Eop Auto Industry Of Pakistan


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Details about the auto industry, deletion programs, impact of rupee devaluation on the auto manufacturers , import of Ckd\'s and Lcv\'s, Vision 2012, Challenges etc.

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Eop Auto Industry Of Pakistan

  2. 2. HISTORY  Pakistan Automobile Industry produced its first vehicle in 1953, at the National Motors Limited, established in Karachi to assemble Bedford Trucks. Subsequently buses, light trucks and cars were assembled in the same plant.  The industry was highly regulated until early 1990’s  After deregulation major Japanese manufacturers entered in the market  Assemblers of HINO Trucks, Suzuki Cars (1984), Mazda Trucks, Toyota (1993) and Honda (1994) in particular, entered once deregulation was introduced.
  3. 3. INTRODUCTION  star performer of industrial sector during the last 6 to 7 years  impressive annual compound growth, surpassing other sectors of the economy  Become a part of global supply chain  exporting 2/3 wheelers, cars and tractors in particular  attaining a critical mass of production  acquiring latest technologies  improving human resource  Pakistan Auto Industry has potential to become a global choice for outsourcing, off shoring and becoming part of the global supply chain.  There are presently 82 vehicle assemblers in the industry producing passenger cars, light commercial vehicles, trucks, buses, tractors and 2/3 wheelers
  4. 4.  contribution to other sectors of the economy both tangible and intangible is highly significant  The auto industry economic and job multiplier in Pakistan context would be around Rs.1: 3 and 1: 8 respectively  over 600 players in the vendor industry  total investment of over Rs.98 billion  contributes $3.6 billion to the economy  largest ever drop in volume with sales of  Locally assembled Passenger Cars (PC's) and Light Commercial Vehicles (LCV's) declining by 44% to 27,159 units from 48,559 units  due to the impact of political uncertainty and drastic slow down in the economic environment of the country resulting in rising interest rates limited credit availability for auto financing, depreciation of the Pak Rupee against all major currencies and unprecedented rise in prices of oil, steel and other inputs causing high inflation and severe volatility in the market place
  5. 5. Pakistan’s motorization level is 8 cars per 1,000 persons, one of the lowest in the region. Motorization levels:  Country No. of cars per 1,000 persons  Pakistan 8  China 10  India 12  Indonesia 21  Iran 23  Sri Lanka 25  Philippines 31  Turkey 67  UAE 193  Saudi Arabia 236  UK 426  Japan 543  New Zealand 580  Australia 619  Malaysia 641  USA 785
  6. 6. MAJOR PLAYERS IN THE INDUSTRY Pak Suzuki Motor Company  Pak Suzuki Motor Company Limited (PSMC) a subsidiary of Suzuki Motor Corporation Japan has the distinction of being the first overseas Suzuki Plant to produce Suzuki vehicles outside Japan  By early 1990, on the completion of the first phase of this plant, in-house assembly of all Suzuki engines started.  In 1992 the plant was completed and production of the Margalla car commenced  Presently the entire range of Suzuki products currently marketed in Pakistan is being produced at this plant  The Company continues to be in the forefront of the automobile industry of Pakistan  effective and comprehensive network of sales service and spare parts dealers
  7. 7. Indus Motor Company  Indus Motor Company (IMC) is a joint venture between the House of Habib , Toyota Motor Corporation Japan (TMC) , and Toyota Tsusho Corporation Japan (TTC) for assembling, progressive manufacturing and marketing of Toyota vehicles in Pakistan  IMC's Product line includes 6 variants of the newly introduced Toyota Corolla, Toyota Hilux Single Cabin 4x2 and 4 versions of Daihatsu Cuore. We also have a wide range of imported vehicles.  The Indus Motor Company has started to assemble in Pakistan, the Toyota Hilux model 4/2 van. The first hilux was rolled out at the end of October 2007.
  8. 8. Honda  Honda Atlas Cars Pakistan Limited is a joint venture between Honda Motor Company Limited Japan, and the Atlas Group of Companies, Pakistan  All dealerships are constructed in accordance with the standards defined by Honda World over. Percentage of local parts conforms to the government's policy. Local vendors are continuously patronized to develop parts locally .  Honda always strive to give outstanding service to our valued customers Dewan Mushtaq Motor Company  DMMC is committed to providing Sales, Service and Spare Parts under one roof to the past, present and future customers of Mitsubishi Motors, and for this reason DMMC has established 36 dealerships across Pakistan.  DMMC makes Lancer, Pajero, L300 and L200 Dewan Farooq Motor Limited Nissan Gandhara
  9. 9. Market Share
  10. 10. NUMBER OF CARS 2006/07-2007/08 COMPARISION  Looking at car sales alone, it showed a poor performance during FY08 and fell by 11 percent to 147,441 units against 165,268 units last year. The share of cars and LCVs in total auto sales came to 79 per cent and 21 per cent respectively.
  11. 11. CONTRIBUTION TOWARDS GDP AND GOVERNMENT REGULATIONS  Pakistan is amongst a few countries of the world which manufacture all kinds of vehicles i.e. 2/3 wheelers, motorcars, LCVs, tractors, prime- movers & trucks and buses.  Contribution of Auto sector towards GDP was expected that to increase to around 25% in the next 5 to 7 years.  The GDP is expected to grow from $145 billion to $210 billion by the year 2012. But this does not seem to be certain as the demand is falling of cars so is the contribution of Auto sector towards GDP.  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
  12. 12.  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  Current turmoil in the automobile industry has claimed jobs of around 150,000 workers  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.  Price of steel used by automotive sector increased by Rs 7,500 per ton in July and Rs 8,500 per ton in August making around 12 percent increase in both months.  5 per cent excise duty has been levied; the revenues from automobile sector would decline by over 25 per cent this year due to declining demand  Auto industry paid Rs63 billion cumulative taxes that the government has levied on automobiles.  This year, despite additional duty the sector would hardly contribute Rs50 billion in the national exchequer .
  13. 13.  The Pakistan Association of Auto Parts and Accessories Manufacturers (PAAPAM) and Pakistan Automobile Manufacturers Association (PAMA) appealed to the government to withdraw the 5 per cent excise duty on cars and impose a ban on import of used parts instead of allowing their import after imposing 30 per cent redemption duty.  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 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.  Government has recently approved a 5 year tariff plan for the auto sector to ensure a stable and predictable environment and to facilitate investment.  It has also been proposed that government technical institutes should be attached with automobile companies for practical training
  14. 14.  development of infrastructure, human resource development, technology acquisitions, investment in productive assets, cluster development and development of standards on safety, quality and environment through a well structured and deliberate approach  The government has recently approved the Trucking Policy which provides sustainable measures for the Modernization of Trucking Sector  It has also proposed that the government may waive tax liability on cost of training, which would be based on quality and number of persons trained by these institutes.  Companies producing over 500,000 units of cars/LCVs annually abroad will be considered 'new entrants'. AIDP also includes new entrant policy, which provides eligibility criteria, benefits and terms for new assemblers of cars/LCVs .  The government discourages import of used cars through tariff measures and calls for a uniform computerized registration system for access across the country. It will enhance auto sector's contribution in GDP to reach 5.6 % and the share in manufacturing sector to 25 % by 2011.
  15. 15.  The import duty on completely built units of cars would not be lowered to encourage investment in auto sector, components and manufacturing.  Government will also allow the assembly of new entrants through import of 100 % CKD kit at the duty applicable to non-indigenized parts. However, they would have to provide a commitment to develop and purchase local parts to fit in locally assembled cars.  Cabinet's Economic Coordination Committee once again approved duty free import of controversial 'black cabs' with new name of 'purpose-built taxis', and passenger buses.  Central Board of Revenue had recommended to the ECC that import of these taxis without duty and sales tax be allowed in CBU and CKD condition.  According to the new price list issued by the assemblers in line with the Budget 2008-09, cars prices swelled drastically ranging from Rs 30,000 to 0.4 million on various engine capacities
  16. 16. CKD and CBU  Performance of locally assembled vehicles or CKD remained sluggish during FY08.  Market share of used CBUs had kept shrinking owing to the restrictions imposed on import of higher age cars.  During FY08, 18,000 CBUs (6,000 new and 12,000 used) were imported
  17. 17. DELETION PROGRAM  Pakistan auto industry observed a “Preparation Phase – 1985-05” which was based on the formulation and implementation of compulsory local content conditions, commonly referred as deletion programs.  Deletion programs worked on the basis of Industry Specific Deletion Programs (ISDPs) and Product Specific Deletion Programs (PSDP). Under these programs annual deletion targets for each model of vehicle would be set by giving choice to assembler to choose components from a basket carrying fixed indices based on their individual values.  The EDB would conduct the technical audits annually to determine the achievement or shortfall of deletion targets.  In case of shortfall, assemblers would be penalized by charging the CBU rate of duty on the value of components which were not indigenized in that period.  Coupled with government’s macro economic reforms and rapid economic growth from the year 2001 onwards, and through effective monitoring and implementation of deletion programs, local content increased substantially.  The localization nevertheless was less in those components which were high value added or critical in design and operation. The “Preparation Phase – 1985-05” observed couple of car assemblers and dozens of 2/3-wheelers coming into operation.  The economic objectives of that time i.e. import substitution, job creation and investments in OE and vending sectors were achieved to a large extent.
  18. 18. Taxation on Auto Industry The auto Industry remains second largest tax payer in terms of its contribution to customs duty, sales tax and withholding tax.  5% FED imposed on cars and jeeps with engine size exceeding 850cc.  Progressive WHT slabs imposed on locally assembled cars.  Import duty on CBU’s with engine size upto 1,800cc increased by 10%, while import duty on bigger cars and jeeps increased from 90% to 100%.  Duties on car CKD’s reduced by 250bp to 32.5%.
  19. 19. BUDGET REPORT HIGHLIGHTS (2008-2009)  Automobile Sector  Pakistan’s automobile sector has been contributing 3.6 bn dollars annually  Pakistan’s automobile sector is also providing direct employment opportunities to about 192,000 people.  The production of cars/jeeps in the country during the period July-March 2008 decreased by 3.9 %  LCVs continued to register a positive trend and showed a growth of 16.5 %.  About 15,652 units were produced during July-March 02008 against 13,436 units last year.  Production of buses grew substantially from 627 units to 828 units – a healthy growth of 32.0 %.  Production of trucks, as well, increased by 1.5 %.  Motorcycles registered a phenomenal growth of 28.06 % and are expected to grow further
  20. 20. Year-to-date demand supply analysis of local industry  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.
  21. 21. continued  The domestic automobile industry recorded the largest ever drop in volume with sales of locally assembled Passenger Cars (PC's) and Light Commercial Vehicles (LCV's) declining by 44% to 27,159 units from 48,559 units for the quarter ended September 30, 2007.  Looking at car sales alone, it showed a poor performance during FY08 and fell by 11 percent to 147,441 units against 165,268 units last year.  The share of cars and LCV’s in total auto sales came to 79 per cent and 21 per cent respectively.
  22. 22. IMPACT OF IMPORTED CARS •During preparation phase, import tariffs on CBU’s of cars and HCV’s remained very high and started phasing down rather quickly in the later part. •The import of used cars due to high import duties remained minimum and were allowed only to the overseas Pakistanis under the transfer of residence, baggage and gift schemes. High import of used •Cars in the last 2 to 3 years was however, to bridge temporary demand – supply gap. •Government’s intervention was owing to growing demand supply gaps which resulted in delayed deliveries and high premiums. A total of 64,764 used and 14,363 new cars were imported during the last 3 years. During the same period 10,054 used trucks were imported.
  23. 23. •The import relaxation led to stiff competition for the local auto industry as imported cars provided value for money and customers were lured towards buying them instead of locally assembled cars. •This led to decline in demand for local cars especially some makes like Hyundai Santro that was badly hit and customers preferred opting for the imported Toyota Vitz etc.
  24. 24. HCV’S AND LCV’S
  25. 25. RECENT CRISIS OF US AUTO INDUSTRY •The credit crisis that is affecting USA is wounding the U.S. auto industry in many different ways. •Carmakers can’t get loans to restructure and to produce new advanced technology vehicles. •Suppliers and dealers can’t get loans for routine business, and customers can’t get loans for new cars •All automakers have been affected by the dramatic drop in car sales and by the credit crunch. •Total U.S. auto sales in October were 838,000 vehicles, down 32 percent from a year earlier. That represents an annualized sales rate of 10.5 million vehicles, the worst since 1983. Toyota’s U.S. sales in October were down 23 percent, and Honda’s were down 25 percent.
  26. 26. IMPORTANT HIGHLIGHTS  A GM shutdown would wipe out jobs among suppliers as well as at the automaker itself, pushing the U.S. unemployment rate next year to 9.5 percent, compared with current projections of as high as 8.5 percent.  A GM collapse would mean ``more aid to specific states like Michigan, Ohio, and Indiana, and more money into unemployment and extended benefits.  A projection of $100 billion to $200 billion in costs dwarfs the $25 billion industry bailout plan that will be debated in Congress next week to prop up Detroit-based GM, Ford Motor Co. and Chrysler LLC. The drain on taxpayers from a rescue or a GM failure is a central issue for U.S. lawmakers.  Congress has allocated $25 billion, but the Department of Energy is still writing the regulations that will allow automakers to get access to the loans, perhaps sometime next year. Further, since the Energy Bill was passed, the credit crunch and sharply lower auto sales have made GM’s situation even direr, and those loans, while appreciated, will be too little, too late.  GM Collapse at $200 Billion May Exceed Bailout Tab
  27. 27. Impact of Yen on Auto Sector  This year the Yen has appreciated by almost 50%  This had a negative impact on our automobile sector.  The prices of imported cars have increased due to the appreciating value of YEN against Pak Rupee ( MARK X)  the buyers have to pay more in order to buy the same car  Demand for imported cars from Japan has decreased due to increase in their prices  People have to pay 50% more for each car (PORT STOCK)  Imported cars which are already in the market, their prices have increased.
  28. 28. Impact of Yen on Auto Sector  The cars which are assembled in Pakistan their input prices have also increased as the companies have to pay more for the raw material, paints and parts etc (IMPORT)  Honda, Toyota and Suzuki are also increasing due to increase in the input prices and the cost of producing has increased  Therefore the demand for used cars has increased as people don’t have cash to buy new cars and consumer financing has also become very expensive  Increase in the prices of used cars  The prices of cars have increased and the demand for used car comparatively to new cars have increased.
  29. 29. IMPACT OF INFLATION AND CAR FINANCING  Inflation has led to the increase in production costs and hence the list price of various models of cars have sky rocketed in the recent months.  Cost of Production coupled with more expensive parts due to yen appreciation and higher duties plus taxes have all led to a plunge in demand for new cars as prices have risen sharply.  As interest rates were increased to curb inflation (Discount Rate@15 %) so now the consumers are not willing to get cars financed by banks at such higher rates which has reduced the demand for bank financed cars.  Car financing by banks has been cut down greatly due to many customers defaulting.
  30. 30. FUTURE OUTLOOK  In view of frequent price-hike in gas and petroleum products, the four wheelers’ sales growth is likely to decline significantly during the FY09  The increase in prices due to the imposition of Withholding Tax, Federal Excise Duty and GST along with halt in auto financing facilities and rising interest rates on auto loans, charged by the commercial banks, the local cars and LCVs unit sales is expected to report negative growth of around 9 per cent in FY09.  The local auto assemblers profit is also projected to remain under pressure owing to expected exchange rate depreciation and rising costs  components used in assembling vehicles being imported, declining rupee has significantly increased costs of local auto assemblers.
  31. 31. FUTURE OUTLOOK  The car dealer told The Nation on Thursday that the soaring PoL product prices badly affected their cars and Light Commercial Vehicles (LCVs) sales business and consumers were reluctant to buy any variant of new or used locally produced/imported car. The impact of increase in WHT, FED and GST directly passed on to the buyers  According to the new price list issued by the assemblers in line with the Budget 2008-09, cars prices swelled drastically ranging from Rs 30,000 to 0.4 million on various engine capacities in terms of different taxes levied on car sales  Dealers said, adding that even if the current sky-rocketing trend in oil and gas prices get continued, consumers will be scared about the maintenance of their vehicles rather than to buy a new car.  Industry analysts are of the view that the fall in auto sales is expected due to inflationary pressures in the economy refraining people from purchasing luxury items
  32. 32. FUTURE OUTLOOK  Government has imposed 5% FED and fixed rates of WHT on auto sales in Budget FY09, to discourage consumer spending on luxury items  Rising interest rates have made auto financing expensive, which accounts for almost 60-70% of the total auto sales  Already in FY08, auto sales have depicted negative growth of 11% to 187k units compared to 204k units in FY07 ( Situation will be worse in 2009)  Economist expects further rupee depreciation, on average exchange rate, of 13% in FY09 against the US$. This would substantially increase costs for CKD (Completely Knocked Down) kits for the local companies, negatively impacting their gross margins  Steel prices have been continuously rising in the international market  This sharp rise in steel prices has caused the cost of both imported and local components to rise, increasing purchase costs for local auto assembling companies
  33. 33. FUTURE OUTLOOK  In Short this is just the trailer… there's more to come… Wo kia boltay hai???  “Picture Abhi bakee hai meray DOST!!” Samjhay k NAi???????
  34. 34. VISION 2012  To make auto industry a global player, achieving competitiveness through a critical mass of production, contributing to the GDP by 5.6% by 2012, attracting large investments, development of technologies and human resource through a well structured policy framework formulated in consultation with stakeholders.  Pakistan auto industry because of the country location and a diversified range of products and particularly in the 2- wheelers, low engine capacity and fuel efficient cars & LCVs and tractors along with auto components has the export potential.  The industry has been barely meeting the local demand while the increasing growth has convinced the principals to expand
  35. 35. VISION 2012  The 2-wheelers have entered into export market followed by tractors though indirectly, and few models of Suzuki Motor Car and components are in the process of confirming the export orders.  In the next phase, Pakistan auto industry is expected to position itself in the auto services and an attractive out-sourcing hub for the manufacturing of forgings, castings, wire- harnessing and machining of components  The AIDP has laid a target of export of US$ 650 million by the close of the year 2011-12.  Pakistan imported auto products including CKD kits of a value of $ 1.3 Billion during 2005-06  Earlier while working on Vision 2012 for the engineering sector, stakeholders had vowed to make the Auto Industry foreign exchange neutral by the year 2012.  Government will continue facilitating the industry to develop market and product know how, industry participation in major trade fairs, enabling fiscal policy, capacity building and due recognition to the exporters.
  36. 36. CHALLENGES FACED BY AUTO INDUSTRY  Auto industry is generally faced by multiplicity of taxes; the presumptive tax regime has led to increase in prices of imported inputs and the finished goods (under-invoicing, misdeclaration and smuggling )  Imposition of Federal Excise Duty on the royalty and technical fee remitted to the Suppliers of technology remain a potential barrier to innovation  High cost of capital and relatively difficult access for the small and medium enterprises and lack of any incentive in the financial policy for the auto industry. Need of a dedicated fund for technology and Human Resource Development.
  37. 37. CHALLENGES FACED BY AUTO INDUSTRY  Increasing cost of energy and its unreliable and inconsistent supply adds up the cost of manufacturing and wastage of resources. It is estimated that by the year 2012, auto industry consumption of electricity will cross 500 – 600 MW from around 250 - 300 MW, as of now.  To improve competitiveness, government and industry’s high focus is needed on investment in HRD, technology and productive assets and supply chain management.  Benchmarking the performance of industry against the world practices, adopting best manufacturing practices and production techniques and producing globally acceptable quality products.  An all embracing and consultative policy making with elements of stability and predictability through effective participation of industry in the policy formulation, implementation and review process
  38. 38. Future Prospects Problems with Today's Automobiles:  What Makes them Run?  Fuel: Our automobiles are powered by fuel, mostly petroleum based petrol There are two major associated problems:  a) The exhaust of the fuels is major pollutants and contributors to the greenhouse effect  b) Estimates show that the reserves of fossil fuels are only finite and can last for another 100 years, if used at the same rate  Alternate Fuel :Hydrogen H2 ( Engine extracts H2 from water and release O1 in the air)
  39. 39. Future Prospects  Road Powered Electric Vehicles: Another fascinating idea is that the automobile is driven by the power from not within, but without. The car travels on a road that is embedded with electric cables. These cables activate an electronic circuit inside the car which drives the motor and the axle of the wheels, through electromagnetic interaction. This technology requires close vicinity of the automobile and the surface of the road. Moreover, the cost for laying down such a road amounts to more than a million dollars per mile, so the idea seems more as a phantasm than a reality-to-be-turned-true.  Fuel Cell Electric Vehicle: A fuel or a flow cell is a special type of chemical cell. The reactants of such a cell are constantly supplied from the exterior of the cell
  40. 40. Hybrid Cars and their Twofold Approach  During start-up and at ordinary speeds, the battery supplies electrical power to the motor that drives the wheels. While running downhill or during deceleration, the excess mechanical output from the motor, is supplied to a generator.