25106629 Role of Auto Sector in the Growth of Pak GDP

7/27/2019 25106629 Role of Auto Sector in the Growth of Pak GDP

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THE ROLE OF AUTOMOBILE SECTOR IN THE GROWTH OF PAKISTANS ECONOMY

PRESENTED BY

MUHAMMAD ATIQUE BILAL JAMIL

28S-608 28S-601

PRESENTED TO

MR. GHULAM MUSTAFA

SAN INSTITUTE OF MANAGEMENT SCIENCESAFFILIATED WITH

RIPHAH INTERNATIONAL UNIVERSITY ISLAMABAD (AUG, 2009)


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ACCEPTANCE LETTER

It is to certify that I have gone through this project submitted by;

MUHAMMAD ATIQUE Bilal Jamil

28S-608 28S-601

In my judgment, this project is up to the standards.

_________________________ Subject Coordinator

SAN INSTITUTE OF MANAGEMENT SCIENCESAFFILIATED WITH

RIPHAH INTERNATIONAL UNIVERSITY ISLAMABAD (AUG, 2009)


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TABLE OF CONTENTS

1. Introduction 1.1 1.2 1.3 1.4 1.5 1.6 A Review OF Pakistans Economy.......... Statement............................... Objectives of the Study.................Significance of the Study............... Research Questions...................... Procedure of the Study..................

1 6 13 13 13 14 14 15 15 16 16 24 31 36 38 38 38 39 39

2. Review of Related Literature 2.1 2.2 2.3 2.4 2.5 2.6 Automobile Segments in Pakistan......... Automobile Manufacturers in Pakistan.... History of Pakistans Auto Sector....... Analysis of Automobile Sector........... SWOT Analysis of Pakistans Auto Sector. Pakistans Auto Sector at present.......

3. Data Collection and Analysis 3.1 Procedure of Data Collection.... ....... 3.1.1 3.2 3.3 Research Variables...............

Population.............................. Sampling................................


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3.4

Data Analysis...........................

39 40 41 42 46 47 48-49 50 51 40 55 56 59

4. Analysis and Interpretation of Data 4.1 4.2 Graphical Presentation.................. Frequencies............................. 4.2.1 4.2.2 4.2.3 4.3 4.4 Frequency Tables................. Pie Charts....................... Histogram........................

Descriptive Analysis.................... Regression Analysis.....................

5. SUMMARY, CONCLUSION AND RECOMMENDATIONS 5.1 5.2 5.4 Summary................................. Conclusion.............................. Recommendations.........................

REFERENCES APPENDIX


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CHAPTER I INTRODUCTION

Auto market is one of the largest segments in world trade. cutting Changing costs models, and improving user fuel efficiency, without

enhancing

comfort

compromising quality are the most important challenges of the auto industry in afast global world. The automotive industry rightly prides itself on being recognized as the mother of all industries. In its folds it carries many different kinds of vehicles to provide mobility to people and goods. While they may appear to be simple machines, their design and manufacturing, have much deeper roots inall the known technologies. of In-depth mechanical, knowledge and

skillful

application

electrical,

electronics, chemical and a host of other technologies culminate in achievementand improvement of the

manufacturing base of a country, by focusing on a single product the automobile.This then provides an opportunity to produce a large number of goods and services for

consumption of the entire international community. Use of the word mother for automotive industry is therefore the most appropriate description to define the nature and

importance of the industry.

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sector. The world is witnessing the real GDP of Pakistan maintaining a steady growth at one of the fastest rates in the history of the Country and among the highest in the economies of the world. The international trade is increasing owingto revolutionary changes in tariff

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structures, domestic consumer

better

international both The at the

relations industrial exchange

and as

growing well as are

demands, levels.

foreign

reserves

maintained at a respectable level. Major investments are underway sector, in Engineering and & Automobile manufacturing infrastructure, developing

ports

communication

telecommunication,

information

technologies,

newer sources of energy and power generation to meet the increasing demands. Thecurrent pace of development in Pakistan is no miracle but is the result of a dedicated and continuous effort by the Government for of Pakistan

through

implementing

policies

deregulation,

liberalization and privatization.

Pakistans automotive industry is continuing in a slump which began to in the previous financial published year and

according

BMIs

recently

Pakistan

Automotives Report, the industrys performance this year will be even worse. In FY08, which ended in June 2008, total vehicle sales fell by 6.2%. The down turn has been carried over into FY09, with sales for the first half of the year (July to December 2008) down by 48%year-on-year (y-o-y) to 52,927 units for cars and li


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112,000 units in FY09. We expect the total market to contract by over32%, with the worst damage done in the car and bus segments, which we forecast to fall by 45% each. Measures are being considered to arrest the

industrys Committee domestic

decline. (ECC) is

Pakistans to consider has

Economic a tax cut

Co-ordination of 10% by for the

carmakers,

which

been

suggested

Ministry of Industries and Production. However, the plan is not without its opposition, as the Federal Board of Revenue is reportedly against supporting individ

ual

sectors as this would prompt other industries to seek help. Moreover, with justfive carmakers producing

locally, the automotive industry is relatively small. On the other hand, the industry is also largely self-

sufficient as the majority of its output is sold within Pakistan; this reduces the countrys reliance on imports and raises issues such as the protection of localjobs and the industrys contribution to the overall economy.

The poor state of the industry is reflected in BMIs Business Environment Rating f

or the automotive industry in Asia Pacific, where Pakistan is in last place on ascore of 42.4 out of a possible 100. The market is held back by low productiongrowth potential and an average rating for sales growth. However, as a signatoryto the Trade Related Intellectual Property Rights Agreement

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(TRIPS)

under

the

auspices

of

the

World

Trade

Organization, the countrys regulatory environment scores well. A number of free trade agreements also contribute to this criterion, although forming FTAs with non-Asian countries would improve this rating further. Despite low marks for bureaucracy and corruption, the market does

score well for its long-term economic risk and policy continuity.

With

just

a

handful

of

manufacturers, narrow.

Pakistans car

competitive

landscape

remains

Japanese

manufacturers control most of the countrys passenger car production and sales. Figures for FY08 show that Suzukibrand models represented 62% of total Pakistani passenger car production and 51.7% of sales. Toyota is gaining, however, as its Corolla became the countrys best-selling model in the first half of FY09.

1.1 A short review of Pakistans economyThe economy of Pakistan is the 26th largest economy in the world in terms of purchasing power, and the 47th largest in absolute dollar terms. Pakistan

s economy

mainly encompasses textiles, chemicals, food processing, agriculture and other industries. In 2005, it was the third fastest growing economy in Asia.

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The economy has suffered in the past from decades of internal political disputes, a fast growing population, mixed levels of foreign investment, and a costly, ongoing confrontation approved investment with neighboring policies, access India. However, by IMF-

government and

bolstered to global

foreign have

renewed

markets,

generated solid macroeconomic recovery the last decade. Substantial macroeconomic reforms since 2000, most

notably at privatizing the banking sector have helped the economy.

GDP growth, spurred by gains in the industrial and service sectors, remained inthe 6-8% range in 2004-06. Due to Economic Reforms of the Year 2000 by the Musharraf government. In 2005, the World Bank named Pakistan the top reformer in itsregion and in the top 10 reformers globally. Pakistan

s then Prime Minister Shau

kat Aziz

stated Pakistan grew at a rate of 8.4% making it the 2nd Fastest Growing Economyin the World, after China, in the same year. However, this assertion is disputed by figures from other authorized sources.

Inflation remains the biggest threat to the economy, jumping to more than 9% in2005 before easing to 7.9% in 2006. prices 25.0%. In 2008, following in the surge has in global as petrol high as

inflation The

Pakistan bank is

reached

central

pursuing

tighter

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policy while trying to preserve growth. Foreign exchange reserves are bolsteredby steady worker remittances, but a growing current account deficit - driven bya widening trade gap as import growth outstrips export expansion could draw downreserves and dampen GDP growth in the medium term.

Since

the

beginning

of

2008,

Pakistan

s

economic

outlook has taken stagnation. Security concerns stemming from the nation

s rolein the War on Terror have created great instability and led to a decline in FDIfrom a height of approximately $8bn to $3.5bn for the current fiscal massive Combined year. Concurrently, flight the insurgency Pakistan to has the the forced Gulf. dual

capital with

from

high

global

commodity

prices,

impact has shocked Pakistan

s economy, with gaping trade deficits, high inflation and a crash in the value of the Rupee, which has fallen from 60-1 USD to over80-1 USD in a few months.

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Economic Comparison of Pakistan 1999 ~ 2008

Indicator GDP GDP Purchasing Power

1999 $ 75 billion

2007 $ 160 billion

2008 $ 170 billion

$ 270 billion Parity (PPP) GDP per Capita Income Revenue collection Foreign reserves Exports Textile Exports $ 450 Rs. 305 billion $ 700 million $ 7.5 billion $5.5 billion

$ 475.5 billion

$ 504.3 billion

$ 925 Rs. 708 billion $ 16.4 billion $ 18.5 billion $ 11.2 billion $ 75 billionat 14,000 points $ 8.4 billion 26% of GDP 24% 53% Rs. 520 billion

$1085 Rs. 990 billion $ 10 billion $ 19.22 billion $ 56 billion at 9,000 points$ 5.19 billion Rs. 549.7 billion

KHI stock exchange (100- $ 5 billion at 700 Index) Foreign Direct Investment Debt servicing Poverty level Literacy rate Development programs points $ 1 billion65% of GDP 34% 45% Rs. 80 billion

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Major economic sectorsPakistans major economic sectors are as follows;

1. Agriculture 2. Industry Automobile Industry CNG Industry Cement Industry Industry Textile Industry

3. Service Communication Aviation Wholesale and retail trade Finance ance Ownership and dwellings Public administration and defense Social, community and personal services Electricity

ExportsPakistan

s exports increased 100% from $7.5 billion in 1999 to stand at $18 billion in the financial year 2007-2008. Pakistan exports rice, furniture, cotton,

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fiber, cement, tiles, marble, textiles, clothing, leather goods, balls), sportsgoods (renowned for footballs/soccer appliances,

surgical

instruments,

electrical

software, carpets, and rugs, ice cream, livestock meat, chicken, powdered milk,wheat, seafood (especially food and items, other tanks,

shrimp/prawns), Pakistani

vegetables, Suzuki

processed (to

assembled defense

Afghanistan

countries),

equipment

(submarines,

radars), salt, marble, onyx, engineering goods, and many other items. Pakistan now is being very well recognized for producing and exporting cements in Asia andMid-East.

ImportsPakistan s imports stood at $30.54 billion in the financial year 2006-2007, up by 8.22 percent from last year s largest products. imports import Other of $28.58billion. is Pakistan s and single

category imports

petroleum

petroleum machinery, computers,

include: trucks,

industrial

construction

machinery,

automobiles,

computer parts, medicines, pharmaceutical products, food items, civilian aircraft, defense equipment, iron, steel, toys, electronics, and other consumer items.

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Structure of Production

Share of Various Sectors in GDPSector Goods (1+2+3+4+5) 1. Agriculture 2. Mining 3. Manufacturing 4. Construction 5. Energy Distribution Services (6+7+8+9+10+11) 6. Transportation & Comm. 7.Trade 8. Finance & Insurance 9. Ownership of Dwellings 10. Public Admin. & Defense 11. Other Services 2000-01 2001-02 2002-03 2003-04 2004-05 48.2 25.1 1.3 15.92.4 3.4 51.8 11.7 18.1 3.1 3.2 6.3 9.4 47.3 24.4 1.4 16.1 2.4 3.0 52.7 11.5 18.0 3.6 3.2 6.5 9.9 47.1 24.2 1.5 16.4 2.4 2.5 52.9 11.5 18.2 3.3 3.2 6.7 10.0 47.4 23.3 1.5 17.6 2.1 2.9 52.6 11.4 18.5 3.3 3.1 6.5 9.9 47.6 23.1 1.4 18.3 2.0 2.7 52.4 11.1 19.1 3.7 2.9 6.0 9.6

Note: GDP is estimated at constant factor cost. Figures are in percentage. Source: Economic Survey of Pakistan 2005

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1.5 Research questionsI. What is the role of Auto sector in the growth of countrys economy? II. Why this sector is facing hurdles in its growth? III. How to remove those hurdles? IV.What should be the role of the Govt. in the growth of this sector?

1.6 Procedure of the studyThe population of the study was Automobile Industry of Pakistan. Data was gathered of last 14 years (1995 ~ 2008). After gathering the secondary data, we organized, analyzed results. and interpreted the data and concluded the

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CHAPTER 2 REVIEW OF RELATED LITERATURE

This related to

chapter the

deals

with

the

literature of

review It

Automobile

Industry

Pakistan.

includes past and present situations of automobile sector in the region. Literature review provides an excellent starting point for researchers to do research i

n a new way.

2.1 Automobile segments in PakistanIn Pakistan, there are following automobile segments:

Cars and Light Commercial Vehicles (LCVs) Two and Three Wheelers Tractors Trucks, Buses etc

The industry operates under franchise and technical cooperation agreements withJapanese, European and Korean manufacturers.

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2.2 Automobile manufacturers in Pakistan

Al-Ghazi Tractors Ltd. Adam Motors Ltd. Dewan Farooque Motors Ghandhara Industries Ghandhara Nissan Ghani Automobile Industries Hinopak Motors Honda Atlas Cars(Pak) Ltd. Atlas Honda Ltd Indus Motors Company Suzuki Nexus Automotive Pak Suzuki Motor

2.3 History of Pakistans auto sector

Beginning of auto sectorPakistan is basically an agrarian economy since its independence. In 1947, agriculture contributed more than 62% towards GDP whereas contribution of manufacturing

sector toward GDP was only 7%. Pakistan inherited only 5% of the large scale industrial facilities of British

India. At that time Pakistan hardly had any industrial

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base

and

was

without

any

institutional, basic

financial

or

energy

resources.

Besides,

infrastructural

facilities, technical skill and other pre-requisites for development automobilecapabilities were also lacking. plants for There were were any neither any

assembly

nor this

industrial the

available

sector.

However,

development of this industrial sector started soon after the independence. Peacein the country and development planning by government resulted in increased economic

growth that sequentially laid the foundation of industry.

First serious effort by government to develop the industry and engineering sector in particularly was

observed in 1950 when a six-year plan (First Development Plan) was drafted the the to guide government For auto the investment industry, in to

developing overcome

infrastructure. initial

difficulties,

government,

besides developing infrastructural facilities established the Pakistan Industria


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l Development Corporation (PIDC) in 1950. The main objective of PIDC was to playthe

pioneering role of establishing such industries which the private enterprise wasunable to undertake either because they were technologically complex, needed large capital or were less profitable. These steps results in growth of the industrial sector resulting 56.62 % growth of the manufacturing sector from 1949-1955.

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The first phase of automotive assembling in Pakistan started in 1950 with Bed Ford truck followed by Ford Prefect, Ford Cortina and Dodge Dart. The indigenized

parts in these vehicles did not exceed 20% with only exception of Bed Ford trucks with a deletion level of 80%. By the end of 70s practically all automobile

assembling in Pakistan ceased.

The 2nd phase of Automobile assembly started in 1983 with the introduction of FX800cc Suzuki Car. In 1989 Pak. Suzuki changed the Model of FX 800cc with Mehran800cc. Pak Suzuki thereafter In 1992 Introduced Khyber 1000cc and 1300cc Margalla but the indigenization levels from 1983 to 1995 were not significant (i.e. Mehran 30%, Khyber 20%, and Margalla, 15%).

In 1993, Indus Motor Company Ltd. Karachi introduced Toyota Corolla. Honda Atlascars (Pak) Ltd. Lahore

introduced Honda Civic having 1300cc engine capacity in 1994. Indus Motor, DewanFarooq Motors and Pak Suzuki introduced smaller Cars i.e. Cuore, Cultus and Santro of engine capacities 850cc, 1000cc respectively in 2000.

This

was

known

as

era

of

competitiveness.

Up

to

1995, the deletion cell of Ministry of Industries and Production deletion (MOIP)programs. was formulating industry and monitoring the

The

specific

deletion

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programs

were for

formulated cars,

to

specify

local

content and

requirements tractors etc.

motorcycles.

Buses,

trucks

The deletion policy finalized in 1996 has the following features:

Industry Specific Deletion program No roll back from achieved Deletion Levels Even handled Tariff Protection at all levels of

processing

The deletion levels were finalized by the sub-committees for cars, LCVs, by motorcycles and tractors of EDB etc., on the

constituted

indigenization

committee

basis of technology levels prevalent in the engineering industry program of Pakistan. books The were Industry published specific and deletion

(ISDP)

distributed

amongst the stakeholders, which resulted in a significant improvement in indigenization.

Period of progressive manufacturingPotentials products of industry new and high demand the of the

attracted

entrants

whereas

existing

players started producing in mass quantities. This mass production that started


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of Pakistan. The idea of progressive manufacturing was first mooted by the Ghandhara Industries and Mack Trucks. The idea was to start local manufacturing withsimple and non-functional parts and to add more and more complicated parts in small steps. According to the planning then done 100% local manufacturing was to be achieved in 7 - 10 years. Unfortunately, this period does not last long as theprojects undertaken proved to be over ambitious that eventually fail.

Clearly the concept of progressive manufacturing has not added much to technology, self-reliance or economy. For example, as against the targets set of manufacturing 100% of local contents in maximum 10 years actually

achieved deletion in 18 years is 45.78% for trucks & buses, 43.17% for trucks &buses engines, 16.50% for 4x4 jeeps units LCVs, and for zero percent for cars. Furthermore, cars, 4x4 no new

manufacturing and trucks

passenger were

vehicles, this

buses

established

under

concept, but still few new units for producing tractors, jeeps and specialized vehicle were established. New units established were Atlas Honda, Khawaja Autos,Rana

Tractors, Jaffar Industries, and Bela Engineers. A more market oriented and approach Vespa was observed this by Honda as

motorcycles

scooters

during

period,

they introduced light motorcycles for the first time in a

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market dominated by heavy motor bikes like BSA, Triumph and Lamberetta scooters.

Nationalization of IndustriesFollowing nationalization the of progressive industries manufacturing under Economic period, Reforms

order had a profound impact on automobile industry in Pakistan. In early 1972 under Martial Law Regulation, the Government took over the control of 32 industrial units, including eight automobile plants, under the officially appointed Boardof Industrial Management with the

Minister for Production as its Chairman. Out of the units taken over by the Government were included iron and

steel, heavy engineering, heavy chemicals, assembly and manufacturers of motor vehicles.

Initially, the management of these industries was taken over by the government,but in August 1973, the President Ordinance promulgated after which the the Economic Federal Reforms (Amendment) acquired

Government

majority ownership of shares of these industrial units. After nationalization, t

hese units were renamed, their functions Corporation corporation were (PACO) under redefined was the and in Pakistan 1973 as Automobile a holding of the

created

administrative

control

Federal Ministry of Production.

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Formation of PACOIn order to manage the automobile units and to

advise the Government (in developing policy guidelines for growth and development of auto industry), Pakistan Automobile Corporation (PACO) was formed in 1973 under the administrative control of the Federal Ministry of

Production. It was a major public industrial conglomerate of 15 companies including four joint ventures. For the first time in Pakistan emphasis was given to develop the nationalized units under took local manufacturing

facilities and the development of parts in an organized manner and the system ofstandardization, regulations and monitoring was established. This requires theindustry to assemble from Complete Knock Down (CKD) and then go on to manufacture components and to achieve a local content of 75% over a five year period. A number of small and large industrial unorganized units that were mostly functioning into a more in the

sector

were

canalized

formal

pattern of production management under the PACO control. The direction for achieving quality standards as laid

down by the "Principals" was also established. The MOI was entrusted the responsibility of allowing any waiver for non-performance, and was applicable if CBR also

concurred.

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Privatization of IndustriesThe policy of de-nationalizing public sector units was adopted once the change in government took place. Privatization brings in foreign companies. This resultsin a number of joint ventures. Due to these ventures, Pakistan auto industry enters into assembly/progressive manufacture of passenger cars, commercial vehicles and motorcycles. Once the new management of cars and

motorcycle assemblers took over the control they entered into joint ventures with foreign companies mostly

Japanese, for further development. Most important joint venture that took placewas of Atlas with Honda and Indus Motor with Toyota.

The

process

of

privatization

is

still

on

and

fortunately every government has adopted the policy of privatization and openingof the markets for foreign

investors. Although, process is on but still many object that this process is not crystal clear and has many short comings.

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2.4 Analysis of automobile sectorThe growth automobile the last sector four has or been five registering years along due to high the

for

country s

business

friendly

policies

with

lower

tariff rates, persistent growth in GDP, and per capita income. Globally the considered auto as the in mother of is all fast

industries,

industry

Pakistan

evolving as a robust industry. Some sub-sectors of this fast growing industry, like motorcycle production, have already achieved economies of scale.

The

tremendous

rise

in

automobile

production

has

resulted from increased domestic demand, giving a healthy impetus 150,000 to theindustrial output and generating over

direct

employment

opportunities

besides

contributing substantially in duties and tax revenues to the national exchequer.Since 2001-02, the automobile

market has grown by over 40 per cent per annum and if an average growth of 30 per cent is maintained during the coming years, the country s auto market will cro


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ss the milestone of 500,000 units by the year 2010. During the financial year 2005-06, the sale of locally assembly cars posted an impressive growth of 22 per cent, rising to 155,514 units as against 127,309 units during the

previous year. To ease the pressure on rising demand and

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to curb the evolving culture of premium on the factory price, some 40,000 vehicles were also imported during the said period.

The increase in demand for automobiles can be traced to rising income and levels, auto creation financing of by new job

opportunities

liberal

financial

institutions. As a result, on an average, some 13,000 vehicles are assembled andmarketed every month. The

country has also started importing vehicles. The result is a quantum jump in carregistrations, primarily due to bank leases. In the capital city of Islamabad alone, some 2000 vehicles are registered every month. While all this is leading the motorization of the country, it can t be ignored that this influx of new vehicles has made the existing road infrastructure insufficient, giving rise to theneed to improve and widen the national roads network. And yet, this will lead tothe creation of more jobs thereby accelerating the pace of economic activitiesin the country.

Meanwhile,

auto

financing

and

other

such

schemes

have given rise to lucrative consumer banking. Though the main objective of consumer financing is to solve some of the immediate or short-term problems of the customers, it is resulting, at the macro level, in giving a push to large-scale manufacturing, creating new jobs and 25


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positively impacting the GDP growth. When the government undertook restructuringof the economy, it was expected that bulk of excess liquidity available in themarket post 9/11 would go towards the development of the

corporate sector. However, this did not happen, while the banks they faced started a dilemma diverting of excess liquidity. towards Therefore, the more

their

funds

lucrative consumer financing.

One

hopes

that

the

cycle

of

rise

in

demand

and

supply in the auto sector would have a healthy effect on the national economy asa whole, ensuring continuity in its growth. It has already led to the growth ofa strong auto-parts manufacturing/ vending industry, which is not only meetingthe demand of the local assemblers in a sizeable number of auto-parts, but also

competing in the international market for a share in the global auto-parts market.

Pakistan Association of Automotive Parts Accessories Manufacturers (PAAPAM) wasformed in 1988 to represent and to provide technical and management cooperationto its members. PAAPAM, with its almost a decade old

history, has attained a level of an indispensable and extremely effective link between the policy-making

echelons at government and the whole entity of its member firms. The Associationachieved recognition form the 26


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Government represented

of in

the many

Pakistan Government

in and

1999 semi

and

today

is as

government

well as Private Institutions by its members. PAAPAM is the member of the Federalof Pakistan Chamber of Commerce & Industry (FPCCI). With a registered membership base of over top line tier of one over 278 1200 members and general has

manufacturers

base

companies,

PAAPAM

under its wings manufacturing companies making parts for Pakistan, Cars, Motorcycle, Tractors, Trucks and Buses assemblers. billion. Investments in place now exceed US$ 1.5

Buyer power

In Pakistan automobile market, the buyer power is limited. It is only effectivewith no powerful lobbying group. This has tended to lead the government to favorother side then consider their aspect on issues. The

recent changes in liberalization were made after a lot of protests by people andthat too after a period of 3 years of consisting paying almost premiums of 10%prior to

import liberalization. Now with more choice with models, premium affecting the buyers is limited to certain models out of which maximum premium is of Rs. 60,000is on

Corolla XLI. In our analysis the major reason for lack of buyer power is lack of

consumer groups in our country. As

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our country is still progressing, hopefully in the future with the development of consumer groups in the country will lead to similar formations in the automobile sector.

Supplier powerThe power of manufacturing companies is immense in our country. All companies have their CKD kits imported from abroad through their parent companies. This

situation offers little room for local suppliers. Another aspect which might have been useful to supplier is the deletion program. The government has not been able to implement it due to lobbying power of the manufacturing companies. As a result suppliers tend to toe the line of the manufacturers. This scenario is present in all

segments of the auto industry in Pakistan.

Factors stopping growth

Heavily reliance on imported Completely Knocked Down (CKD) Kits.

Ineffective

implementation

and

monitoring

of

the

deletion program has resulted in lesser deletion in the car industry as comparedto 84 per cent in Tractors and an average 50 per cent in Bus and Truck manufact

uring.

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Tariffs

of

35%

for

import

of

CKD

by

the

OEMs

and

commercial importers have eliminated the attraction for deletion. Lack of spareparts market for vendors as they are bound to sell parts to the assemblers only. Delays in inspection and approval of parts by the

parent company. A part developed locally has to be sent to Japan or Korea for approval. Small size of the market resulting in under capacity utilization. The vending industry, which comprises 400 units, is operating at just 30 per cent of its

capacity. Indifferent attitude of the assemblers i.e. a component developed forone assembler is not accepted by others.

Major policies after year 2005

1. Tariff Based Systems (TBS) 2. Auto Industry Development Program (AIDP)

July

1st

2006,

the

deletion

programs

for

the

Automotive Sector have been replaced by the Tariff Based System (TBS). The deletion programs have gradually been phased out under The TBS the is WTO the regimeoutcome to of become a long TRIMs drawn

compliant.


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consultative dialogue between all stakeholders including

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OEMs and Vendors, belonging to different sub-sectors of the Automobile Industry.

The TBS had been developed with the following overriding objectives;

Preservation & promotion of technologies that have been developed in the country

Protection to the present job structure in the auto sector

Promote job creation Protect the existing & planned investment by the OEMs & Vendors

Promote new investment Expand the consumer base to create economies of scale

The basic framework of Tariff Based System is as under;

Imports

in

CKD

condition adequate

would

be

allowed

only

to and

assemblers

having

assembly

facilities

registered as such by the concerned Federal Government Agency. Parts / components indigenized by June 2004 have been placed at higher rate of Customs Duty. Parts not indigenized would be allowed at CKD rate of Custom Duty.

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Introduction of Statutory Regulatory Order (SRO);

SRO 656 (I) / 2006 dated June 22. 2006 (For OEMs) SRO 693 (I) / 2006 dated July1. 2006 (For OEMs) SRO 655(1) / 2006 dated June 22, 2006 (For Vendors)

2.5 SWOT analysis of Pakistans auto sector Strengths

Demand for cars

In Pakistan context there are 9 cars in 1000 persons which is one of the lowestin the emerging economies which itself speaks of high potential of growth in theauto sector and more so in the car production. Rising per capita income with changing demographic distribution and an anticipated influx of 30 to 40 million young people in the economically active workforce in the next few years provides astimulus to the industry to expand and grow.

Resale of local assembled cars

Resale of locally assembled cars is better due to availability of spare parts and after sales services and warranty. Used imported cars have been selling below

their cost at the show rooms for the last six months but

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consumers are not inclined to buy because of their low re-sale value and problems in parts availability.

Quality of local cars

Initially when the import of cars was liberalized, the quality of local assembled cars was unsatisfactory. Therefore, the people of high-income level group started buying imported cars and the sales of the local assembled cars started decreasing. In that the situation, quality of local their

assemblers

started

enhancing

vehicles so we can say that the quality of local cars is becoming the strength of the auto industry.

Weaknesses

WTODeletion program

The

World

Trade for

Organization the

(WTO) of

has the

rejected deletion

Pakistan

s

request

extension

program, which enabled it to lay down the condition of the local content requirement (LCR). Under LCR, the

automobile and other engineering industry was required to use locally manufactured parts and accessories in terms of government s deletion policy. WTO s decision for not extending its deletion program / LCR condition has varied impact on Pakistan s vendor industry, automobile

assemblers, car users and the government as well.

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Input cost

In Pakistan as the inflation is increasing so as the input costs and for manufacturers it is becoming harder to produce at lower cost. Increasing cost of energyand its unreliable and inconsistent supply adds-up the cost of manufacturing that and by wastage the year of resources. auto It is

estimated

2012,

industry

consumption of electricity will cross 500 - 600 MW from around 250 - 300 MW, asof now.

Protection level

Before the TBS was introduced the auto industry was well protected by the government but now as the import of CKD and CBU is liberalized, the protection level to

industry by the government is decreased.

Lack of skilled manpower for modern machinery

In Pakistan conventional machines are not able to meet the precision manufacturing and the available labor is not familiar with modern technology it caused by lack of coordination and linkages with the Govt. / Semi Govt. Supporting Bodies and Technical Training Institutes.

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Scarcity of raw material especially steel

Through previous years, the world prices are rising and causing costly inputs and Pakistan has faced scarcity of iron and steel. Therefore, the manufacturers are

facing difficulties in producing cars with low prices.

Opportunities

Import German technology and skills EDB supply wanted network, vendor to build aPakistan-German opportunities to get to the to automotive Pakistani from

providing

automotive German

enterprises and

benefit

know-how

technology and

improve of

quality,

productivity, products.

developing

marketing

value-added

Foreign investment and setup production facilities

China (CNHDTCJ)

National one of

Heavy the

Duty

Truck heavy

Corporation duty truck

largest

manufacturers in China, has shown interest for investment in the automobile sector of Pakistan. The study is

required to attract players from Germany as well as from other countries to start business with the Pakistani

counterpart.


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2.6 Pakistans auto-sector at presentPakistan

s Auto Sector continues to under-perform as end-FY09 (ending June 30) approaches, but as BMI points out, some segments are showing signs of recovery.

Although passenger car sales for the first 10 months of the fiscal year are still significantly, lower than the same period in FY08. Sales for the last three months achieved month-on-month (m-o-m) growth. However, year-todate sales have been impacted by a particularly bad

December, when only 2689 cars were sold. In order to further support sales, theFederal Board of Revenue (FBR) has forwarded a proposal to the government recommending that it allows imports of cars over 10 years old. It is suggested that brands with local production facilities have a monopoly, as imports of used cars are restricted to those of three years old or under. It adds that this gives themanufacturers the opportunity to hike prices, which is adversely influencing themarket. There appears to be little advantage for the local manufacturers at present, however, as production remains almost 50% lower than the same period of FY08.

Given the poor prospects in the short term, Pakistan brings up the rear in BMI

sBusiness Environment Ratings for the Asia Pacific auto industry on 42.4 out ofa

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possible

100.

Low

production

growth

potential

and

an

average rating for sales growth hold the market back. However, as a signatory tothe Trade Related Intellectual Property Rights Agreement (TRIPS) under the auspices of the WTO, the country s regulatory environment scored

well. A number of free trade agreements also contribute to this criterion, although forming free trade agreements (FTAs) with non-Asian countries would improvethis rating further. Despite low marks for bureaucracy and

corruption, the market does score well for its long-term economic risk and policy continuity.

Japanese

manufacturers

still

control

most

of

Pakistan s passenger car production and sales. Figures for FY08 show that SuzukiMotor-brand models represented 62% of total passenger car production and 51.7%of sales. The Suzuki Mehran also won back its place as Pakistan s best-selling model after losing out to the Toyota Corolla in the previous financial year. TheCorolla struck back in the first 10 months of FY09, however, selling 20,626 units compared to 11,142 for the Mehran. Honda Motor, which ranks third for car sales, dominates the motorcycle segment with a market share of 70% in FY08, which rose to 72.5% for 10M FY09.

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CHAPTER 3 DATA COLLECTION & ANALYSIS

This

chapter

deals

with

the

methodology

and

procedures for the collection of data. This descriptive research aimed to find out the role of Auto Industry in the growth of Pakistans economy. For our research, we collected secondary data.

3.1 Procedure of secondary data collectionWe collected secondary data through internet

resources. We collected annual automobile manufacturing and annual GDP figures o

f last 14 years (1995 ~ 2008) from Pakistan Automotive Manufacturing Association(PAMA) & State Bank of Pakistans websites.

3.1.1 Research VariablesIn our research, we have defined two variables, one is dependent and the other one is independent.

1. Automobile Manufacturing Independent Variable 2. Gross Domestic Product Dependent Variable

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CHAPTER IV ANALYSIS AND INTERPRETATION OF DATA

This

chapter

is

concerned

with

the

analysis

and

interpretation of data. Presentation and analysis of data is the hub and heart of a research work. It needs immense care and precision from hard to interpret the and present the data used.

gathered

toils,

researcher

have

Analysis are performed through SPSS software and these analysis are presented intabular form in this chapter. Interpretation is also given below of each table.These analysis provide researchers with a clear picture of the effects of automobile sector on the growth of annual GDP of Pakistan in the last 14 years from 1995 ~ 2008.

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4.1 Graphical presentationGraphical presentation is a unique way to present your data. You need to selectthe appropriate graph type, which can present your data effectively. Here we have selected scatter graph to present our data.

8000000

6000000

GDP4000000 2000000

0

200000

400000

600000

800000

1000000

Manufacturing

Note: GDP figures are in Millions and Mfg. figures are in Lakhs.

The

resulting

scatter

plot

shows

that

the

relationship between variable is nonlinear. As you can see that in the start (1995 ~ 2002) there were ups & downs in GDP figures while manufacturing sector didntshow any considerable growth. But from 2002 to onward the relationship of boththe variables is showing tremendous growth. But in the end GDP is falling down while

manufacturing is still increasing.

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There

are

many

summary

measures

available

for

scale

variables. Some are as follows;

Measures of central tendencyIt is often useful to describe a series of

observations in a data parsimoniously, in a meaningful way, which would enable individuals to get an idea of or a feel for the basic characteristics of the data.There are three measures of central tendency: the mean, the median and the mode.

Measures of dispersionThese statistics measure the amount of variation or spread in the data. The three measurements of dispersion connected with the mean are the range, the varianceand the standard deviation.

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Our results are as follows;

Statistics Manufacturing N Mean Median Mode Std. Deviation Minimum Maximuma. Multiple modes exist. The smallest value is shown

GDP 14 0 4691643 4846500 1014000a 2048120 1014000 7667000

Valid Missing

14 0 390550.57 238181.50 57936a 283382.636 57936 888067

The Mean:

The

mean

or

the

average

is

the

measure

of

central tendency that offers the general picture of the data without unnecessarily inundating one with each of the observations in a data set. Annual average production of automobile is 3,90,550 and annual average GDP is

46,91,643.

The Median: The median is the central item in a group of observations when theyare arrayed in either an ascending or a descending order. The median of manufacturing is 2,38,181.50 and of GDP is 48,46,500.

The Mode: In some cases, a set of observations would not lend itself to a meaningful representation through either the mean or the median, but can be signifiedby the most frequently occurring phenomenon, which is called the

mode. The mode of manufacturing is 57,936a and of GDP is 10,14,000a.

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Standard

Deviation:

The

standard

deviation

offers

an

index of the spread of a distribution or the variability in the data. It can also be defined as how much value has been increased or decreased by the mean. It is a very commonly used measure of dispersion and is simply the square root of the variance. The standard deviation of manufacturing is 283382.63 and of GDP is 20,48,120.

Minimum & Maximum: The minimum production of automobile is 57,936 and the maximum is 8,88,067. Same as the

minimum value of GDP is 10,14,000 and the maximum is 76,67,000.

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4.2.1 Frequency tablesFrequency tables are shown below;

Manufacturing Frequency 1 1 1 1 1 1 1 1 1 1 1 1 1 1 14 Percent 7.1 7.1 7.1 7.1 7.1 7.1 7.1 7.1 7.1 7.1 7.1 7.1 7.1 7.1 100.0 Valid Percent 7.1 7.1 7.1 7.1 7.1 7.1 7.1 7.1 7.1 7.1 7.1 7.1 7.1 7.1 100.0 Cumulative Percent 7.1 14.3 21.4 28.6 35.7 42.9 50.0 57.1 64.3 71.4 78.6 85.7 92.9 100.0

Valid

57936 153388 153572 162964 163738 189720 196294 280069 456610 616360 656771 725754 766465 888067 Total

GDP Frequency 1 1 1 1 1 1 1 1 1 1 1 1 1 1 14 Percent 7.1 7.1 7.1 7.1 7.1 7.1 7.17.1 7.1 7.1 7.1 7.1 7.1 7.1 100.0 Valid Percent 7.1 7.1 7.1 7.1 7.1 7.1 7.1 7.17.1 7.1 7.1 7.1 7.1 7.1 100.0 Cumulative Percent 7.1 14.3 21.4 28.6 35.7 42.9 50.0 57.1 64.3 71.4 78.6 85.7 92.9 100.0

Valid

1014000 1982000 2550000 3224000 3660000 4260000 4846000 4847000 4963000 60000006381000 6920000 7369000 7667000 Total

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4.2.2 Pie chartsHere the frequencies have been presented in the form of Pie Chart;

Manufacturing57936 153388 153572 162964 163738 189720 196294 280069 456610 616360 656771 725754 766465 888067

GDP1014000 1982000 2550000 3224000 3660000 4260000 4846000 4847000 4963000 60000006381000 6920000 7369000 7667000

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4.2.3 HistogramHere data has been presented in the form of Histogram.

Manufacturing

6

Frequency

4

2

Mean =390550.57 Std. Dev. =283382.636 N =14

0

0

200000

400000

600000

800000

1000000

Manufacturing

The above showed histogram is normal but skewed to the right side. Though duringthis period there is some increase in manufacturing but growth of this sector is still declining. This is known as Decreasing Return.

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GDP

4

3

Frequency

2

1

Mean =4691642.86 Std. Dev. =2048119.648 N =14 0 2000000 4000000 6000000 8000000

GDP

The

above

showed

histogram

is

normal

and

equal

skewed to both the sides. There are two multi-collinear points, thats why the histogram didnt show a column. During this period of 14 years GDP growth is normal.

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4.3 Descriptive analysisDescriptive analysis of our data are as follows;

Descriptive Statistics N Manufacturing GDP Valid N (listwise) 14 14 14 Range 830131 6653000 Minimum 57936 1014000 Maximum 888067 7667000 Mean 390550.57 4691643Std. Deviation 283382.636 2048119.648 Variance 8E+010 4E+012

N represents the number of years, from which the data has been gathered. Range refers to the extreme values in a set of

observations. Manufacturing range figure is 8,30,131 and of GDP is 66,53,000. The minimum production of automobile is 57,936 and the maximum is 8,88,067. Same as the minimum value of GDP is 10,14,000 and the maximum is 76,67,000. The mean or Annual average production of automobile is 3,90,550 and annual average GDP is46,91,643. Standard Deviation is that, how much value has been increased or decreased with by the mean. The standard deviation of manufacturing is 283382.63 andof GDP is 20,48,120. Variance is the absolute change in the values by the mean.Manufacturing variance is 8E+010 and GDP variance is 4E+012.

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This seems a daunting task at first, but becomes easier with some familiarity with the model.

b1 represents the upper asymptote for GDP. Looking at the chart, even the largest sales values fall just short of 80, so that s a reasonable starting value. b2is the difference between the value of y when x=0 and the upper asymptote. A reasonable starting value is the minimum value of y minus b1. Looking at the chart,say that

s about 7-80=-73. b3 can be roughly initially estimated by the negative of the slope between two "well separated" points on the plot. Looking at the chart there are a few points about x=2, y=10, and about x=6, y=36. The slope between these points is74 20 = 13.5 thus a rough initial estimate for 62

b3 is -13.5.

Our results are as follows;

Parameter Estimates 95% Confidence Interval Lower Bound Upper Bound 3381906.8906001378.824 -73.000 -73.000 -13.500 -13.500

Parameter b1 b2 b3

Estimate 4691643 -73.000 -13.500

Std. Error 595068.1 .000 .000

The parameter estimates table summarizes the modelestimated value of each parameter. Parameters in a

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nonlinear regression model usually do not have the same interpretation as linearregression coefficients, and

often vary from model to model. b1 (Intercept) = 4691643 shows that, this levelof GDP does not depend on automobile manufacturing. If

automobile manufacturing will be zero in some period, then GDP standard will belike this. Std. Error = 595068.1 is small with respect to the value of the estimate. So it suggests that we can be confident in the estimate. Confidence interval shows the variation of the points from the line of interception. Lower bound shows that how much points are below the intercept line. Upper bound shows that how much points are over the intercept line. b2 (Coefficient possible Its of GDP)is the GDP difference when is there between is no and the

maximum

GDP

and

manufacturing. confidence

standard is equal

error to

zero of

interval

the

value

estimate, so there is no uncertainty. b3 (Exponent of GDP) controls the rate atwhich the maximum is reached, the so-called "rate constant". Like b2, there is no uncertainty in the estimate.

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ANOVA Source Regression Residual Uncorrected Total Corrected Total Sum of Squares 3.1E+014 5.5E+013 3.6E+014 5.5E+013

a

df 3 11 14 13

Mean Squares 1.0E+014 5.0E+012

Dependent variable: GDP a. R squared = 1 - (Residual Sum of Squares) / (Corrected Sum of Squares) = .000.

The ANOVA table provides a breakdown of the sum of squares, a measure of variability in the dependent

variable, for this model.

The

Regression

row

displays

information

about

the

variation accounted for by your model. The Residual row displays information about the

variation that is not accounted for by your model. The Uncorrected Total represents the entire variability in the dependent variable. Corrected Total is adjusted to only reflect variability about "average" GDP. df represents the degree of free

dom which means that the x number of values are free to vary. 1% means 1 of freedo.

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CHAPTER V SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.1 SummaryThe Automobile topic of the research sector was in The the role growth of of

Manufacturing

Pakistans economy. The major objectives of the research were to explore the majorreasons behind the downfall in this sector. Its significance is for Pakistans Govt. to adopt such policies that can contribute in the growth of this sector. In the second chapter, the researcher

reviewed the related literature regarding the automobile sector of Pakistan. Inthis connection different related terms have been defined and discussed in detail. In the third chapter data collection procedure has been

described, research variables, population and sample have been defined. In the forth chapter, the data was analyzed with the help of SPSS software, in terms offrequencies and percentages. Descriptive and regression analysis have been addedin the report with their explanation. In the fifth chapter, the conclusion wasdrawn and

recommendations were given on the basis of results and conclusion.

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5.2 ConclusionBased on the results of the study, the following conclusion is drawn:

In the light of our research we can say that the automobile sector is a very important element as far as the countrys economical growth is concerned. The local automobile industry has experienced impediment and

decline in its different segments as compared to earlier where the industry observed tremendous high growth in

terms of production and sales. After a significant growth spurt in 2002-2006, the auto sector in Pakistan is

feeling the pain of economic slow-down. The industry is continuing financial inyear. a slump Pakistan which is began an in the previous for

emerging

market

automobiles and automotive parts offers immense business and investment opportunities. The total contribution of

Auto industry to GDP in 2007 was 2.8%. Automobile grew from 2001-2007, fixed a t

he industry of and the half government million of

Pakistan

target

over

units

production by the year 2011-12 that now seems out of reach.

The most recent statistical data issued by Pakistan Automotive arrival of Manufa

cturers the imported Association vehicles explains rising that the

and

interest

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rates situation has decelerated the over manufacturing all sales figures of theautomobile industry which is considered as a large scale-manufacturing sector of

economy. The vast import of used cars has affected demand of locally manufactured automobiles. The only way forward for the assemblers is either by expansion intheir

production capacity along with brand extension or through inclusion of updated and better quality vehicles in their trading portfolio. However in todays fast globalizing world changing models, improving fuel efficiency, cutting costs and enhancing user comfort without compromising on quality industry. are the most important challenges trends, of the the auto

Following

international

industry in Pakistan is also quickly evolving and may soon begin materialize thedream of achieving economies of scale.

On the contrary the Pakistani auto market has grown up around 30 percent in thelast 10 years. Almost all major automobile units in Pakistan either are runningon double shifts or planning to go into double shifts to meet the growing demand. This phenomenal growth in demand is amazing especially in the face of increase

d financial charges by the that leasing over 70 or bank financing. of the It maybe

mentioned

percent

cars

enrooted

either through leasing or bank financing in Pakistan.

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However, Government of Pakistan had undertaken two major initiatives in the formof National Trade Corridor Improvement Program (NTCIP) and Auto Industry Development Program (AIDP) for the development of the automotive

industry in Pakistan. Engineering Development Board (EDB) is actively implementing the AIDP to increase the GDP contribution engineering of is the a automotiveforce US$ 3.6 sector. of Automotive scale to the in

driving

large

manufacturing, national

contributing and

billion 192,000

economy

engaging

over

people

direct employment.

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5.3 RecommendationsFrom feels the conclusion to give of the the study the researcher and

obliged

following

suggestions

recommendations.

A

consistent

policy

should

be

declared

by

the

Government every 7-10 years in order to make the local manufacturer more focusedand more certain. The current deletion policy should be maintained and officially announced to lessen the uncertainty created by the WTO agreement. The duty onparts should be increased from 35 percent to 45 per cent to create a gap between CKD which is also 35 per cent. Deletion level should be increased specially ofhigh tech and major engineering parts. Market expansion measures should be taken which will definitely benefit the industry, government and general public in terms of employment and price. Volume of production should be increased in orderto achieve the economies of scale. Localization should be increased and investments should be made to increase localization. Financing scheme in options such as

leasing and car finance

collaboration

with

banks

and

financial

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institutions should be extended on a wider basis so as to increase the purchasing capacity of the buyers. The car manufacturers should also encourage the use ofCNG as an alternative to fuel in order to stimulate the demand of the cars despite the rise in fuel prices. The government should also keep a close watch on new entrants so as to prevent Foreign Firms from dumping there vehicles to the Pakistan market.

In

short,

Pakistan

is

geographically

an

ideally

located region for the foreign manufacturers to invest in this market, aiming i.e. regard, to supply Middle the to East, Govt. of the domestic and and CIS

regional states.

markets In this

African

Pakistan

should

formulate conducive and investment friendly policies for foreign investors to and it will joint Govt. also encourage with define towards local their such the

manufacturers foreign policies

implement The

ventures should

counterparts. which can

efficiently

contribute

economical growth of the country.

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REFERENCES

Economy

of

Pakistan

(2009) the

Retrieved

July,

2009

from of

http://Wikipedia, Pakistan

free

encyclopedia/Economy

History

of

Automobile

Industry

in

Pakistan

Retrieved

July, 2009 from http://PakWheels.com

Automotive Report

Market Q3

Research 2009

Reports

-

Pakistan 2009

Autos from

Retrieved

July,

http://just-auto.com


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PAMA - Pakistan Automotive Manufacturers Association / Production & Sales.mht Retrieved July, 2009

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APPENDIX Annual Automobile Mfg. & GDP Figures

Automobile Mfg. Sr. No Year (Ind-Var)

GDP (Rs) (Dep-Var)

1 2 3 4 5 6 7 8 9 10 11 12 13 14

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

57,936 1,62,964 1,53,572 1,63,738 1,53,388 1,89,720 1,96,294 2,80,069 4,56,610 6,16,360 7,66,465 7,25,754 8,88,067 6,56,771

49,63,000 48,47,000 10,14,000 25,50,000 36,60,000 42,60,000 19,82,000 32,24,00048,46,000 73,69,000 76,67,000 69,20,000 63,81,000 60,00,000

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Documents

25106629 Role of Auto Sector in the Growth of Pak GDP