Automakers wheels start falling off as the ride turns bumpy

LAHORE: Among other industries struggling to survive the economic slump, auto sector is the worst hit as it has lost a large segment of consumers owing to massive rupee devaluation and high interest rates, dispelling the notion: highly localised cars can withstand depreciation shocks better than others.

In fact, the entire localisation calculation is false based on the number of components that replaced the imported components. A mud flap and nut bolts are each a separate component used in car assembly.

These components may have nominal value, but if 100 such parts replace their imported counterparts the deletion (localisation) would be deemed to be 10 percent. In value terms it might not be more than two percent. This is true that every component that replaces the imported one is much cheaper in cost and impacts the overall cost of the vehicle.

When the original concept of deletion was introduced in Pakistan some 30 years back every component was indexed according to its value but after the World Trade Organisation (WTO) regime came into force this indexation was discontinued.

Today, if an automaker claims that 70 percent of its particular model has 70 percent local parts it does not in any way mean the imported components will consume only 30 percent foreign exchange. The 70 percent deleted parts might account for only 30 percent of the car cost, while for 30 percent parts that will have to be imported would value 70 percent of total cost.

This explains the massive increase in car prices after devaluation. Had the localisation been indexed to the value, its level would have been much lower. In Pakistan 70 percent is perhaps the highest deletion level in cars as most of the high-end cars have localisation level of 30-50 percent and import component of 80-85 percent. In other words one could import these lowly localised cars by spending 15-20 percent more foreign exchange.

The high increase in the retail prices of all cars have crowded out low-end consumers that regularly graduate from motor bike to small cars. In fact the entire middle class has been forced to compromise on their car choice.

A year back for instance a fully-loaded 800cc car was available at Rs850,000. Today even smaller cars of 660cc cost almost double (for fully-loaded version and one-and-half times more for standard version). The motorcyclists that aspired to buy a car at Rs850,000 cannot manage to arrange over Rs1.5 million to buy even a smaller car.

The middle class families that dreamed of buying a 1300cc car two years back for around Rs1.6 million, now find they can buy a car that has 50 percent less power and a smaller body at this price and may save Rs100,000. So the dreams of each type of consumer have been shattered by this massive price hike. Those that aspired for 1800cc or above cars now find it difficult to arrange finances for a 1500cc car.

As the car production is steeply going down it was heartening to note that a company has announced that despite scrapping one shift it has retained its entire workforce. But then car assemblers hardly employ 5 percent of the total workforce in the auto sector value chain. The auto parts vendors employ almost 95 percent of the auto industry workforce.

They are small firms producing different components for the assemblers. As the orders start slowing they find it hard to retain their workers. There are many components for which there are more than 3-4 vendors. Normally each gets 25 percent of the order but when production declines the orders could drop by 50-60 percent. In that case it becomes unviable to produce that component for a long time.

When the recession in industry prolongs most of these small vendors have to close the shop. In that case the one or two survivors manage to pull on. Some vendors point out that up till now around 40,000 workers in automobile chain have lost jobs.

Another factor that hit the car sales was the high cost of car financing. A year back this financing was available to the corporate buyers at 8-9 percent. Now the rate has gone up to 15-16 percent for corporate buyers and up to 19 percent for ordinary aspirants.