Automotive industry in developed economies forms about 10 % of the GDP. Amazingly in little Vietnam, it is a much higher percentage because of the advantages it offered to those who wanted to out shore their operations. In Pakistan too, it contributes substantially to the GDP and provides about 6.5% to the national exchequer.
Currently the automotive industry is in a remarkable growth mode as figures given under will reflect:
======================================= NUMBERS 2002 2004 2005* in 000 of: ======================================= Cars & LCVs 49 112 150 Motorcycles 135 350 500 Tractors 22 38 43 Trucks/Buses 2.5 3.5 4.3 =======================================
-- (Estimated)
The growth has brought about due contribution to society and the country in the form of:
EMPLOYMENT:
(Direct) 100,000, 130,000, 142,000
INDIRECT EMPLOYMENT:
is in the ratio of 1:100
Contribution to Exchequer (Rs b) 23, 32, 37
SAVINGS IN:
Forex - $600m, 1100, 1250
Besides, the automotive wallahs continue to look after schools, hospitals, orphanages and participate in crisis times in whatever measure and manner they can.
THE GROWTH HAS HAPPENED BECAUSE OF:
-- Consistent policies of government
-- Industry supportive policies of government
-- Low leasing rates
-- Introduction of new models
The irony is that what helped the industry to forge ahead is now being wrought into different shapes and causing huge concern to the auto engineering industry - the vendor industry.
The main issues which have now surfaced are:
1. Change of government policy year by year, and not necessarily in favour of industry.
2. Fear of roll back.
3. Increase in interest and leasing rates.
4. Lack of development of sustaining and supportive infrastructure.
5. Unethical practices in trade.
THE POSSIBLE SOLUTIONS ARE AS FOLLOWS:
GOVERNMENT POLICIES:
Surely a vision of Pakistan and the place of engineering and automotive industry in it should be possible. An exercise to enunciate it in quantitative terms along with the requisite road map was carried out in 2002, presented to and accepted by the President of Pakistan.
Is it asking too much to identify the automotive industry as a 'Driver' industry; after all it forms 13% of the world engineering trade which at the last count was 63% of the total trade. Are examples of China, Malaysia, Indonesia, Korea, Thailand, Japan, India and USA, etc not sufficient to clinch the argument, if any, that this industry can be the engine of growth of our economy, the fruits of which easily percolate to the lowest strata as it is one of the largest employer in the world. In India it provides employment to 1% of the total population; in Malaysia the industry provided employment to 4.1% of the employed in 2002 - must be higher now, in Germany every 7th person is employed in it.
USA, only last month slapped quota on textile imports from China, in days of non-quota (!!) only to save its own industry. Why are we shy of doing things which are right by our industry?
What the industry needs is a clear statement of what government levies on CBU and CKD of vehicles will be for the next 7 years, whether they are reduced over the period or increased (!) is secondary, it is absolutely essential that they be known today; that second hand vehicles and parts will be importable at exorbitant rates of levies only; that trade will also be brought into sales tax net; that unethical practices in the trade of auto parts will be progressively weaned out (only 12% of the after market needs are met by the local industry!)
Are these unfair requirements of the industry? Thailand and India, the 2 Asian giants of automotive industry are following the above practices. India has now replaced Italy as the 11th largest producer of automotives in the world, while Italy has slipped to 14th. It produced 11.78 lakhs cars and LCVs in 2004 vs 400,000 7 years back. TATA has also bought out Daewoo Commercial Vehicles Plant in Korea. Kudos for them!
INVESTMENTS:
All the vendors and auto makers have been investing heavily and plan even more investment. Pak Suzuki alone has invested over Rs 2 billion in 2 years; HACPL and IMC have also invested substantially and have finalised plans for Rs 1.5 billion more each.
The vendors have invested about Rs 1.75 billion and are now generally running multishifts. Can the investments made and that needed to be made, be carried out with confidence in absence of a sustained, known friendly policy.
EXPORTABILITY:
Volume is important for every industry, but more so for the automotive, as model changes happen every few years, as well as technological obsolescence hounds the investment in fixed assets.
Lack of volume not only inhibits efficient manufacture but also affects the quality. The policies and strategy should create an environment for volume production and an indigenous capability for innovation and investment, which will create exportability.
Without volume, without proper investment in equipment, without investment in people, without technological prowess, without a culture of progression, to become a part of supply chain in the world or the region will remain a pipe dream.
This enablement will only come about when we start making 250,000 to 300,000 cars, and then only a quantum jump in exports will happen.
If the choice is for trade, then the losers will be the vendors (the real auto industry), the common people of Pakistan who will be denied jobs and, the government because of the loss to the exchequer; the winners will be a paltry few traders and the rich who yearn for top of the line vehicles. I am told more Mercedes have been sold in a month, than sold in a year. One can see Lexuses and BMWs on the road now - all imported.
I suggest that a clear and unambiguous choice be made for the industry. Hurrah for the leaders!
ROLL BACK:
Localisation in Pakistan has not happened by itself. The OEMs have had to be prodded and pushed, time and again by EDB and Dr Akram Shaikh, its erstwhile Chairman. Naturally not everybody loves him. Whilst he may have been harsh on some occasions, he fought for the engineering industry at every forum passionately and to him the vendor industry owes a debt.
Now under the onslaught of WTO, a scheme called Tariff Based System (TBS) is being introduced. There are many uncertainties in the scheme, especially for vendors, which are causing concern.
A full dialogue with the industry needs to be held by EDB and CBR jointly, to alleviate the fears the industry has, otherwise there is likely to be a chaos. Now that implementation of TBS has been deferred until September '05, I suggest a mock tariff book be prepared, and comments be sought on it so that anomalies be removed before implementation.
Another fear the vendors have is that OEMs will withdraw orders where they may be legitimately more expensive (in due course of time local costs do come down generally, with volume increase, rupee depreciation and OEMs intransigence). As high tariffs are being proposed, by way of a deterrent, for local manufactured parts, OEMs will be within their right to do so. If a penalty neutral tariff was adopted then the OEMs would have been bound not to withdraw any order. To be competitive in the current scenario, vendors will have to revisit their cost and structure.
It is suggested that OEMs should work with the 'uneconomical vendors' to help them reduce the cost; a short term pain may lead to eventual gain for them and Pakistan. It is also suggested that vendors be helped by the OEMs to enter into technology agreements with the suppliers to their Principals, as this is likely to eschew roll back on one hand and reduce cost in the medium term.
We are short on Technology, which is often confused with being technical. As more TAAs are signed up with different vendors the whole environment in the industry will get charged creating its own dynamics. In 1998 Malaysia paid $2392 m as Technical fees, and Pakistan only $7 m. we have a long long way to go.
INTEREST RATES
The interest rates are increasing, pushing the leasing rates up. This will certainly curtail the booking of vehicles if over 11 - 12 %. The good days could end soon, unless matters are put right by the government. As far as I can perceive the inflation is cost pushed in our country, not demand driven. Higher interest rates will curtail the effectiveness of the middle class and in fact the strata itself will shrink.
SUPPORTIVE INFRASTRUCTURE:
Supportive infrastructure is like buoyancy of water which helps to keep the swimmer afloat. Some laws which need to be improved and faithfully implemented are:
1. MOTOR VEHICLES ACT:
It needs to be updated and implemented. This would reduce the hazard of accidents and loss of lives witnessed daily on our roads.
Perhaps a citizen-police NGO should be made responsible for inspection of vehicles. The Road Users Association could be asked to join in.
2. EMISSION STANDARDS:
By emission standards we live in dark ages. The diesel engine in the world is moving towards Euro IV, but we are still at the starting line. How can we export our products anywhere if we don't move with the world. However to use Euro Standard Engines, the diesel and petrol have both got to be improved.
3. ANTI DUMPING LAWS:
The laws come into force only after one has been hurt, even fatally! They have to be brought into play before calamity strikes. We are after all small players and trying to play catch up. Here an industry friendly approach is needed.
4. EDUCATION & TRAINING:
Thinking professionals are needed. Our education system needs to be tuned to producing 'developed brains' not exam passers. Good professionals are difficult to come by especially because of the brain drain from our country. Those few still around are in constant mobility due to great demand.
Vocational training institutes, polytechnics need a fresh look at their syllabi, teaching materials, teaching methods and the faculty.
The automotive industry has already helped establish some training centres and could be easily prodded to do more.
5. UNETHICAL PRACTICES:
For some reasons autoparts attract the unscrupulous the most, and in Pakistan we have rampant under invoicing, misdeclaration and smuggling. Infact no autopart imported other than by an OEM or a recognised vendor is at its real price. A shock absorber and strut gets imported at less than a dollar, the raw material of which alone costs many dollars!!
It is estimated that the current spares market size is Rs 25 billion, of which only 11 - 12% is met by the local industry. The balance is brought in the country, one way or the other.
This deprives the vendors a very sizeable market and deprives the government of their rightful dues. Even a reduction of 25% in this field would improve the government revenues manifold as well as prompt the industry to make investments. Both fiscal and administrative matters are needed here to ameliorate the situation in favour of the national exchequer and the industry.
POTENTIAL OF THE INDUSTRY IN PAKISTAN:
Automotive industry is more that just an industry. It has been called "Industry of the Industries" by Peter Ducker and a "Mother Industry" by many. For us in this country, it is also a strategic industry as it provides the technology and skills which spill over to sensitive industries as well.
This industry has been used by many countries to develop their economies and has become the back bone of industrial initiatives. In Pakistan there are only 7.5 cars per thousand persons; the world average is 120, India is at 9 and China 12. To reach 12 per thousand persons by 2010 we need to start producing 250,000 vehicles per annum from today. The potential is very substantial and its effect on our economy will be profound and liberating to the populace at large.
This industry can create the magic our country needs to leap frog into the future of choice and shake hands with tomorrow.
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