Auto makers: negotiating from a weak position

This years budget isn likely to hold any exciting development for general public. But there is an appealing proposal in the pipeline regarding the import of used cars that might bring some positive news for car enthusiasts.
Reportedly, Prime Minister Yousuf Raza Gilani, while chairing a meeting of ECC in April, pressurized local carmakers to either bring down their prices or face the prospect of imported used cars.
In a negative development for car manufacturers, the government is likely to relax the age limit on the import of used cars to 5 years from the existing 3 year limit. The move is primarily aimed to benefit general public, since prices of locally assembled cars increased sporadically during the past few years.
Though exact numbers of used car imports aren released by the authorities, estimates suggest that about 3,500 used cars will be imported this year, down from about 25,000-30,000 in 2007.
And if import of up to 5-years used cars is allowed, an additional 8,000 to 10,000 used cars will be imported next year, according to Furqan Punjani, an analyst at brokers Topline Securities.
However, as much as they would want to, it will be difficult for auto manufacturers to strengthen their case.
In order to assist the automobile industry, assemblers were given protection by government in form of a comfortable duty structure and restrictions on used car imports during the past decade.
But despite these impetuses, assemblers were unable to put ample resources in action to become self sufficient in technology and achieve competitiveness.
The auto makers are calling on the government not to raise import duty on certain high tech auto parts in the next budget, as they have failed to localize in accordance with the Auto Industry Development Plan.
If the penalty is implemented, import of high tech parts would attract 50 percent duty from the existing 32.5 percent, according to industry sources.
In keeping with the rising prices of locally assembled cars, chances look slim for the imposition of a higher duty structure in this budget, since it will lift car prices and dent the profitability of local assemblers at the same time, who are already facing severe cost pressure from the depreciating rupee and the high cost of imports.
Ordinarily, such a dicey environment calls for bearish sentiments at the bourses.
However, analysts opine that the worst is over, as in FY11, rupee is unlikely to depreciate by as much as it did in last two years, whereas steel prices are also seen tame. "Growth story in auto is intact", says Punjani.
Yet, knowing the love for imported goods in Pakistan, one can be too sure if local players will be able to survive. Barring Indus Motors, auto stocks are ill-loved at the KSE. And if imports start streaming in as feared, then one would expect further thrashing of auto stocks at the exchange.