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August 24, 2019

No promising future for new entrants as auto sector goes through turmoil

Business

August 24, 2019

KARACHI: Pakistan’s auto sector is going through turmoil, as analysts and stakeholders see no promising future for the new entrants while thousands of jobs are at risk.

According to data released by Pakistan Automotive Manufacturers Association (Pama) on Monday for the first month of FY20, passenger car sales plunged 42 percent at only 10,968 units from 18,875 units sold during the same period last year.

Senior industrialist and auto parts manufacturer Aamir Allawala told The News that buying a car was not the top priority of a household as it came after food, rent, children tuition fees etc. “Middle class’ buying power has already declined,” he said.

There are several factors behind the decline in the auto sales. Economic contraction period has started, he said. Rupee has seen devaluation of around 45 percent during last one and half years. CKD duty has been raised by seven percent to 37 percent from 30 percent. Federal excise duty was also raised by 2.5 to 10 percent that increased the prices too much.

Bank interest rates have also increased to above 17 percent from 11 percent. Around 30-35 percent cars were leased. “Now buyers are waiting to interest rate cuts, which has also resulted in a decline in sales.” Due to an increase in the duty, CKD import will decline.

“Though current account deficit will decline, the government will not be able to achieve its tax collection target as required by the IMF, as decline in sales will affect its revenues as well,” he said. “The government has a huge share of 39 percent in all vehicle sales in the shape of taxes. The negative side of the slowdown would be on local parts manufacturers, as car industry uses 50 to 60 percent local parts.”

Due to a decline in the demand, Honda and Suzuki have reduced their productions to one shift from two shifts while Indus Motors have reduced it to one shift from two and half shifts. “They have asked vendors to cut down jobs,” Allawala said. “Unemployment will increase rapidly.”

“As I have received numbers from the manufacturers till yesterday (August 20),” he said. “August is going to be hardest as compared to July. Car makers say they never saw such slump even in 2008. It will continue for at least four months.” He said there was a slump in overall economy of the country.

Aamir Allawala said that compared with the existing players, situation would be tough for the new entrants, as existing assemblers have reserves; they have old and depreciated plants, no big loans of banks. They have joint ventures. In 2011, Honda Motors had suffered a loss of Rs2 billion, it got credit for nine months from Honda Japan. Similarly, Indus and Suzuki can get support from their organisations in Japan. “But, new entrants will have to bear huge losses. KIA has invested Rs25 billion that can’t come from selling a few units in a month. They will have destruction,” he said.

He said people thought prices would come down with the arrival of the new entrants and monopoly of existing players would end, but KIA launched Sportage at a higher than affordable price. It was announced at Rs3.5 million but price was raised to Rs4.9 million at the time of official launch.

The KIA Lucky Motors has invested $175 million on setting up a new auto plant having a capacity of 50,000 units per year. Renault is not coming, he said. They had purchased the land but no construction was made. It would suffer losses of around Rs700 million. It can sell back the land with some penalty. Hyundai and KIA were suffering huge losses, he said.

DG PAMA Abdul Waheed said August figures might also be low because of holidays. “Backlog of ban on non-filers still continues. People defer purchases. Outlook will be clear in October,” he said.

He said that market situation was not promising for the new entrants. “Market had boomed here, they might see the slow days as well,” he said.

Auto analyst at Topline Securities Hammad Akram said during last six to eight months, auto sales dropped by 15 to 30 percent. “We expect same trend to continue till next three to four months. Since dollar has stabilised, there are expectations that auto numbers may stabilise after four months,” he said.

During last one year, auto prices have increased by 10 to 40 percent, which have hurt buying. He said though Kia officially launched Sportage this month, it had revised its targets of the last year down. “New entrants will face problems in sales, as they are coming up with mid- and high-end vehicles of 1800cc and above. Customer buying power is already low. Attraction will be low for the new entrants.”

Renault and Nissan have not told about their expected launched. Hyundai has also announced launch of its one model only. They are waiting for the customer confidence to build up, he said.

Muhammad Ashraf Shaikh, chairman of Pakistan Association of Automotive Parts and Accessories Manufacturers said their sales had also dropped with the same proportion of the original equipment manufacturers. “Cars have become too much expensive beyond purchase,” he said. “However, prices of new vehicles were increased by 25 to 30 percent soon after their launch.”

He said since country was going towards documentation, people did not want to invest. “Now investors are not coming to purchase cars,” he said.

Talking about a possible cut in jobs he said, “We will definitely have to reduce the strength, as we cannot support the financing. If you don’t’ get the money, how will you run the business on bank loans?”

He said the new investment had either stopped or slowed down. Those who had entered in the market were facing issue of their survival. “Auto industry is in turmoil,” he said. “No improvement is visible in short term. Situation may improve in next three to four months.”

Mashood Ali Khan, a local parts vendor, said production had declined and unemployment was increasing. “This is not a good time for the industry,” he said.

Small and medium enterprises are going in the financial crunch. Several vendors had to shut down their business in 2008 and they are moving towards the similar situation. “They will have to shut down their plants whether they manufacture tractor parts or bike parts. First quarter is not going to be positive. Let us see towards the next quarter,” Khan said.

He said Toyota closed its plant for 10 days in July and cut down their orders by half to three days a week only. Besides four wheelers and above vehicles, sales of three wheelers (rickshaws) and motor bikes also decreased by 29 percent in July to 107,427 units from 150,664 units in July last year.

Sabir Shaikh, chairman of Association of Pakistan Motorcycle Assemblers said that documentation was also a reason behind a decline in sales, as sales tax registration of dealers had to start from July 1, as they were not registered under sales tax. “Under new law, they have to register for the sales tax. The law has come into effect from Tuesday, August 21,” he said. “August sales will also be down.”

“Purchasing power is so low that people are unable to buy even the bikes,” he said. “The situation is likely to remain worse for auto bike industry till February-March 2010.”

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