Minister of Industries and Production Mian Manzoor Ahmed Wattoos proposal to cut automobile prices by higher degree of indigenization is admirable. But its easier said than done.
The industry has already achieved an average percent of local production with engine, chassis, and other high tech parts - also in some cases, car doors and bonnets - amongst other ancillary materials still being imported.
So, unless the government plans to pave way for the setting up of original equipment manufacturers (OEM) plants in the country, the benefits of local production are limited as only about 10 percent of further localization can be achieved.
Yes, on the face of it, indigenization swill lower the cost of production by reducing the negative impact of the exchange rate stemming from rupees persistent weakness against the Japanese Yen. But just how much it will be?
Although, the industry would be saving 8 to 10 percent in cost by localizing the remaining 10 percent, it will not reap any benefit from cost saving as the government would want to pass that impact to the consumers.
This wouldn be of any help to automakers who are facing a pressure on margins amid sharp depreciation of rupee against the Yen. Although they have increased prices by an average 10 percent in 2009, it is still lower compared to prices in the past and compared to the increase in production costs.
Moreover, expanding deletion factor would ultimately mean compromising on quality, as locally manufactured parts have reliability-related problems. This can lead to a decline in demand in the high-end segment where consumers are wiling to pay for good quality.
So, if the purpose is to lower auto prices, then the best thing is to wait for global steel prices to ease and stability in PKR-Yen parity, or wait for the domestic economy to pick up, which in turn can help boost sales volume and create room for reduction in prices.
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