts, and the Capital Value Tax.

 

Almost the entire car manufacturers depend on international suppliers for spare parts. A limited number of spare parts are available locally; however, there have been complaints of low quality and sub-standard parts. The government, in 1994, banned the import of second-hand cars in order to provide the local industry with an incentive to improve production. However, it laid a condition that the local manufacturers would substitute foreign parts with local ones, gradually, over a period of time (the Deletion Program). Even though most of the manufacturers, at that time, submitted their plans for increasing the levels of indigenisation, none have actually implemented them successfully.

 

Process innovations in the vendor industry are rare, while product innovations take the form of slight changes in the model’s shapes and accessories. A combination of strategies is in play in the automobile sector. For example, Pak Suzuki follows cost leadership, in its production and other areas, while Indus Motors and Atlas Honda depend on differentiation to promote their sales.

 

In the future, the prospects for advancements in the localisation industry depend entirely on any new Policy to be announced by the new Government. As yet the vendor industry is still in its infancy stage and may take some time to establish itself wholly. entry, due to the high initial capital investment that is required, and also due to the sorry state of the industry.

 

 

 

The Automobile Industry  in Pakistan

 

AUTOMOBILEs:

The automobile industry generates less than ten percent of the revenue in the industrialised world which not only help rapid industrialization but also provide mass employment and in Pakistan it contributes more than 12 billion rupees to the GDP.

An automobile has over 10000 components and parts out of which the assemblers usually concentrate on the manufacturing of small but critical parts while the remaining parts are supplied by the vendors and the subcontractors.

However Pakistan has so far been lagging behind in the development of the engineering industry as compared with other developing countries in the region, just a couple of years ago the only mentionable in the engineering industry in the country is that of textile and cultivation.

In Pakistan the automobile components manufacturing industry consists of mainly units producing original components for assembly under deletion programme and units producing reconditioned and original components for local use.

These units are in three types which include the original equipment manufacturers, independent manufacturers and the ancillary industry producing small parts and non-automotive items.

There are more than 1000 vendors in the country, including bot registered as well as unregistered with a total investment of over eight billion rupees, they are engaged in the manufacturing of original components for the assembly operation under the deletion programme as well as producing reconditioned and original components for sale in the local market.

They manufacture and supply the local car assemblers with auto parts such as pistons, engine valves, gaskets, camshafts, shock-absorbers, struts, steering mechanism, cylinder head, wheel hubs, brake drums, wheels, bumpers, instruments and instrument panels, gears of all types, radiators, cylinder liners, blinkers, lights, doors and door locks as well as auto air conditioners.

 

HISTORY:

Immediately after partition ,the Pakistan army undertook the responsibility of rebuilding vehicles in Pakistan under the chief inspector of vehicles in Chaklala rebuild Factories. The first automobile manufacturing plant in Pakistan was set up in 1960 when national motors was established to manufacture Bedford trucks. Afterwards, millat tractors ,Al-Ghazi tractors and Atlas Honda were also set up.

 

From a non-existing industry at the time of creation of Pakistan, automobile industry is now producing more than 40,000 cars and commercial vehicles. Local car industry is paying around  Rs. 6.6 billion as Duty & Sales Tax, is saving Rs. 1.5 billion of foreign exchange and providing jobs to about 100,000 people directly in vendor industry and 400,000 people are indirectly employed in allied industry. At present there are twelve automobile units in existence. Out of these ten units are in operation while two have yet to start production. The local car and light commercial vehicle assembly industry consist of four local manufacturers. All four assemblers are joint ventures between Japanese car manufacturers and local partners. Pak Suzuki Motor Company (PSMC) was the first company to start local assembly in 1983. Being the only company in assembling field, PSMC has enjoyed monopolistic position for many years but now with the entry of new companies like Honda and Toyota in early 1992, PSMC faces fierce competition in high capacity cars. Even in economical sector fierce competition has eroded as Kia 1000CC production has started.

 

The development of automobile manufacturing sector in Pakistan can be divided in to the following 4 distinct phases these are:

 

PHASE NUMBER 1 (1947-63)

 

Semi Knock Down (SKD) Automobile assembly parts was established  during this period. In most of the cases the assembly operations were limited to assembling of the units imported in SKD condition and no substantial localization took place in this phase.

 

PHASE NUMBER 2 (1964-1971)

The progressive manufacturing programs were started in this phase. Ghandara motors successors of General motors &Sales Company were the first assemblers to embark upon local development of Bed Ford Trucks, they also prepared and submitted  a deletion program. Kandawalla industries also established  in-house metal, pressing and die making facilities. However, most other assemblers continued with the SKD assembling.

 

The reasons for slower process of localization are as following.

 

• Absence of well-organized components manufacturing facilities.
• Lack of suitable ancillary facilities like forging, casting etc.
• Lack of transfer of technology.
• Low production volumes.

 

PHASE NUMBER 3 (1972-88)

The Indo-Pak war of 1971 and nationalization of industries under the economic reforms orders had profound impact on the Automobile industry of Pakistan. 10 Automobile plants were nationalized and renamed.

 

ASSEMBLER	RENAMED
Wazir Ali Engg.	Sind Engg.
Ali Autos	Awami Autos
Haroon Ind/Karachi Auto	Republic Motors
Ghandhara	National Motors
Kandawala Ind.	Naya Daur
Hyesons	Mack Trucks
Rana Tractors	Millat Tractors
Jaffer	Trailer Devp
Ghandhara	National Motors
Ali Autos	Awami Autos

 

Following the progressive manufacturing period, nationalization of industries under Economic Reforms order had a profound impact on automobile industry in Pakistan. In early 1972 under Martial Law Regulation, the Government took over the control of 32 industrial units, including eight automobile plants, under the officially appointed Board of Industrial Management with the Minister for Production as its Chairman. Out of the units taken over by the Government were included iron and steel, heavy engineering, heavy chemicals, assembly and manufacturers of motor vehicles.

 

Initially, the management of these industries was taken over by the government, but in August 1973, the President promulgated the Economic Reforms (Amendment) Ordinance after which the Federal Government acquired majority ownership of shares of these industrial units. After nationalization, these units were renamed, their functions were redefined and Pakistan Automobile Corporation (PACO) was created in 1973 as a holding corporation under the administrative control of the Federal Ministry of Production.

 

Formation Of PACO

In order to manage the automobile units and to advise the Government (in developing policy guidelines for growth and development of auto industry), Pakistan Automobile Corporation (PACO) was formed in 1973 under the administrative control of the Federal Ministry of Production. It was a major public industrial conglomerate of 15 companies including four joint ventures. For the first time in Pakistan emphasis was given to develop local manufacturing facilities and the development of parts was under taken by the nationalized units in an organized manner and the system of standardization, regulations and monitoring was established. This requires the industry to assemble from Complete Knock Down (CKD) and then go on to manufacture components and to achieve a local content of 75% over a five-year period. This not only entailed utilization of the existing facilities in the country but also required the assemblers to plan for future investment to achieve 75% local contents if the manufacturing capability was not there.

 

The monitoring by Ministry of Industries (MOI) played an important role in achieving the objective of enforcing the policy of localization. A number of small and large industrial units that were mostly functioning in the unorganized sector were channelised into a more formal pattern of production management under the PACO control. The direction for achieving quality standards as laid down by the “Principals” was also established. The MOI was entrusted the responsibility of allowing any waiver for non-performance, and was applicable if CBR also concurred.

 

Performance Under Government Control in the 70’s

According to the government resources, the nationalized industries made progress on a wide front. The performance of automobile and farm equipment group was the best with production recording an increase of 78.6%

The number of units in almost all areas of automobiles developed in this phase. The distinctive feature of after nationalization period is the assembly of Suzuki range of vehicles (Cars, P/up, Vans & Jeeps) and Isuzu Trucks & Buses in the public sector. Awami Autos signed a Joint Venture Agreement with Suzuki Motor Co. of Japan and a new company by the Name of Pak Suzuki Motor Co. Ltd was established in 1983 to produce Suzuki range of vehicles at the existing facilities of Awami Autos. PACO also established two units in the public sector namely Baluchistan Wheels and Bolan castings.

 

PHASE NUMBER 4 (1989-1999)

The policy of denationalizing public sector was adopted and following units of PACO (Pakistan Automobile Corporation) were transferred to the private owners:

 

 

 

Units	New Management
Pak Suzuki Motors	Suzuki Motors, Japan
Naya Daur motors	Tawakal Group
Baluchistan Wheels	Tawakal Group
Millat Tractors Group	Millat Employees Group
Republic (Hino-Pak) Motors	AL-Futtaim Group

 

The Deletion Program in the Automobile Industry Also took its real shape during this phase this is the time when the PAAPAM was also set up.

 

The setting up of PAAPAM:

The Pakistan association of Automotive Parts and Accessories Manufacturers (PAAPAM) was founded in 1988 to represent the auto parts dealers at various Government levels and to provide technical and management cooperation to its members. PAAPAM with its almost a decade old history has attained a level of an indispensable and extremely effective link between the policy making echelons at the government and the whole entity of its member firms.

The main objective of PAAPAM is the acquisition of technology and excellence in quality and cost for manufacturing auto-parts  and to maximize the contents of indigenized auto parts of international quality at competitive prices leading to manufacturing of a totally indigenized automobile.

The association has 180 members at present and this number is fast growing. According to an estimate, the total number of auto-parts manufacturer exceeds one thousand and provides jobs to around 50,000 persons both directly as well as indirectly. The estimated investment in this sector exceeds Rs.8 billion.

PAAPAM is also represented through its members in the Government and business bodies such as the indigenisation committee, National Engineering Manufacturers Export Councils, Engineering Development Board, and FPCCI etc.

 

Over the years , PAAPAM has been looking after the interests of the auto parts manufacturing industry. By the forming of the Engineering Development Board, PAAPAM was provided a channel through which its concerns about the vendor industry could be taken care of.

 

Around 90% of the vending industry constitutes of small and medium enterprises that are self-financed and they help in building up of local technical skills and import substituting.

 

The Association commands over 180 members with capital over 8 billion Rupees manufacture, for the local assemblers, auto parts such as pistons, engine values, gaskets, camshafts, shock-absorbers, struts, steering mechanism, cylinder head, wheel hubs, brake drums, wheels, bumpers, instruments and instrument panels, gears of all types, radiators, cylinder liners, blinkers, lights, door locks and auto air conditioners.

 

But according to critics in the industry, the Association has not put in enough efforts to take the industry forward, a failure which the Association has blamed partly on the policy-markers and partly on the assemblers who have not been encouraging the local vendors as such.

 

THE PRESENT SCENARIO OF THE DELETION PROCESS IN THE AUTOMOBILE INDUSTRY

 

INPUTS AND SUPPLIERS

The basic raw material for every manufacturing concern in the auto and allied sector is the CKD units. These are actually parts that have either to be painted and or bolted together. CKD stands for Completely Knock Down kits. There are two parts to any single car manufactured. One is mechanical while the other electrical. In newer models the electrical section takes up a lot of time. Due to the low level of indigenization, the primary reliance is on the CKD units.

 

Also, it is important to realize, that most companies in Pakistan are supplied spare parts by their parent companies and therefore they obtain the parts on substantial discounts.

 

The automobile is one product, the manufacture of which encompasses a wide spectrum of manufacturing facilities and technologies. At the upstream level, these include manufacture of high grade alloy steels, aluminum and non-ferrous alloys, plastic raw materials, glass, chemicals, including paints and lubricants, and capital goods such as machine tools. On the ancillary ships, pressure die-casting, precision machinery, sheet metal presses, plastic molding, rubber products, electrical and electronics, hydraulics and pneumatics and miscellaneous other facilities required for the production of fitments and accessories. Thus, the automobile with its 10,000 parts and ever increasing complexity remains one of the most challenging products to manufacture and a telling measure of an industrial societies capabilities.

 

Production of vehicles

The production of vehicles has shown an upward trend that is a proof of the fact that the demand for vehicles is further increasing.

 

Passenger Cars

Presently, there are four car manufacturers engaged in the progressive manufacture of Suzuki, Honda, Toyota and Nissan cars in collaboration from Japan.

 

The total production of passenger cars has gone up from 31,079 in 1995-96 to 38,619 in 1998-99. The major players in this market have been:

 

• Pak Suzuki with its models of Baleno, Khyber, Mehran and Margalla.
• Toyota with corolla an other medium sized cars
• Honda with 1300 ,1500,1600 and 2000 cc cars

 

The highest deletion level achieved in this sector has not been more than 60% for cars up to 1000cc and 35% for 1300-1500 cc cars.

 

The installed capacity of car industry in the country is about 10,000 with employment of more than 100,000 people directly and indirectly. The car manufacturers in collaboration with their principal have established facilities for the manufacture of the petrol and diesel cars ranging from 800CC to 1600CC(petrol) and 2000CC(diesel) of international standard. The car industry continues to strengthen and reinforced the engineering sector by developing the vendor industry in the country. The total production of cars in the year 1996-97 and 1997-98 was 33741 and 33683 respectively against the installed capacity of 100000.

The deletion so far achieved by the progressive manufacture of different cars are given below:

The small cars manufacturers have shown interest to come in the progressive manufacture of different cars like Hyundai from Korea and Oka from Russia. As per government policy they are required top start at the level of 75% of achieved deletion.

Level of indigenization achieved so far:

Suzuki 800cc Mehran	58%
Suzuki 1000cc Khyber	44%
Suzuki 1300cc Margalla	35%
Suzuki 800cc Pickup	52%
Suzuki 1000cc Potohar 4×4 jeep	35%
Suzuki 800cc Van	47%
Toyota Corolla	28%
Honda Civic	28%
Tractor Massey Ferguson	84%
Tractor Fiat	84%
Honda Motorcycles	70%
Yamaha Motorcycles	70%
Suzuki Motorcycles	65%
KIA Ceres Pickup	26%

 

 

Critics said that the local vendor industry though still in the process of development could not achieve the deletion targets by producing low quality components which are not acceptable by the local assemblers, it is said that the Pakistan Association of Automotive Parts & Accessories which represents the auto parts manufacturers have not in a way been fully able to contribute its share to the development of the sector.

The vendors on their part however put the blame on the policy makers and partly on the assemblers who have not been encouraging the local vendors as such.

On the other hand it is said that the foreign car principals have no justification for their complaints because of the level of their participation in the local vendor industry. Hino trucks it was pointed out have started manufacturing wheel drums locally while Suzuki is still complaining about the quality of silencer it received from the local vendors.

The planned production capacity of the automobile, if all the factories operate on full production capacity should produce over 102,000 units every year.

 

Production and Production Capacity

Assemblers are not producing at their potential full capacity as the local demand is less than installed capacity of the assemblers. Due to this reason assemblers faces the problem of under-utilization of their production capacity. For example, Atlas Honda is producing about 20% of its capacity. Similar percentage can be observed in all other assemblers except PSMC who is producing more than 60% of its capacity. PSMC has been able to attain 60% of its capacity due to the fact that it enjoys the monopolistic position in low CC or economical cars that is the dominant segment of the car industry in Pakistan.

 

Trucks and Buses

At present there are six assemblers /manufacturers of buses /LCVs and Coaches in Pakistan. Most of them are working at ¼ of their installed production capacity. Details of their installed capacity and two year’s production (all types of vehicles) are as follow:

                 

                                  INSTALLED PRODUCTION

                                     CAPACITY            1996-97    1997-98

Hino Pak Motors Ltd          6500                 1404            392

National Motors Ltd           2400                  139             178

Ghandara Nissan Ltd          1440                  1278           187

Sind Engineering Ltd          3000                 1687            87

            Total                         13340               4508           844

 

Total production of all types of vehicles in the year 1996-97 was 4508 and in 1997-98 was 844 against the installed capacity of 13340.

 

The highest deletion level reached so far has been 51%, which is not satisfactory at all considering the fact that most of these companies have been operating in Pakistan for  more than 20 years now.

 

Light commercial vehicles

The total market for such LCVs is around 10,000 units and the highest deletion level achieved so far has been 40%.

LCVs are manufactured by Suzuki and Toyota by utilizing their installed manufacturing facilities for the manufacture of different cars that in case of Suzuki is 50000 while Toyota is 20000. In early 90’s, they were producing LCV’s up to 12000 annually which has declined to about 10543 at present.

 

The Pak Suzuki motor company has achieved a deletion level of 50%, which is quite low as it seems that no concentrated effort has been made on the part of the company to produce locally.

 

Motor Cycles

Atlas Honda dominates the market for motorcycles with a market share of around 64%.the total market for these vehicles is about 100,000 units. In this field the companies particularly  Atlas Honda and Dawood Yamaha  have been able to achieve deletion levels of only 70% even after being a part of the local market for more than 30 years. This shows that the manufacture of local parts for using in the production process has been going on and this sector has been able to establish itself in the market.

 

OUTCOME

The overall scenario reflects a sad picture on part of the corporations as they have been unable to achieve high deletion levels even after being a part of this market for quite some time now.

 

Millat tractors which has been in this market for more than 18 years now has achieved an overall deletion level of 78% only, Pak Suzuki an average of 43% after 16 years whereas Atlas Honda has been the biggest disappointments even after 30 years in the local market, they have still not been able to achieve 100% deletion whereas Indus Motors has been working as low as 20% on some models. All these companies have not been able to implement an effective deletion program due to which Pakistan has still not been able to develop a truly locally manufactured car.

 

Recently, due to the Govt. policies imposed, the Automobile industry has been following deletion program approved by the government and it is making all endeavors to continue to meet the present and future deletion targets. Indeed with the support of auto parts manufacturers/vendors , the industry has also achieved indeginization/deletion level of over 52% approximately. The auto part manufacturers/vendors that are almost 800 in number are the main driving force behind this achievement.

CAUSES OF DELAY IN LOCAL MANUFACTURING

Prior to 1972 the auto mobile plants were only assembling and partially manufacturing vehicles, achieving few simple deletion like sheet metal components, radiators, batteries, tyres and minor casting. Rarely efforts were made on a manufacturing projection to achieve 100% deletion. The reasons are:

 

• Uneconomical volume, higher tax decline on raw material as well as finished products and loss incurred in the shape of deletion penalty by the licensors.
• The liberal import policy extensively hampered the market demand of ancillary products. By non-standardization of locally produced articles a delay in economic development of the Automobile industry was caused
• The attitude of the decision makers to sanction more than necessary industrial complexes, producing limited products for a limited annual requirement which did not justify the product’s viability, since this resulted in low volume and high cost.

With certain projects, the development targets were non-realistic and were not in line with available facilities or future demand.

The overall deletion levels have not been able to add much to technology, self-reliance or economy. Even the deletion level that has been achieved has been in sheet metal parts, welding, painting, upholstery, and machining of imported forged and cast components besides bought out parts like tyres and batteries. Manufacturing parts, which involve technical and detailed machinery and equipment, have not even been touched upon.

 

STEPS TAKEN FOR THE IMPLEMENTATION OF THE DELETION PROGRAM

 

Indigenization Program

In 1997, with the formation of the Engineering Development Board of Pakistan, the deletion program has been rationalized, made transparent and industry specific. All local made vehicles, be it cars, tractors, trucks, motorcycles have to follow the deletion levels set up by the EDB. The Vice Chancellor of the Planning Commission is the chairman of the EDB. The board consists of members from the private sector of the engineering Industry, including the automobile as well as other Government functionaries. The   purpose of the board is to formulate strategies through which the local engineering industry could be further encouraged and established on stable footings so the it could play its due role.

 

Previously, the firm specific deletion program was being used but it proved to be ineffective and was not able to encourage local manufacturers to opt for higher deletion levels as no incentives were provided for enabling higher local content.

 

Afterwards the EDB was introduced which focused on industry specific deletion program. The EDB prepared deletion programs up to the year 2003and has been an encouraging factor for the local auto part manufacturers to gear up activities and play their role. This has also helped in developing the engineering industry of the country.

 

The Engineering Development Board has revised the detection program from a ‘company specific’ to ‘industry and components specific’ system. This more efficient system has accelerated the program of localization. The company’s Product Development Department has met deletion because of low volumes and an addition of higher technology components, effort will need to be intensified to achieve future targets.

 

To maintain consistent quality checks and to assist vendors in product development, a state-of-art Quadrant measuring machine has been installed which will ensure standards are maintained for locally manufactured parts.

 

The Pakistan Automotive Manufacturing Association has set up an Automotive Testing and training Center in which the Company is actively participating to further support Vendor Development programs.

 

The Pakistani Engineering Scenario

The state of the engineering industry describes the status of industrialisation of a country since it portrays the capability to add value to the primary products and of indigenous production of plants and machinery. This industry had no real demand for its products in the region that now constitutes Pakistan, largely because it was an agricultural and not an industrial area. As is well known, the industrialisation of the country was initiated for import substitution, and that is one reason why engineering industry did not receive the status as the basic component of industrial infrastructure. Shamefully, it still does not constitute its basic component after 50 years of Pakistan.

One of the basic deficiencies of the engineering goods sector during the last 50 years is its laxity in quality and delivery schedules which state of the credibility and capability of institutions. The local industry has failed to give precision-controlled products on which the buyer could depend. Devotion to work, a characteristic of the Mistries has faded out. This has taken away the innovative capability of the workers and no new model or improved version of machinery is forthcoming. The country has a limited capability to design, test and experiment on new machines. The small and medium-sized units do not have the finances to risk innovative efforts, while the large ones are preoccupied with their production and have no time to spare for testing innovations. If such units need modifications in design or are faced with trouble-shooting problems. They depend on their foreign suppliers or their principals abroad.

Capability similarly exists within the country for a self reliant automobile industry to assemble trucks buses, light vehicles, tractors, motorcycles, scooters, rickshaws, and cars, but the same are being imported. The total number of above vehicles produced was 54,341 in 1981-82; which increased to 89,111 in 1986-87; 193,174 in 1991-92; 147,588 in 1995-96 and then decreased abruptly to 88,778 in 1997-98. Yet the import of cars, buses and other vehicles of the same category continue. Their import in 1988-89 was 97,793, in 1991-92 it was 177,802 and was 275,298 in 1995-96 while in 1997-98 it was 140,935.

It is unfortunate that the production technology has only been transferred to a limited extent. The deletion programme, as it is called, is aimed at transfer of technology, which each automobile manufacturer had agreed to implement, but it has been running far behind schedule. Suzuki, the biggest car manufacturer in the country, has achieved a deletion level of only 45% instead of the 87% that should have been achieved by 1996-97 as per the agreement of 1984. Toyota and Honda have achieved a level of only 30%, truck and bus manufacturers 50%, while the tractor manufacturers have achieved the highest level of 80%.

The exports of this industry have recorded a small growth of less than 1% during the past few, years, rising from Rs 371 million in 1989-90 to Rs 407 million in 1990-91, and to Rs 858 million in 1991-92. These decreased to Rs 653 million in 1995-96 and to Rs 572 million in 1998-99. The eighth plan estimated an investment of Rs 80.4 billion for its promotion and development out of which 32.6 billion or 40% is proposed to be absorbed towards modernisation, creation of new capacity and transport equipment, while 39.3% has been reserved for basic metal industries.

 

 

 What needs to be done

The half-hearted indigenous production of parts and machinery or the deletion programme aimed at smooth transfer of technology has so far achieved 100% deletion in tractor industries; 95% in electric pumps; 100% in electric motors, 84% in tractors; 85% in electric metres; 80% in deep freezers. 75% in switchgear. 79% in sugar plants; 70% in motorcycles and 61% in packaged air conditioners. The deletion programme has yet to be extended to over 1,000 units and industries, including precision-made transmission components, and many technology-transfer agreements have yet to be honoured. Manufacturers on their part, complain of supply of inferior quality auto parts which reflect badly on their prestigious productions. That makes it essential to commit to control of quality of production and seeking certification by ISO 9000 which has so far been obtained by only 35 firms, compared with India’s 3,500. This has become more important due to the WTO agrements coming in to full force, since the competition with different countries will be based on quality of products. The engineering industry will therefore have to gear up with precision controlled equipment for quality production.

Economic development, it must be emphasised, picks up pace when the domestic market is protected, as much as by enhancing the share in the international market, by increasing and assuring quilty controlled production. A strategy of laissez-faire faire in procurement of economic assistance, aimed at economic development but never utilised for protecting the domestic market or gaining a better share in the international market by engaging the R&D institutions for technical backup and quality assurance has resulted in the loss of export market.

A chance for local manufacture of cars was missed by Nawaz Sharif when he launched of his yellow cab scheme and wasted $1 billion. Thus he could not avert the import 0f 275,298 vehicles in 1992-93 and many more in the following years.

Pakistan has permitted damage to be done to its technology base by not indigenising various sectors of its economy while launching on privatisation and  inviting investments. The power sector, for example, relied on the supply of complete sets of power plants. It is now faced with the twin menace of not having an indigenous R&D base and of being burdened with heavy debt. The economic conditions would have been different if Pakistan had the capability to manufacture plants and accessories not only for the power plants but for all other sectors by simply challenging the R&D sector to get involved.

 

Reluctancy on part of Car assemblers to achieve deletion targets

Inability of the local car industry to achieve the government-fixed deletion level has forced the Engineering Development Board (EDB) to set an ambitious deletion target, observers say. They believe that it would be hard to achieve.

The target set by the EDP calls for deletion of 62 per cent for cars upto 800 cc, 34 per cent for cars of 800-1200 cc and 34 per cent for cars over 1200 cc during the next fiscal.

The auto industry’s deletion programme, observers told PAGE, is running far behind the schedule. They cited the example of Suzuki has only achieved an average deletion level of only 45 per cent by comparison with 87 per cent agreed with the government about 12 years ago.

Suzuki produces some 30,000 units each year and enjoys 75 per cent of the market share.

Indus and Honda, which started with 20 per cent deletion in 1993 and 1994 respectively, have only managed to raise deletion levels by 10 per cent to 30 per cent respectively.

The car assemblers will be required to catch up with deletion level prevalent in the industry within a year, while the new car assemblers will be required to start at a level achieved by the industry during the previous year.

Industry sources say that the 30 per cent deletion level achieved by the car industry comprises 12 per cent assembly line work, while the remainder 18 per cent constitute such parts as tyre and tubes, battery, radiators, upholstery and sheet-metal components.

While the 30 per cent deletion level achieved by car manufacturers, comprising basic assembly of Completely Knocked-down (CKD) components, was relatively inexpensive, the next phase of deletion would require heavy investments. Indigenisation of high-tech, precision and capital-intensive items — such as engines, transmission axles, suspensions, die-casting, machining, dyes, pattern moulds and fixtures — would require an average investment of Rs 50 million in machining and tooling for each consecutive per cent of indigenisation augmentation.

Thus, the automobile industry would be required to pour in an investment of Rs 850 million to raise the deletion level for 800cc cars from the current 45 per cent to the required 62 per cent.

Similarly, increasing the deletion level for cars above 1200cc, from the current level of 30 per cent to the required 34 per cent, would require an investment of Rs 200 million.

Less than one per cent of the country’s population owns a car, including jeep and station wagons.

The total number of new cars sold in a year by the top three car makers does not exceed 40,000: some 30,000 by Suzuki and 5,000 each by Toyota and Honda; or one out of every 3,250 persons.

This number, well-placed sources said, include around 1,000 to 2,000 units of imported luxury cars such as Mercedes, BMW, and others.

Thus, Suzuki, Indus and Honda — which have a combined single-shift annual production capacity of 50,000 units — are forced to work at only 37 per cent of the total production capacity.

Industry sources were not overly optimistic about the car industry’s willingness to make such heavy capital investments to achieve the required deletion targets.

The sources stressed upon the government to provide not only financial assistance but also technical and administrative support to the vendor as well as the ancillary industry.

They also stressed upon the need for joint ventures to achieve the deletion targets set by the government.

Indigenisation would encourage long-term investment, besides helping transfer of technology and creating employment opportunities as well as reducing the prices.

 

Taxation

As a result of the taxes and duties imposed over the years, sales in the car market have been showing a downward trend while the prices of different cars in the market, whether CBU or CKD, are now registering an increase of between nine to fifteen percent.

Different policies were introduced by different governments at different times but the latest one — imposition of ban on import of used cars — was introduced in February 1994 on the insistence of local assemblers that such imports were killing the local industry. on their part, they assured the authorities that there would be no increase in prices.

Things have never been the same again as the assemblers increased their prices more than six times since then on the pretext of rupee devaluation, inflation, etc. (Since then, the prices (of automobiles) have been increased six times with a total average of about 75 per cent over the prices —

The automobile industry which has been in operation for more than a quarter of a century now, is still unable to solve its own problems due to what the players in the industry called ‘inconsistency’ of the government policies.

The government’s taxation policy, too, has been in question from time to time since it appears that whatever government comes to power uses the taxation policy as a tool to subjugate the industrialists.

In 1995, the formulas for taxes on import of completely knocked down (CKD) and completely built-up (CBU) units of vehicles were simplified. All the previous import taxes and duties were rolled into one import duty of 30% on CKD kits as well as assembled vehicles. A sales tax of 15% is charged on the total of the cost, insurance and freight value and import duty. The import duty charged on CBUs starts at 100% and increases with the engine size for passenger cars while in the case of commercial vehicles it is fixed at 60%. For taxation purposes, the CBU passenger cars have been categorised into four groups. Those below 1000cc are in one group, those in the 1000cc and 1300cc bracket constitute another group while those in 1300cc to 1800cc are grouped together separately and those above 1801cc are placed in yet another category.

The whole industry is now facing uncertainty as a result of introduction of the new taxes in the budget which have been levied according to the new policy. The sales tax on CBU has been increased to 18% while the 10% regulatory duty stays. In addition to that, a Capital Value Tax (CVT) of 4% for those who have already acquired a National Tax Number (NTN) and 10% for those without NTN has been imposed, according to market sources.

The CVT rates recently introduced to the automobiles sector were also categorised on the basis of tax-payers and non-tax-payers and according to the capacity of the vehicle. A non-tax-payer planning to buy a car of upto 800cc will have to pay 2.5% while tax-payers or those in possession of NTN are exempted in this category. Vehicles of upto 1000cc are subjected to 7.5% CVT for non-tax-payer while tax-payers are still exempted from this tax. Vehicles falling between 1000cc and 1300cc are subjected to 10% Capital Value Tax in case of non-tax-payers and two per cent for tax-payers. A 12.5% CVT is to be paid in case of non-tax-payers and four per cent in case of tax-payers in the 1300cc-1600cc cars category whereas for vehicles above 1600cc, the CVT is fixed at 15% for non-tax-payers and 6% for tax-payers.

The result of this increase in prices and the introduction of new CVT will be that the consumers will have to pay for it again in terms of another increase in prices, since the latest price increase was just before the budget when the prices were increased in the name of rupee devaluation.

 

According to sources in the Indus Motor Company, assemblers of Toyota range of vehicles and the first to announce an increase in their prices after the budget, this increase is due to the six percent increase in the sales tax and the rise in the import duty on the CKD as announced in the budget.

The  Company said that the new prices will be announced shortly, the new prices have already been applied in the market for those who do not have the patience to stand the ordeal of booking their cars through the company and would rather pick up a car from the showroom of a car dealer for a bit of premium.

Before February 1994, consumers had a choice : whether they wanted to buy an imported second-hand car, available at outlets all over the town right then, or would prefer to go for a brand new car. This parallel market had served as a control to keep in check the local assemblers right since they entered the scene with the introduction of the first car assembly unit in the country in 1983. Suzuki being the only assembler then, with the objective of producing a passenger car that was affordable for the masses, could not price itself beyond the masses had it come to serve.

The tenure of prime minister Nawaz Shariff who allowed the import of more than 77,000 yellow cabs under the tax-free scheme had an adverse affect. Though the objective then was said to be the improvement of public transport and the creation of self-employment opportunities among the youth, it was believed that the scheme was widely abused, and that many of the vehicles found their way into open market.

Another scheme allowed import of a vehicle tax-free if a 10% deposit was made with a bank — the banks being obliged to finance the rest of the purchase. Therefore the banks took initiative and imported thousands of passenger cars and commercial vehicles which were cancelled as soon as the present government took over, leaving the importers with massive stocks and huge bank debts.

While, on the other hand, the schemes boosted demand, the effect on the local assemblers, on the other hand was very severe which prompted the joint action of the local assemblers and the vendors association. The Pakistan Association of Automotive Parts and Accessories Manufacturers (PAAPAM) went into consultation with the new government. They argued that the average life of second-hand cars was much shorter and therefore their import should not be allowed as it would adversely affect the local car assembling industry and its allied industries. The government promptly banned the import of second-hand cars initially for a period of one year which was later extended.

This, according to All Pakistan Motor Dealers Association, gave an unprecedented free hand to the local assemblers since they now had no competitors and could increase prices at will.

According to one study, the prices of the locally assembled vehicles in Pakistan were competitive with equivalent models in Europe until recently when, over a period of nine months, the local assemblers increased their prices four times and therefore the prices could not be compared anymore. Pakistani cars were slightly higher in prices while their standard of their interior was slightly lower. For example, cars in Europe would rather use leather for the seat covers than the Rexene which is generally used in Pakistan.

And until the import of second-hand cars was banned in the country, as mentioned earlier, Suzuki car stood as the car of the masses and was selling very well alongside the imported second-hand cars of higher capacity. However, since then the car, which used to cost less than 90,000 rupees, has gone up to 305,000 rupees.

KIA Pride was introduced as an alternative to Suzuki as a common man’s car., it started with a very bad reputation in terms of meeting its commitments and therefore evidently failed to deliver the goods. Nevertheless, they too have joined what one consumer described as the “bandwagon of purse snatchers” by arbitrarily increasing the prices of their cars — which they have yet to deliver.

 

Vehicle finance

Bank loans, or other form of vehicle purchase financing are yet to develop in the country. As one study concluded recently, Citibank Car, the only car financing organisation operating in the country is believed to have provided less than 3,000 car loans to individuals since its inception, though accurate figure could not be obtained from the company. The major difficulty is providing the bank with security, which some termed as a way of keeping the genuine lot of consumers away. Therefore the loans are available only to very high ranking civil servants or senior employees of multi-national companies.

Vehicle leasing, although still in its infancy, is more or less growing faster than the car loans from banks. It is a hire-purchase sort of scheme, whereby the vehicle is hired for a monthly fee, and ownership is transferred only after the requisite number of payments have been made. The purchaser ends up paying more than the market price at the end of the day.

Generally the market that was just picking up after almost one year of ‘still market’ due to the law and order situation and cases of car snatching, is once again still at the moment as there has been very little activity in the market the military takeover.

Former Prime minister Benazir Bhutto (1993-96) after finding out, during her trip to Japan, that the Japanese versions of Toyota and Suzuki are cheaper in Japan than the Pakistani assembled ones priced in the Pakistani market, is quoted as having agreed with the All Pakistan Motor Dealers Association that she will allow import of second-hand cars for the people of small means who cannot afford to buy expensive cars. On the other hand, there is high resistance from the supporters of the car assemblers among the policy-makers in the capital to allow import of second-hand cars.

And with the rupee falling every other week, there is no remedy in sight for car buyers while the car manufacturers hang their price decision on the rupee-yen parity.

Yousuf Shirazi of Honda Atlas Cars recently expressed the opinion that the only solution to this problem was mass production while, other than KIA and Suzuki, all assemblers in the country today manufactured bigger cars which were not within the reach of the masses. The prices, according to market sources still indicate an upward trend and have not stopped moving because the assemblers have not officially announced the increase in the prices of their cars. Whatever may be going on in the market at present, prices are being pushed up only by the market trends, they say.

The latest Honda Civic that was priced at 685,000 rupees around this time about 18 months back, has now come to cost 880,000 rupees and may go up further. As for Toyota Corolla, the latest model which cost Rs 645,000 about this time last year, is now available in the market for Rs 725,000 with expectations of further rise after the announcement of the new prices by the assemblers.

Likewise, Mitsubishi Pajero 5-Door, 2800cc Diesel intercooler Turbo engine have also increased their prices. Along with Suzuki Potohar for 485,000 rupees.

Awami Tractors

Not only have the prices of passenger cars and trucks gone up considerably, the prices of Awami tractors, too are reported to have gone up from Rs 150,000 to Rs 280,000. These tractors were reportedly being imported by the government for distribution among the small farmers through balloting.

 

 

Vendor Industry & Deletion :

 

In engineering industry the Original Equipment Manufacturers (OEM) traditionally undertake to draw, design and produce just a small number of critical parts, the remaining parts generally from 80% to 90% are undertaken to the ancillary industry, sub-contracting and vendorization. Nowhere in the world engineering industry developed without it. Automobile vendor industry in Pakistan started with in-house production of low tech bulky items like seats, with the passage of time and as the industry grew assemblers

realize the benefits of the indigenous production of selected non-functional items and the vendor industry start emerging.

 

With the introduction of deletion policy by the government in late 60’s and the formation of PACO in 1973, things started to change rapidly. The assemblers were asked by the government to give deletion programs of in-house deletion and those through vendors. Companies also started thinking about localization and deletion for the very first time. Gandhara Motors successors to General Motors & Sales Co., were the first assemblers to embark upon local development of Bed Ford Trucks and in 1966 they chalked out a deletion program. Kandawala industries also established in-house sheet metal, pressing and dye-making facilities. Mostly, other assemblers continued with SKD assembly. Existing deletion policy was given by the government in 1987 and more than 700 deletion programs have been implemented so far.

 

At present, as many as 22 assembly lines are engaged in assembly-cum-manufacture of cars, tractors, motorcycles, heavy vehicles etc in Pakistan. Currently, vendor industry has provided Jobs to 100,000 people with total investment in this sector of Rs. 8 billion and its contribution towards GDP is of Rs. 11.288 billion. The domestic auto parts manufacturing industry is reportedly meeting the demand for parts and components from the local assembly lines, only to the extent of 24% while the target to be achieved by 2003, is said to have been fixed at 60%. This shows the extremely narrow range of parts manufactured locally.

The overall achievements in localization were not so remarkable due to the following reasons:

• Lack of transfer of technology,
• Low production volumes.
• Absence of well-organized components manufacturing facilities.
• Lack of suitable ancillary facilities like Forging, Casting etc.

The national focus being on the Japanese cars now, the government is keen for localization of Japanese cars. For that purpose, a deletion policy program has been finalized. In addition to government condition for localization, the deletion now has become a commercial proposition in view of he world currency fluctuations the experience is that indigenization leads to lowering of the components.

Honda has achieved the proposal  localization target of 34% until June 1997. Presently the company has developed 47 vendors who are supplying more than 625 locally manufactures parts. Last year the company was getting 238 local parts from 36 vendors. To help achieve the set deletion targets by the government, the company has assisted local vendors to enter joint ventures and technical assistance with foreign counterparts.

 

 

INDUSTRY EVALUATION

Industry Life Cycle

 

The auto and allied sector is still in its growth stage. This is evident from the fact that there has been an inflow of companies over the past few years. The companies listed in this sector are, in majority, manufacturers. The companies are growing and are increasing their production due to the availability of excess plant capacity. Thus, they are creating a demand for their cars. Though one or two of the main players in the industry are older than the others, but they certainly do not classify as mature ones. Suzuki seems to be the oldest in terms of manufacturing, also the one with the largest plant capacity and output.

Buyers and buyer behavior

 

The auto industry is in the growth stage, due to the fact that the customer base of the manufactured cars and other vehicles is changing. The consumer may even accept uneven quality. e.g. Suzuki.

Products and Products Change

 

There are some products present in the auto sector which have a technical edge over the others. e.g. Toyota GLi has an inkjet fuel system and Honda Civic VTi a unique V-shaped engine design.

Marketing

 

The fact that the industry is in the growth stage is evident from the intense advertising, selling and distribution, which are the key non-technical aspects  that are available and that help a particular firm in differentiating.

Manufacturing and Distribution

 

Some excess capacity is prevalent in all the companies. The companies are currently producing at around 40% of total capacity.

Research and Development

Product improvement is not prevalent in Pakistan as the companies do not have the money or the patience to wait for a new breakthrough.

Foreign Trade

 

Very few exports are carried out due to the high costs and also the availability of enough models and manufacturers in the international markets. In fact only one unitís export has taken place by Indus Motors. Nonetheless there are opportunities in the foreign trade market.

Competition

 

Many companies have now entered the market and thus the production capacity is more than what is required. Thus demand is less than supply.

Risk

 

The existing companies in the auto sector can afford to take the risk of producing a new vehicle because the growth potential will cover it. The brand name speaks for itself and thus a new addition to the existing family of vehicles could be a worthwhile investment.

Profits

 

The profits for the manufacturers are very high and this is evident from the fact that Indus Motors operates at 20 – 25% of its capacity and still is able to generate enough revenue to cover its fixed costs and variable costs and still be able to show profits.

 

Long-Run Changes in Growth

 

The segment of the market that the industry targets are the people who have the decision making power in the family. Plus the organizations too are the focus of attention.

 

To buy new and fancy cars has become a trend for the people of today. The more a vehicle will cost the more prestige it will carry for the people. Therefore, the automobile companies usually improve the interior of their vehicles or they come up a new color to attract the customers.

 

The change in the style of the product is initiated by the parent company and thus there is no Research and Development in the local subsidiaries. If there are some developmental changes made in the cars, the alterations are minute and do not really contribute towards the firms successes.

 

Buyer segments have become more prudent than ever in purchasing automobiles. Presently, the customers that come to buy vehicles have complete knowledge about the automobile market and thus, are able to properly identify the blemishes of the product. Also, the customer of today is very price conscious.

 

To some extent there has been a reduction of uncertainty because of the government assurance over the used cars market. However, the main problem is that no government stays for long periods of time and thus the future of the sector is bleak. The main reason is that there has been the persistent threat of the used cars market, plus the fact that the trade and tariffs will be removed by the year 2005. Thus the threat of other foreign vehicles also exists.

 

There is no diffusion of proprietary knowledge because the technology is well known and the competitors have their own competitive and technical advantages. The experience comes to the new firms by the top management who are well versed in the profession (only Japanese Managers), as most of them have come from the parent company, or have been in the production of cars for a substantial period of time.

 

There is room for expansion in sale, but demand for the products is not up to the producers capacity. Pak-Suzuki has the largest plant with a capacity of 50,000 units a year. Also, all the major parts are imported, for example CKD kits, and if the prices for these basic raw materials rises, then the prices for the final products will also rise. There, however, is the threat of rise of labor costs.

 

There does not seem to be any major transportation cost dilemma, currently, but we can expect problems in this area as well, as the companies consistently move vehicles from up north to Karachi and adjacent areas. Also, the exchange rate fluctuation with the Japanese Yen can cause a rise in the prices of the raw materials.

 

Product innovation, in its true sense does not apply to any of the auto manufacturers in Pakistan, as most of them simply depend on slight differentiation through additional accessories etc..

 

There have been only print media ads by the companies, and this does not indicate a high rate of investment in the advertising and media ( e.g. no ads on television ). Additionally, process innovation rarely takes place.

 

 

Structural changes in the adjacent industries help determine the direction of the auto industry as the companies rely heavily, both on the local manufacturers and the foreign suppliers for their basic components. Deletion rates are still not high in any company.

 

The government is the single-most important factor for the survival of the industry. This is because of massive impact of the devaluation of the Rupee. The imposition of duties on the imports of CKD kits plus the CVT (Capital Value Tax) to be paid to the government, are examples of the type of government policies that the industry is subjected to. A fluctuation in the current price structure could easily lead to wide fluctuations in the profitability of the companies.

 

The entry and exit barriers are very high because of the fact that to start a manufacturing business in the auto sector large capital outlays are required. Additionally, the environment is not conducive for production, with the government popping its ugly head in now and then. The need for trained and experienced staff from Japan will be required. Also, there is uncertainty in the demand for bigger and better cars.

FRAGMENTATION OF THE INDUSTRY

LOW OVERALL ENTRY BARRIER

 

There are no low entry barriers because the cost of capital investment is very high. Any single group has not invested the capital outlay, as yet. In fact there have either been joint ventures or companies that are completely owned by the parent company.

Absence of Economies of Scale

 

There are no economies of scale as most of the parts are imported, thus there is no self-sufficiency. Expensive parts constitute absence of economies of scale. There is no mass production either.

High inventory cost or erratic sales are the main stay of this industry.

 

Inventory costs in the auto industry are not exceedingly high, even though they are high to some extent due to imported parts. Also, there have not been erratic sales fluctuations.

Advantage of size in dealing with buyers and suppliers

 

Most automobile manufacturers do have an advantage they have their own dealership network. Also, the parent companies, in each case, gives an added advantage for the firm.

Local regulations

 

The government plays a very crucial  role in the success of the industry. The regulation of deletion targets set by the government, has instigated moves towards self-sufficiency by the manufacturers. However, the manufacturers have so far been unable to achieve them.

 

High transportation cost

 

There are no high transport cost because all the plants are located within the vicinity. Therefore, the transport costs are minimized.

TRANSITION TO INDUSTRY MATURITY

 

Slowing growth means more competition for the market share

 

The industry will be moving towards growth, as we see that the major players in the industry are competing against each other. Thus we see that the products are being sold at a slower rate as when they were introduced into the country. The introduction of newer companies, or even the introduction of newer models, could extend the growth of the industry.

Firms increasing selling to experienced buyers

 

The products now offered by the most of the companies in the industry now have no new models to introduce, but only produce new models with minor variation of the older ones. The buyers are now experienced about the vehicles they buy, and  are prudent in their purchasing decisions.

Shift towards service

 

The companies such as Indus and Honda are now moving towards service orientation. Thus, we see the sales and service centres of the companies.

No new addition to capacity

 

We now see that after the last major shift in capacity by Pak-Suzuki there really has been no increase in the capacity of the companies. Most companies are operating at a maximum of 60% of their total capacity, which actually only Suzuki has attained, while the rest are operating at not more than 30 % of their total capacity.

Manufacturing, Marketing and Distribution

 

The marketing of the newer products have induced a change in the marketing of the products. First, they were targeted toward the higher end of the market, but now with the introduction of the newer products which are attractive for the middle income groups the marketing stance for the companies has changed.

 

INCREASE IN SCOPE OF PURCHASES

 

This is a very important and relevant factor for the industry, as per the deletion targets set by the government. The companies have to look for local vendors for their parts, and thus will have to move towards self sufficiency sooner than they would have liked.

 

Also, the stage is set up for the supply of the local vendors who have a potential problem: they have poor quality or quality that does not fit the criteria of the company. This is a potential problem for the companies who, on one hand, have to look for ways to reduce costs to counter competition and on the other, have to reach the deletion targets set by the government.

 

 

CONCLUSION:

 

• Presently, the industry is operating in the private sector. Interestingly , even after years of manufacturing the local car manufacturers  have not been able to come up with the technical expertise that would have allowed them to assemble automobile engines locally. This is a disappointing fact for an industry that has been operational over here for more than 30 years now.

 

• The automobile industry has greatly benefited from the successive governments decision to impose high import duties on the import of CBU’s into Pakistan. Through this decision the government has been able to protect the local industry from competition from overseas. Instead of responding positively to it, the local manufacturers have been further asking for concessions and complaining about unstable Government policies. The high level of duties on imported vehicles has dampened the demand for imported vehicles in Pakistan. At present duties on imported vehicles range from 110% to 265%. This high level of duties together with the ban on imports of second hand vehicles is meant to protect the automobile industry. The industry will find it hard to compete with foreign manufacturers if these barriers are removed.

 

 

• The automobile industry may face a lot of difficulties by the year 2005 as according to the World Trade Organization Agreement , all import duties and tariffs will have to be abolished and as Pakistan is a member of WTO, it would have to honor the agreement. In this case the government will no longer be in a position to protect the local manufacturers against foreign competition.

 

• Also, normally the car manufacturers have to submit a detailed deletion plan to the Government of Pakistan at the time of setting up proposing to manufacture 75% of the vehicle parts within the country over a period of five years. In this case, the local manufacturers have not been able to reach the required level that shows for their commitment towards the agreed deletion level.

 

• The govt. should chalk out a plan to highlight the persons per car at present and define what it should be within a specific period in future along with the range of vehicles, and local content as part of an overall vision. This would allow those who are a part of this industry to evolve a strategy for achieving the targets set up by the Government.

 

• The market expansion did not take place as was expected in the 1990’s . For example, Suzuki produced 42,000 vehicles in 1991-92 which declined by 50% in the mid-nineties the projected rate could not be reached due to no favorable government policies; the increased car financing facilities which did not take place due to concerns about security of recoveries in the absence of the needed repossession laws, plus the deteriorating law and order resulting in auto thefts and snatchings.

 

• The auto parts industry is worst hit by smuggling, as it has 80% share of the parts market. If the Government is somehow able to reduce smuggling of auto parts by even 25%,the vendor industry would grow by two-and-half fold. However, over the last few years, the government has exposed the automobile industry to a potential risk of virtual annihilation as the authorities plan on legalizing some 50,000 smuggled vehicles, through the tax rebate and waiver scheme, that is currently being advertised by the CBR. Under the scheme, the smugglers have to pay only normal duty on the vehicle which will be far less than on the old models. This scheme will prove to be the second blow to the auto industry after the Yellow Cab Scheme that introduced around 25,000 cars into the country, virtually duty-free.

 

The current move is part of a scheme to collect maximum revenue in customs, before the last quarter of the fiscal year 1999-00. The bulk of the smuggled cars are already being driven in far-flung areas, which are located at some distance from the retail markets.

 

• A greater interaction between the assemblers and the vending industry would also encourage the development of the vending industry. It is imperative to take measures to ensure that vendors are provided with the financing facilities. The banks should be made to play a more significant role in the development of this sector.

·       Pakistan auto industry is inherently a protected industry. The industry is heavily protected through a high import tariff differential between Completely Knocked Down (CKD) kits and Completely Build-Up (CBU) units and a ban on the import of used cars. However, since the industry serves the multiple purpose of reducing foreign exchange drains, developing the local downstream industry and job creation, the government needs to provide some form of protection to ensure its continued viability. Although import tariffs on importing CBU are quite high (from 100% to 265%) comparing to CKD tariff rates (32%) along with additional 15% import duty, but still imports are on the increase and furthermore, most of the imports are in CBU shape. Infect, out of total imports 68 % is in CBU whereas only 32% is in CKD condition as shown in Table 7. Within different categories of autos, in car sector 80% import is in CBU condition that is the highest whereas lowest import in CBU is in shape of Motorcycles in which it is only 8%.

 

These assemblers import Kits in Completely Knocked down condition from Japan and Korea and then assemble these kits, adding parts obtained locally. Local contents in the automobile vehicle range from 35% to 80% the highest deletion achieved is in Suzuki Alto Air-conditioner, which stands about 50%. It is sad that capacity utilization in these plants is as low as 40%.

• The vending industry offers Pakistan a great opportunity to earn foreign exchange through exports of spare parts. The Pakistani auto spare parts and components have been able to make inroads in such developed markets such as the USA, UK, Germany, Italy and Turkey, not as replacements but also as original components in many of the vehicles produced there. During the last year, the auto components and parts exports helped Pakistan to earn $1 million. Though this is a small amount, the receptive developed markets and their penetration by the Pakistani vending industry offers Pakistan a huge potential in the years to come.

 

• The automobile industry which has been in operation for more than a quarter of a century now, is still unable to solve its own problems due to what the players in the industry called ‘inconsistency’ of the government policies. Like other industries, the development of automobile industry, too, depends on persistent government policies. Any sudden changes in the official priorities certainly affect the long-term planning of an industrial sector. This is particularly true of the automobile industry where production units require heavy amount of capital investment and long-term commitment. Therefore the Government should come up with stable policies for the future.

 

The local automobile industry does not stand on its own, the development involves other smaller components such as metal, plastic, mechanical and the glass industry. The development of the industry will therefore depend on the development of the input industries. An organized network of these sub-industries plays a vital role in the overall industrial development of the automotive sector in the country. Unfortunately, in the case of Pakistan, every successive government has come to power with its own rather peculiar notion of industrial growth.

 

Different government, have shown different positive signs of formulating a long-term industrial policywiht regards to the automobile industry. On the other hand, any effort on the part of the policy-marks would go in vain unless it is backed by the expertise of professionals and the extent to which our policy-makers, and the professionals in the auto industry, have been working together in the country has not been very satisfactory.

 

 

There is a great potential in the local engineering sector which still needs to be exploited, but this could only be achieved through the right policy as it has been demonstrated in the past that the industry could not only produce goods as good as the imported ones cheaper but compete successfully internationaly as well.

And if the growth rate of 12% is assumed, by the year 2005, the demand for passenger and commercial vehicles will rise upto 270,000 units per annum from the existing planned production capacity of 102,000 units annually, therefore in this context, more car manufacturers are going to join the existing ones and more sophisticated hi-technology are going to be introduced in the local vendor industry and the foreign market will be hopefully opened for Pakistani made cars.