Auto-makers going through testing times

Indus CEO says financial crisis affected industry; calls for revival of auto finance; sees improvement in sales

Tuesday, November 24, 2009
By Hina Mahgul Rind

KARACHI: Global automotive industry is facing worst slowdown in the wake of widespread financial crisis and this has not spared local auto manufacturing business which is currently going through testing times.

Indus Motor Company Chief Executive Officer Pervez Ghias, expressing these views in an interview with The News, said first quarter (July-Sept) of financial year 2009-10 gave an impression that the auto industry had achieved growth as sales of light commercial vehicles and passenger cars increased by 13 per cent. Total sales in the first quarter were more than 30,000 vehicles compared to around 27,000 units in the same period last year.

However, he said, “it is somehow a mismatch because the overall market remained sluggish. Sales of lower segment vehicles from 850-1,000cc like Alto, Mehran, Cuore and Santro declined by around 22 per cent while increase in sales of 1,300cc and above cars is mainly attributable to Toyota Corolla which was absent in the same period last year owing to phase out of previous model.”

Demanding revival of auto finance, he said stringent stance adopted by banks had severely affected sales of vehicles. “Toyota in Pakistan is currently not going to start auto financing as it is not required by its customers. But if sales further worsen, this may be an option for the future which is utilised everywhere in the world like that by General Motors and Ford which usually provide finance and not banks.”

He said the government should focus on mass public transportation as not much attention had been given to the sector so far.

Pervez Ghias said the decline in the foreign exchange rate badly affected the automobile industry. From June 2008 to Sept 2009, the rupee depreciated against the dollar by 36pc and against the yen by 63pc. As a result, “cost of production has increased manifold.”

Discussing the recent increase in car prices, he said it was mainly on account of the depreciating rupee. “Auto manufacturers have utilised all resources to bear the increasing cost as long as possible. Not all the cost has been passed on to the end-consumer.”

About the future, the Indus Motor CEO said economic recovery, political stability and security situation all would play an important role in the performance of the industry.

“Continuous depreciation of the rupee and high interest rates will exert pressure on the margins of Original Equipment Manufacturers (OEMs). Second quarter (Oct-Dec) is also considered traditionally challenging for the auto industry due to the year-end phenomenon. However, it is expected that auto sales in 2009-10 will improve as compared to the previous year.”

He added the federal budget for 2009-10 brought some hope for the auto sector which had struggled for survival during the past year. Removal of 5 per cent federal excise duty on cars with engine capacity above 850cc was a welcome step and there were some signs of a turnaround with stronger demand in the first quarter to September 2009.

With the removal of excise duty, he claimed, all auto manufacturers passed on the benefit to the consumers and that also helped sales.

He suggested that for reviving the auto industry, several steps were necessary including a reduction in withholding tax slabs at the registration stage, a review of the localisation requirement, review of the Auto Industry Development Programme (AIDP) and initiation of dialogue with all stakeholders for renewed implementation of AIDP.

“Current situation is being watched very carefully by parent companies of OEMs and if there is limited or no government support to the auto industry then it may have an adverse impact on future investment and technology transfer.”

However, he said, “there is still a lot of potential in Pakistan’s auto market and we are hopeful that with the right policies things will improve in the future.”

Ghias emphasised that the import of used cars has had a negative impact on sales of locally produced automobiles. “They are a drain on our foreign exchange and results in dumping of junk cars in the country. In spite of a cut in the maximum age of used cars allowed for import from five years to three years, these cars still continue to enter the country.

“However, we appreciate government’s effort to reduce depreciation allowance on imported used vehicles from 2pc to 1pc per month during 2008-09.”

Local manufacturing of parts should be on cost merit basis and without compromising on quality. So some complex parts might take much longer to be manufactured locally and additional time should be given to the engineering industry to manufacture parts, he said.

He said imports of accessories and parts were not feasible as it affected the growing auto vendor industry which had mushroomed with the growth of local manufacturers.

About alternative energy cars, he said production decision on such vehicles was based on the market size due to the need of economies of scale. These vehicles were becoming popular in North America and their market was growing. However in Pakistan, their demand was low and the cost was high. “There is no local production at present.”