Issues of the automotive industry and their solution
By Sohail P. Ahmed
July 30, 2005
Source:
Business Recorder
ARTICLE (July 30 2005):
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.
Copyright
Business Recorder, 2005 |
