Auto industry has great potential for growth.
By Sohail P. Ahmed

May 31, 2004

Source: Daily Dawn

Engineering industry forms about 61 per cent of the world trade; of this automotive industry is about 13.5 per cent. It is thus a very sizable chunk at 8.2 per cent of the world trade (higher than textile at 6 per cent).

In the industrialized world the automotive industry generates about 10 per cent of the revenue. According to Fortune magazine the automotive and allied industry is the largest employer and second largest investor after chemical industry.

That it is also called the "mother industry", because it has given birth to many diverse and new technologies (and continues to do so) which has found application in umpteen engineering fields from avionics to kitchen equipment. It is quite evident from the above why many countries, especially those with high population have chosen the automotive industry to be the engine of economic and strategic growth.

Malaysia's Second Industrial Master Plan (IMP2)1996-2005 identified automotive, motor cycle and marine as industries which could be developed into industry clusters of the future as these industries have the potential to become major contributors to value added, employment, technology upgradation and exports.

Before discussing the status of our automotive industry, let me draw a profile of the Indian automotive industry, to understand what it can deliver. Indian Industry: In the years following Independence, the Government of India, having realized the economic and strategic importance of the automotive industry decided to direct the flow of investment into this sector.

This also meant that a set of complex rules, regulations and an elaborate network of policies were brought in to control the industry. Back in 1945, the government's statement of iIndustrial policy had been centralized, to harness the potential of the automobile industry. The value of the industry was seen as something that needed to be controlled and the Policy Resolution of 1948- the pivotal legislation in this respect- was passed to enable central regulation or control.

In 1951, the Industries Development and Regulation Act was passed and later in 1973 the Foreign Exchange Regulation Act (FERA) was passed which limited the foreign equity to 40 per cent maximum. The policies formed a bulwark against foreign competition and the local industry developed and thrived on its own albeit decades behind in technology.

In 1991 the new Industrial Policy (NIP) swept away most of the hurdles. In 1993 the car industry was delicensed, high foreign equity was permitted to allow for cost of imported capital goods; the rupee was made fully convertible and customs duty dropped from 150 per cent in 1991 to 50 per cent in 1995 and 25 per cent in 2003, except on built-up vehicles which has a higher gross custom levy of about 100 per cent.

The decontrol, delicensing and deregulation of the auto industry charged the growth of the Indian auto world. Today major auto manufacturers such as Volvo, Daimler Benz, General Motors, Mitsubishi, Suzuki, Peugeot, Toyota, Hyundai etc are battling it out in India.

Demand and Production: In 2002 - 03 the production of cars and light commercial vehicles was 686,953 units whilst in 1997-98 it was 466,842 units - a 48 per cent increase in 5 years. Every year production has been increasing which means demand has been more than production. A market pull is good for the industry and essential to growth of the economy. No growth is possible in a saturated plateued market.

The following graphs reflect the pattern of growth for the last 6 years. In the fiscal ended march'04, the passenger cars and utility vehicles have exceeded one million. Next year it is expected that cars alone will reach the million mark because the excise duty on CKD cars has been reduced. Higher demand than production has created this exciting growth phenomena.

According to Mr. Jagdish Khattar, M.D. of Maruti Udyog"the automotive industry's performance is closely linked to industry growth and there has been an emergence of India as a manufacturing hub for the automotive industry". The 2 wheelers also crossed the 5 million mark in 03-04.

Employment: The vehicle manufacturers employed 120,000 persons last year and caused indirect employment of 10m people in the allied and downstream activity - a ratio of almost 1:100, employing about, one per cent of the total population. In other parts of the world the ratio ranges between 90-125. In Malaysia the industry provided employment to 4.1 per cent of the employed in 2002.

Revenue to government: In 2002-03 the industry paid Indian Rupees 664 billion to the government by way of custom duties, excise duties, sales tax etc. A year before it provided Rs.571 billion to the national exchequer.

Exports: Altogether 305,368 vehicles were exported which included 70,547 cars, 10,704 commercial vehicles, 179,568 two wheelers and 43,443 three wheelers, were exported in the fiscal year 2002-03.

In the first 6 months of 03-04, they have exported 220,000 cars and motorbikes world wide. In the same period auto parts worth about $800 million were exported and the part makers are looking at $ 1 billion by the next fiscal year and $ 2.5 billion by 2009-10. Their foundry industry exported $300 million worth of parts last year and has been challenged to do $1 billion by 2007.

Toyota Motors has invested $73 million to build two factories in Karnataka state to make 160,000 transmission systems a year for its overseas plants. Toyota said it chose India over other contenders like the Philippines, Thailand, China and Brazil because of prices, quality and human resources! This is a great happening for India.

In 1991 it was unthinkable, last 13 years of industry friendly policies and practices are beginning to deliver. India is being shaped up by the engineering industry.

TATA goes multinational: On 18th February 2004, after due diligence, Tata Motors signed to takeover the Daewoo Commercial Vehicle (D C V) unit for Rs. 465 crores, piping the other bidders from Europe, US, China and Korea.

D C V is Korea's second largest heavy truck maker and has a modern plant established only in 1995-96. It is a big step for Tata and India, result of a vision of the founding fathers and the coming together of the policy makers and the entrepreneurs.

Mahindra & Mahindra also made a bid for Valtra a global tractor and off- road engine manufacturer in Finland, which they lost to AGCO Corporation of USA (owners of Massey Ferguson tractors). Valtra's sale in year 2002 was 762 million Euros. Big Bucks! Can anyone in Pakistan even think of buying such a company. No one is big enough.

It is a fallacy to believe India is just doing IT. Internationally, its engineering industry, especially automotive industry is moving out, capturing markets along with manufacturing facilities.

Quality and Technology: A Toyota planning engineer, Mr. Yamada, who I met recently told me that Indian technology and expertise is almost at par with Thailand and quality of their vendors is generally very high -around 40/50 ppm. This is very good, considering where were they just a decade ago.

He said Pakistan is where India was 6-7 years back. This gives us hope, we can be there in 6-7 years if our policies remain industry friendly and consistant. Pakistan Auto Industry.

The automotive industry started as an assembly activity has shifted towards manufacture of vehicles and their component parts and accessories. An integrated approach has been developed by EDB, covering manpower development, technology upgradation, infrastructural support, quality assurance etc.

Demand and production: When the whole of South East Asia and South Asia was booming, the growth in Pakistan remained stagnant because of inconsistent policies of the government and the political uncertainties in the country. It is only since, July 2001, that the demand has picked up.

In the last fiscal year it increased by 53 per cent in cars and LCVs and in the current fiscal year it is expected to increase by 46 per cent. A cumulative 102 per cent in 2 years. Great going. Volume is important for any industry, but more so for the automotive as model changes happen every few years, as well as technology obsolescence hounds the investment in fixed asset.

Lack of volume not only inhibits efficient manufacture but also affects the quality. The policies and strategy should create an environment for volume productions and an indigenous capability for innovation and investment.

Possible volume in Pakistan: Currently in Pakistan we have 7.5 cars per 1000 people vs 120 the world average, 180 in Thailand, 220 in Malaysia, 250 in Korea, Even if we target 15 per 1000 persons by 2010 i-e six years, we need to produce 218,000 every year from this year onwards.

Thus if our macro economics remains good and the per capita income increases at the rate the Finance Minister is suggesting, we should look to the future with hope and optimism. Industry profile: Here is the profile of the industry, which covers employment, revenue to government, forex saved, export etc.

June 2003

Employment has been estimated at the ratio observed in Indian industry which is at the mean of the range. Another way to estimate is its linkage to deletion achieved and volumes, which gives a higher estimate at 175 per percent of deletion. The lower has been adopted.

The industry has a great realizable potential to deliver substantially to the economy and the common man. If the industry friendly policies continue, as has been the case in the recent past the projections on conservative basis are as follows:

To quote Mr. Atsumi, who led Toyota Tsusho in Pakistan for some times: "For achieving major economic strides it is now essential that our reliance is shifted to other high value added areas in the engineering sector if we are to catch up with the 21st Century.

There is great potential in the local engineering sector which still needs to be exploited, 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 internationally as well.

The potential of the automotive industry is clear, that it is taking off; leading the economic revival of the country is obvious. Shall we put road blocks or clear the runway?

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