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This report comes. under the subject of Analysis of Pakistani Industry

Text of Pakistan Automobile Industry

ANALYSIS OF PAKISTANI INDUSTRY REPORT

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LETTER OF TRANSMITTAL

June 03, 2008 Mr. Zeeshan Ali Teacher, Analysis of Pakistani Industry Bahria University Karachi. Sir: We herewith present our Term Report authorized by you as a requirement for this course. In this report, we have tried to provide updated information and SWOT analysis of Automobile Industry. We hope we have covered all that was required for the report. If there be any clarification demanded, we would appreciate a call from you to our group members. Sincerely, Bilal Razzak Maaz Khalid Muhammad Zain

BAHRIA UNIVERSITY KARACHI

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ACKNOWLEDGEMENTIn the name of Allah, the most beneficent and merciful who gave us strength and knowledge to complete this report. This report is a part of our course Analysis of Pakistani Industry. This has proved to be a great experience. This report is a combine effort of Bilal Razzak, Maaz Khalid and Muhammad Zain. We would like to express our gratitude to our subject teacher Mr. Zeeshan Ali; who gave us this opportunity to fulfill this report. We would also especially like to thank Mr. Engr. Muhammad Atiq-ur-Rehman Technical Analyst in PAMA and our colleagues who participated in a focus group session to make our work better. They gave us many helpful comments which helped us a lot in preparing our report.

BAHRIA UNIVERSITY KARACHI

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OVERVIEWAuto market is one of the largest segments in world trade. Changing models, improving fuel efficiency, cutting costs and enhancing user comfort without compromising quality are the most important challenges of the auto industry in a fast globalizing world. 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 FX 800 CC Suzuki Car. In 1989 Pak. Suzuki changed the Model of FX 800 CC with Mehran 800CC. Pak Suzuki thereafter in 1992 introduced Khyber 1000 CC and 1300 CC Margalla but the indigenization levels from 1983 to 1995 were not significant (i.e. Mehran 30%, Khyber 20%, and Margalla, 15%). In 1993, Indus Motors Company Ltd., Karachi introduced Toyota Corolla. Honda Atlas cars (Pak) Ltd Lahore in 1994 introduced Honda Civic having 1300CC engine capacity. Indus Motors, Dewan Farooq Motors and Pak Suzuki introduced smaller Cars i.e. Cuore, Cultus and Santro of engine capacities 850 cc, 1000 cc respectively in 2000. This was known as era of competitiveness. Up to 1995, the deletion cell of MOI&P was formulating and monitoring the deletion programs. The industry specific deletion programs were formulated to specify local content requirements for cars, motorcycles, Buses and Trucks Tractors etc. 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, Motorcycles and tractors etc., constituted by indigenization committee of EDB on the basis of technology levels prevalent in the engineering industry of Pakistan. The Industry specific deletion program (ISDP) books were published and distributed amongst the stakeholders, which resulted in a significant improvement in indigenization.

BAHRIA UNIVERSITY KARACHI

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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 WTO regime to become TRIMs compliant. The TBS is the outcome of a long drawn consultative dialogue between all stakeholders including OEMs and Vendors, belonging to different sub-sectors of the Automobile Industry. The TBS has 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: 1. Imports in CKD condition would be allowed only to assemblers having adequate assembly facilities and registered as such by the concerned Federal Government Agency. 2. Parts/ components indigenized by June 2004 have been placed at higher rate of Customs Duty. 3. Parts not indigenized would be allowed at CKD rate of Custom Duty. Introduction of Statutory Regulatory Order (SRO): 1. SRO 656 (I) / 2006 dated June 22, 2006 (For OEMs) 2. SRO 693 (I) / 2006 dated July 1, 2006 (For OEMs) 3. SRO 655(I) / 2006 dated June 22, 2006 (For Vendors) For the purpose to handle the switching from ISDP to TBS and to ensure stable policies the consultations on the development of AIDP kicked off from the 8th March, 2006 Workshop at Islamabad by clearly defining the objectives at a time when the industry was switching over from the deletion programs to a competitive tariff BAHRIA UNIVERSITY KARACHI 4

ANALYSIS OF PAKISTANI INDUSTRY REPORTbased system. There was realization that the transition phase may affect the rapid growth and sustainable development of auto industry. A comprehensive development program with pre-announced tariffs to provide predictable and stable environment was therefore much needed and the finalization and approval of AIDP by the government was held on 13th November, 2007

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Policy Wise Growth of Auto Sector (PC + LCV):

More than 30 policy changes Taxi

Source: PAMA

BAHRIA UNIVERSITY KARACHI

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The automobile industry in Pakistan can be broadly categorized into following segments: Cars and Light Commercial Vehicles (LCVs). Two and Three Wheelers. Tractors. Trucks and Buses. Vendor Industry.

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

Current Investment, Contribution to GDP and Revenue to GOP:Description Total Investment Total Contribution to GDP Total Revenue to GOP Source: PAMA 2007-2008 Rs. 100 Billion 3.5% 10%

In 2007-2008 total investment in auto sector is about Rs. 100 Billion. In 2007-2008 total contribution of large scale manufacturing is 15% out of which auto sector contributes 3.5% to GDP. In 2007-2008 the contribution of revenue to Government of Pakistan by auto sector in the form of taxes is recorded 10% which is approximately Rs. 65 billion.

BAHRIA UNIVERSITY KARACHI

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Installed Capacity of Cars and Light Commercial Vehicles (LCVs):Capacity unit/annumPak Suzuki Motor Co. Ltd, Karachi Public Limited Company with 72.82% shares and management held by Suzuki Motor Corporation, Japan. Indus Motor Co. Ltd, Karachi Joint venture between Habib Group, Pakistan, Toyota Tsusho Corporation, Japan (Toyota and Cuore Honda Atlas Cars (Pak) Ltd, Lahore Joint venture between Atlas Group Pakistan and Honda Motor Co. Japan. Ghandhara Nissan Ltd Technical cooperation agreement with Nissan Motors, Japan. Dewan Farooq Motors Ltd Technical cooperation agreement with Hyundai Corporation, South Korea.

150,000

50,000 20,000 6,000 25,000 251,000

Source: PAMA (Updated to FY 2007-2008) . The automobile industry of Pakistan has travelled a long road to get to where it is now. The ups and downs, the shifts and turns have buffeted it many a times, but it displayed a resilience that had enabled it to counter adversities that it had come to face with and showed massive growth till 2006 but after that government introduced liberalized import policies TBS in replacement of ISDP which led Auto industry to stagnant growth.

BAHRIA UNIVERSITY KARACHI

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PRESENT SITUATION OF CAR INDUSTRY:Locally produced cars have taken an unexpected drastic downturn to the extent of frustrating all future growth prospects and projections. According to the current figures, in due comparison with the figures of last year for September to December period, the sales of cars has gone down by 15 percent. As a result the production has also gone down culminating with its impact on supply schedule; both import and local. This downturn has come at a crucial time as most of the manufacturing had just increased their investment in the expansion projects and vending industry had made equally huge investment to complement the capacity expansion exercise. The local vendors have now to face the curtailed orders, which may most hit the smaller ones with closures. All this obviously has also adversely impacted the government revenues in substantial terms. The government has suffered a revenue loss of Rs. One billion (9%) when September to December data is compared with last year. In the budget 2007-08, government announced a withholding @ 5 percent on purchase of cars which was reduced to 2.5 percent and imposed from 1st September 2007. The intension was obviously to enhance government revenue. The current situation however, has proved a reversal in collection of the revenue. Last year, the ECC approved the five years p

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