Auto import at industrys peril

The Competition Commis-sion of Pakistans latest recommendation to the government to allow the imports of new and used cars to promote fair competition has raised concerns regarding its potential impact on the local industry. To assess the same, it is vital to identify the relative strength of the local auto industry i.e. whether it has the immunity to counter what could be termed the imported competition.
If history is any guide, auto production and price trend clearly shows that the industry is not in a position to willfully hug the foreign competition. The auto industry, which was termed a booming one for most part of the past decade, has been under severe pressure since 2008. Many describe it as industrys failures to absorb the shocks to tackle the rising cost as too much brakes were applied in the local demand.
On the cost front, steel prices doubled during 2008; local currency depreciated sharply against the US dollar and yen while the surge in oil prices boosted freight charges. As a result, car manufactures were not able to absorb the cost pressure and in return increased prices.
Whereas, on buyers front, demand slid as purchasing power declined owing to weak economic activity at home. Likewise, auto loan which played a significant part in increasing demand during the auto boom period, declined considerably post 2008.
As a consequence of these factors, profit margins decreased significantly. For instance, gross profit margins of PSMC declined to 1.5 percent in 2008 from 9.4 percent in 2007, as the production of cars fell by 25 percent.
In such dire situation, there is no ray of hope even in the form of cartel formation - since it is in better interest of manufactures to increase their production to cover their fixed cost and also the fact that the market is heavily tilted towards low-end car buyers, which are highly price sensitive.
However, from the production statistics it is quite evident that forecasters use conservative estimates while forecasting production, since it is unfavorable for them to put excess supply idle, due to high maintenance cost, and loss is even higher if inventory remains unsold.
Given the above scenario, if authorities allow imports, the number of local assemblers and manufactures will further cut on their production, as large chunk of the market would be captured by cheap reconditioned cars and in turn will lead to the closure of local industry. Above all, original equipment manufacturers are already crying foul as influx of cheap Chinese imports has inflicted a great deal of damage on their business.
For the long-term growth and health of auto industry, it is imperative to follow the Indian model, which restricted imports in order to establish local industries for exports.
This raises another question; Why not foster competition among local players? To achieve this it is necessary to encourage foreign manufactures to setup plant at home and provide them access to cheap energy and land near ports, as ports at home will function as a future trade hub in the region. In this regard, Yamaha has already planned to set up motorcycle plant for the export to Asian and African countries.