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ARTICLE

PRESENTATION

SUBMITTED TO: SIR. AFAQ ALI KHAN

BY:

Syed Owais Ali


SP07-BB-0135

Topic:
Automobile
Industry
Automobile scenario in Pakistan

After a boom of about five years the demand of cars has slowed down
by 55 percent. The highest decline was seen in the sales of 1300cc and
above cars, which decreased to 1,382 units in July 2008 as compared
to 4,701 in July 2007, showing a decline of 71 percent, the lowest
since November 2003. A month wise analysis shows that not a single
category of vehicles showed positive results. For example, besides
1300cc cars, there was a decline of 79 percent in 1,000cc cars, 33
percent in 800cc cars and in all categories of cars decline was 66
percent. Trucks sales lowered by 43 percent, buses 60 percent,
LCVs/vans 26 percent, tractors 45 percent, motorcycles and rickshaws
17 percent. While total sales of auto sector was 29 percent less then
the previous month, June 2008, 80,156 units down to 57,203 units in
July 2008.

Main reasons for this decline were policies, under which sales tax
increased by one percent, to 16 percent, five percent FED and fixing
WHT at 2.5 percent in current budget. Besides, inflation raised the
prices to about to 21.5 percent, curtailing the demand further.
Increase in oil prices, and high interest rate made the situation more
difficult. Moreover, a continuous increase in steel prices, by Steel Mills,
increased operating cost for automotive sector. Price of steel used by
automotive sector increased by Rs 7,500 per tone in July and Rs 8,500
per tone in August making around 12 percent increase in both months.

To ease the financial burden the Federal Board of Revenue (FBR)


suspended 2.5 percent withholding tax till June 30, 2008. The tax is
now again restored and is being charged at the time of registration of
locally manufactured cars. The Engineering Development Board (EDB)
proposed total withdrawal of this tax to curb declining demand of
vehicles. The auto industry demanded that not only tax exemption
should further be extended but also one percent federal excise duty on
purchase of locally produced vehicles be removed.

The industry representatives say that levying taxes is actually a


deviation from the agreement of Auto Industry Development
Programme (AIDP). In 2006, the government had approved a policy
package as AIDP, which included a pre-announced tariff for five years.
Now a 2.5 percent WHT along with 1 percent FED abruptly imposed,
which was nowhere mentioned in the AIDP. This has affected the sales
of all assemblers in the shape of negative growth during the first nine
months of 2008.

The auto industry is one of the important industrial sectors of Pakistan.


It is providing direct jobs to more than 500,000 people and also
contributing huge amount to the national exchequer. Therefore, it is
encouraging to note that in spite of alarming law and order situation,
high inflation and high interest rates, an Italian auto manufacture of
bikes has shown interest to invest in Pakistan.

A European company, Piaggio, has signed a Memorandum of


Understanding (MoU) with a local entrepreneur to produce 125cc Euro-
II motorcycles in Pakistan, challenging the duopoly of Japanese and
Chinese bike manufacturers. Piaggio is one of the leading motorcycle
manufacturers in the world and the first two-wheeler scooter, Vespa,
was introduced by it.

Under the agreement, HKF Engineering will launch its first joint
product Ravi Piaggio 125cc motorcycle, the first Euro-II motorcycle in
Pakistan, followed by many other products. The motorcycle industry
had registered a 25 percent growth during the last five years.

Pakistan is basically an agricultural country and tractors and


agricultural equipments have special importance in modernization of
farming. The tractor sale in 1999 was about 20,000 units which are
now about 70,000 units per annum. At present two companies is
producing tractor. The production capacity of each company is 15,000
tractors per annum. About 49,500 units against the demand of 77,261
units were delivered in 2007. Approximately 35,000 units were to be
delivered, which were booked with 100 percent advance payment and
the farmers have to wait for at least eight to 16 months to get the
supply.

The local companies were allowed to import CBU tractors to fill the gap
in demand and supply with the condition that they would establish
tractor plant to manufacture tractors in Pakistan. They have not only
failed to meet this goal, but raising prices of their products every now
and then. For instance, ex-factory price of MF 240 50 HP was Rs
320,000 in 2007 that was increased to Rs 419,000 in 2008, showing
an increase of 31 percent.
The Dewan Autos has asked the EDB to verify lists of importable
components so that it could start production of the new tractor,
namely Dewan Tumosan Tractor DT-550, 55HP. The company has
established a manufacturing plant with a capacity to produce 9,000
tractors per annum. Millat Tractors Limited (MTL) has also submitted
lists of EURO-II- parts for tractors for allowing import of the same at
zero-rated duty.

The Suzuki car prices increased by Rs 15, 000 to 30,000 in cars and
LCVs Rs 40, 000 to 50,000 in petrol and CNG version, blaming
depreciation of the rupee against the dollar, and price hike of raw
materials in the international market, which has enhanced the cost of
production. The Pak Suzuki had increased prices first on February 1
from Rs 5,000 to 20,000 and second on April 1 from Rs 10,000 to
20,000. Indus Motors has also raised the price of its vehicles by Rs 20,
000 to 40,000 from June 1. This was the second increase in car prices
since February 2008. Imported vehicles, like Jimny Jeep, price has also
become costlier by Rs 100, 000. The company had also increased
prices on February 23 from Rs 10,000 to 20,000 and on March 10 also.

Japan Toyota Company has increased prices every year. For example,
the price of XLI 1,300cc was Rs 879,000 in 2006, Rs 893,000 in 2007,
and Rs 910,000 in March 2008 that increased to Rs 925,000 in April
2008 and further increased to Rs 940,000 in June 2008.

As the deadline is approaching for the replacement of two-stroke to


four stroke polluting free rickshaws, the government is trying to come
up with workable options with the operators. But the rickshaws owners
are not fully cooperating and demanding that government should give
rickshaws free of cost. The government said it will give them Rs2
billion to convert present rickshaw into four stroke engines.

Earlier, Sindh minister for transport had proposed to the PPP Co-
chairman that the government should pay Rs 30,000 each to rickshaw
owners on a non-refundable basis because they are too poor to
payback loans.

Transporters maintained that they never demanded any non-


refundable financial assistance from the government. They said that
the government should allow rickshaw owners to acquire CNG engines
and assemble them on their own. The union has already presented a
locally assembled four-stroke CNG auto rickshaw for government
approval. They demanded that the government may arrange loans
from banks on easy terms and without interest.

The Pakistan Association of Automotive Parts and Accessories


Manufacturers (PAAPAM) have criticized giving permission to import 10
years old CNG buses from India in the Trade Policy 2008-09. They said
Pakistan would become a junkyard of used vehicles because after five
years of use in public transport, the buses lost their efficiency and
after 10 years they are outlived their utility. Japanese and Chinese
bike assemblers have again increased prices blaming the rupee
depreciation against various currencies coupled with rising rates of
sheet metal and other parts.

The Japanese motorcycles price has increased to Rs 52, 990, including


Rs 900 to be paid by the customer on account of PSQCA, registration
and transportation cost. In April its price was Rs 50, 890 and in March
Rs 49, 900. Similarly, the CG-125 standard is now priced at Rs 72, 990
from Rs 70, 900 in April. In March it was selling at Rs 69, 900.
Motorcycle prices have been increased on an average of Rs 1,550 per
unit. Chinese bike assemblers raised the price twice since April, while
the Japanese makers enhanced the price three times, twice in May and
once in April. It is to be noted that with the entry of Chinese bikes in
the local market, few years back, forced the Japanese assemblers to
reduce their prices to keep their market share intact that benefited
consumers.

Source: http://thepost.com.pk (8/31/2008)