INDUSTRY ANALYSIS

The Industry
Over the last couple of years manufacturing sector has grown at the rates of 14.
1 and 12.5 percent and the large scale manufacturing at even more rapid rates of
18.2 and 15.4 percent. These growth rates are more than twice the growth rate o
f the first three years of the present decade and more than three times those ob
served in the 1990s. On the other hand investment in the manufacturing sector du
ring the two years has declined at a rate of 2.6 percent comprising 8.5 percent
growth in 2003-04 and 12.6 percent decline in 2004-05. As a percentage of GDP in
vestment increased from 3.2 percent in 1999-2000 to 3.6 percent in 2003-04 but d
eclined sharply to 2.9 percent in 2004-05. The low levels of investment cast ser
ious doubts on the sustainability of growth rates of manufacturing output. The l
ow and fluctuating rate of investment is a cause for concern and has been respon
sible for the slow and fluctuating growth of the manufacturing sector.
The automobile sector saw a phenomenally high growth rate of 46.9 per cent durin
g the last financial year, as compared to previous years when auto sector had gr
own under 20 per cent on average. During FY03, the total number of automobile as
sembled in the country was 62,000 and this figure is expected to remain nearly t
he same during FY04. Analysts believe that macroeconomic conditions, car financi
ng options - reduced to 9 per cent resulting in 40 per cent of total car sales l
ast year, introduction of new models and government policy were the main factors
boosting car sales and growth last year. Automobile Manufacturing Industry at p
resent provided 150,000 jobs and contributes at least 10% of the total Annual Re
venue to GOP and Import Substitutes at least US$ 600 Million per year.
Automobile sector, growing impressively, is becoming an attractive area for fore
ign investment in Pakistan. With the presence of Japanese, Korean, Italian assem
blers (and now Malaysians are also expected to join the auto sector), it is time
that emphasis was laid for speedy implementation of the deletion program in the
auto sector. This is because in order to save foreign exchange, boost industria
l production and employment in engineering sector, the Government will need to p
ursue the policy of deletion/ Indigenization.
Automobile sector is said to be the mother industry and its growth has provided
tremendous support for economic growth of the developed world in their days of s
truggle for economic growth. It is the high time that new licenses for manufactu
ring of automobile units should only be given to those companies which ensure tr
ansfer of technology within the shortest possible time so that the country could
get the actual benefit of the growth of this sector which is certainly of vital
importance for enhancing employment opportunities in the country. In order to e
xploit global & domestic opportunities, demanding levels of technology, logistic
s, coupled with high working capital intensity and inventory levels have to be f
aced as challenges.
Vendor Sector
The increase in automobile sales in Pakistan makes the vendor industry stronger
as well as competitive. The vendor industry employs a large number of people and
its growth and consolidation will also help in adhering to deletion program. Ho
wever, since the majority of the basic spare parts are still being imported from
outside the country, the vendor industry in the auto sector has not been able t
o come out with a strong support to the engineering sector in Pakistan. There is
a need for special treatment, i.e. certain level of protection mechanism built
in trade deals of this sector until it uses full potential in its competitivenes
s, for a limited period of time and in a selective way.
Globally vendor base development/outsourcing components from Asia is set to beco
me a major factor, as world over the aftermarket depends heavily on overseas sup
ply. Thus products targeted for aftermarket have good export prospects in the co
untry. Deletion programs, localization efforts, competitive devaluation, can all
be utilized effectively to promote sub-contracting and vendorization. It is qui
te important to pay a special attention to the vendor sector in the automobile i
ndustry in Pakistan from the point of view of employment generation while moving
to higher value added products. The assessing the impact of the trade deals on
the sector and findings mechanisms to boost growth, productivity and product qua
lity, with a sufficient degree of (higher skilled) employment generation becomes
crucial in the current context.
Owning an automobile is a basic human needâ the desire for easy mobility. During 199
7 the world-wide production of automobiles touched record 39 million marks, up b
y 5.4 per cent over 37 million in 1996. The world automobile fleet grew from 489
million vehicles to 501 million during the same period.
The production of passenger cars in Pakistan during 1996-97 increased only margi
nally by 1.5 per cent, if the production volumes of three most active car assemb
lersâ Suzuki, Toyota and Honda â are any indication. The three companies produced a tot
l of 42,457 cars during 1997-98 as compared to 41,718 units in the previous year
as 43 per cent of their collective production capacity remained under-utilized.
The total cost of a 2003 model 1000cc engine car was Rs. 827,868 but under the n
ew scheme a 2002 model of a 1000cc car can now be purchased at a price of Rs. 71
9,730. â Car sales have gone up by 44 percent during 2002- 2005,â said Faraz Farooq, an
nalyst at Jahangir Siddiqui and Co. This growth is mainly due to cheap and exten
sive car financing schemes, rising remittances and increases in consumer wealth
due to the economic turnaround, he added.
According to Pakistan Association of Automotive Parts and Accessories Manufactur
ers (PAAPAM) Suzuki has achieved a maximum deletion level of 60 per cent on its
800 cc Mehran car. The localization on its other models are â 1000 cc Khyber 42 per
cent, 1300cc Margalla/Baleno 32 per cent, 800 cc pickup 50 per cent, up to 10 pa
ssengers pickup 47 per cent, and 1000 cc Potohar jeep 40 per cent.
Toyota has achieved a maximum localization of 30 per cent on all its models of C
orolla cars which range between 1300-2000 cc. It has achieved an 18 per cent del
etion on its 24cc Hilux trucks. Honda has achieved a deletion level of 30 per ce
nt on both 1500 cc and 1600 cc models of its Civic cars and 28 per cent on its 1
300 cc City cars.
Pakistan offers a promising market for vehicles and accessories, with good sales
opportunities for U.S. exporters in some segments of the industry. The total ma
rket has expanded from U.S. $670 million in FY-2001 to U.S. $ 1.2 billion in FY-
2003. Japanese car manufacturers still control most of Pakistan's passenger car
production and sales. Figures for FY2005/06 show that Suzuki-branded models repr
esented 51.6% of total Pakistani passenger car production and 52.7% of sales, wh
ile in the first 10 months of FY2006/07 (Jul 06-Apr 07), Suzuki represented 59.1
% of production and 56.7% of sales. Toyota follows in second with Honda ranking
as Pakistan's third-largest car producer with an 11% market share. Honda plans t
o invest PKR3bn to double the annual production capacity at its Honda Atlas Cars
(Pakistan) plant, although rival Pak Suzuki has revealed that it has investment
of PKR10bn allocated to the continuing expansion of its plant, after already sp
ending PKR3bn between 2004 and 2006.
The total number of vehicles in Pakistan is over 4.9 million. An annual demand i
s estimated at 300,000 units, which is being met from local sources and imports.
Import total around US$300 million. The local production of aftermarket vehicle
parts and accessories is estimated at US$ 850 million. There are 25-vehicle man
ufacturing and assembly facilities in Pakistan that are supported by 400 manufac
turers of vehicle parts and accessories. The vehicle industry demonstrated a ver
y impressive growth rate of 46.7 percent during the past fiscal year, mainly due
to surging demand and the availability of consumer credit and low interest rate
loans.