Friday June 14, 2024

Benefits of diversification

By Mansoor Ahmad
October 01, 2023

LAHORE: Pakistan has a strong auto-parts vending base that produces precision components for original equipment manufacturers, exactly according to global standards. However, baring few that diversified in other fields, most go into trouble when car production plunges.

Successful auto-vendors have demonstrated that diversifying a business is crucial for long-term sustainability and resilience, especially in industries that are vulnerable to economic fluctuations. In Pakistan, car production fluctuates between 300,000 vehicles per annum to around 100,000 vehicles in bad years. This fiscal, experts expect the production to go below 100,000 vehicles.

With such a narrow base, survival becomes an issue where OEMs take the same components from more than one vendor. In the last decade, many vendors have closed the shop and majority remain operative on truncated capacities.

Former chairman Pakistan Association of Auto-parts Manufacturers Association Amir Allahwala says often, the expertise developed in one industry can be applied to another. For example, precision manufacturing skills developed for auto components can be used in aerospace, medical devices, or electronics manufacturing.

He said it is not possible to earn good money by supplying auto-components to OEMs in Pakistan because the market is very small. However, the expertise to produce precision parts can be used in other fields from where sustained income can be generated.

He said auto-vendors owe it to OEMs that equipped them with technology to produce global standard components and this expertise must be used in other fields.

Syed Nabeel Hashmi, an auto-vendor who is posting regular double-digit growth says relying solely on one industry or client base can be risky. Diversification reduces dependency on a single market, making the business more resilient to economic downturns in any specific sector.

He has a point as diversification can provide a stable income stream even if one sector faces a decline. This stability is crucial for operational continuity, paying employees, and investing in the business. Different industries have different economic cycles.

By diversifying across sectors, a business can spread its risks and reduce the impact of economic volatility in any one area.

Diversified businesses are often more adaptable to changing market demands. They can shift focus more easily because they have experience in different sectors. Exposure to various industries can foster innovation.

Ideas and technologies from one sector can be applied creatively to another, leading to new products or services.

During better economic times, businesses have more resources. Diversified companies can use these resources to explore new opportunities in different sectors, expanding their revenue streams. Diversification helps in expanding the customer base.

Different industries cater to different demographics. By diversifying, a business can tap into a wider range of customers.

Businesses that diversify effectively are often more sustainable in the long run. They can weather economic storms better and are better prepared for future uncertainties.

It is unfortunate that most auto-vendors did not utilise the knowledge and expertise they attained in auto component manufacturing and are currently in trouble. Some have closed down and the majority are barely surviving by pruning staff and other expenses.

There are vendors that started with auto parts production, but are now producing audio equipment, electronic gadgets and even mobile phones. In fact, the largest mobile phone manufacturer in Pakistan is an auto vendor. Even the vendors producing plastic components for OEMs are supplying 19 litre water bottles to multinational companies supplying pure drinkable water. Some have gone into packaging field, producing plastic drums for local and multinational chemical companies. They are also exporting these drums. Some diversified by commissioning LPG plants during better days.

The local auto-vendors have been deprived of the local aftermarket of auto components because of large scale smuggling and under-invoicing too. If these menaces are addressed, the vendors would have a 30-40 times larger market than OEM production at its peak.