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Automobile Industry’s Impact on Pakistan’s Economy SUFIA HUMAYUN KHAN 16839 MICRO & MANAGERIAL ECONOMICS TERM REPORT PRESENTED TO: SIR NABEEL LATIF

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Automobile Industrys Impact on Pakistans Economy

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TABLE OF CONTENT:Introduction....Page 2History of the Automobile Industry..Page2-Page3Impact on Pakistans economy....Page4-Page5Contribution to GDP....Page5-Page6Statistics 2015...Page6-Page7Statistics 2016...Page7Import of Used Cars.....Page7-Page9Auto Development Policy (2016-21)......Page9-Page11SWOT...Page12Tax Collection....Page12Recommendations..Page13Bibliography...Page14

INTRODUCTION:The automobile industry often called the mother of all industries; has always been the backbone of any economy. The automotive industry has acquired the status of a key sector of the economy for every major country in the world. Countries like Japan, Germany, China, Korea, Thailand, Indonesia, India, Malaysia, Brazil and the USA ensure one way or the other that their automobile industry remains in production and continues to provide jobs in assembly & parts manufacturing activities. The Auto sector makes use of practically all engineering technologies, thus giving a chance to different fields to grow with it.The rapid growth in our economy during the last few years has stimulated the manufacturing growth and because of this reason the auto industry has performed better than the other sectors in production and sales. Pakistan Auto Industry has the potential to become a global choice for outsourcing, off shoring and can be a part of the global supply chain. According to SBP report 2014; Pakistan ranked 34 in Global ranking of Automobile producing countries in 2013 (for passenger cars), As per Organisation Internationale des Constructeurs dAutomobiles (OICA) there was a 48% increase in the production of cars in 2015 as compared to 2014.The industry adopted the Tariff Based System (TBS), after elimination of Deletion Program, during the year 2006 to encourage local vendor industry and new players in the Auto Industry.This report focuses on the impact of the automobile industry on the Economy of Pakistan. How the auto industry has contributed to Pakistans economy throughout the years, as well as ways in which it has potential to grow.HISTORY OF THE AUTOMOBILE INDUSTRYA brief over view of the Automobile Industry is as follows:YEARCOMPANY

1953Pakistan produced its first vehicle in 1953 at General Motors in Karachi.GM assembled Bedford trucks and later assembled buses. In 1972 the company was nationalized and renamed National Motors Ltd. And then again in 1999 it was renamed to Ghandhara Industries Limited

In 60sIn Mid 60s NayaDaur Motors established its plant to assemble Jeep (4X4)(It was Originally Kandawala Industries renamed NayaDaur after nationalization of industries)

1964Millat Tractors Limited (MTL) was established in 1964 to introduce and market Massey Ferguson (MF) Tractors in Pakistan. An assembly plant was set up in 1967 to assemble tractors

1976In 1976, under the umbrella of Dawood Group of Companies, Dawood Yamaha Limited (DYL) was formed as a joint venture with Yamaha Motor Company (YMC), Japan.

1983Pak Suzuki motors was founded in 1983

1983Al-Ghazi tractors Ltd started their operations in September of 1983.

1986Hino Motors Japan and Toyota Tsusho Corporation in collaboration with Al-Futtaim Group of UAE and Pakistan Automobile Corporation (PACO) formed Hinopak Motors Limited in 1986

1988Atlas Honda Limited (AHL) .A joint venture between the Atlas Group and Honda Motor Co. Ltd., Japan was created by the merger of Panjdarya Limited and Atlas Autos Ltd. in 1988.

1993Indus Motor Company(IMC) entered into business in 1993; IMC is a joint venture between the House of Habib, Toyota Motor Corporation, Japan (TMC), and Toyota Tsusho Corporation, Japan (TTC)

1994Honda started its operations in 1994; Honda Atlas Cars Pakistan Limited is a joint venture between Honda Motor Company Limited Japan, and the Atlas Group of Companies, Pakistan.

2012New Entrant Al-Haj Faw Motors (Pvt) Ltd. started their operations in 2012

IMPACT ON PAKISTANS ECONOMYThe automotive industry is one of the oldest and most lucrative industries in Pakistan. It has been an active and growing field, after oil and petroleum; the automobile industry is the second largest Tax payer. The industry has significant effects on petroleum, steel and employment. Currently there are 3,200 automotive manufacturing plants with an investment of Rs. 92 billion, producing annually 1.8 million motorcycles and 200,000 vehicles. Its contribution to the national exchequer is nearly 50 billion, approximately 3% of the GDP. The sector, as a whole, provides employment to approximately 3.5 million people and plays an important role in promoting the growth of the vendor industry. Currently the average capacity utilization of the car industry remains at 47%. Its contribution to the governments revenue is around Rs. 7.5 billion.The automobile industry has also strengthened many associated industries / allied industries. The most prominent allied industries are as follows.I. Lubricants IndustriesII. Air condition III. Foam IndustriesIV. Paint IndustriesV. Sheet Metal parts manufacturesEtc.Pakistan is part of an elite group of 40 Automobile producing countries in the world. Uniquely, a large number of Global brands are being locally produced in all 5 sub-sectors namely Passenger Cars, Light Commercial Vehicles, Motorcycles, Trucks, Buses and Tractors.The Pakistan Automobile Industry is not only one of the top 5 contributors to Government tax revenues. It is a highly documented industry that pays 32% of its profits as corporate tax. And, it must be noted that around 32% of cost of the vehicle is paid to the Government in the form of various taxes, making auto sector one of the most heavily taxed industry in the country which directly/indirectly employs almost 3 million skilled workers, technicians, engineers & management professionals.Currently, four of the top 10 global auto assemblers are producing cars in Pakistan, utilizing up to 70pc local parts. The sector is supported by around 3,000 auto parts manufacturers (APMs) providing three million direct and indirect jobs.

Figure 1

Pakistan exports CBUs of LCVs and Cars to Sri Lanka, Bangladesh, Iraq and some African countries in small quantities. However, unrecorded exports of Cars, Motorcycles and Tractors are being done in large numbers to Afghanistan. Two-Three wheelers have also made inroads in African and South Asian Countries. Unfortunately, accurate CBU Export figures are not available.The demand for automobiles in Pakistan is increasing, and due to the increase in car financing schemes, car loans and automobile lease plans from almost every financial institution, its now easier to purchase and own an automobile. Pakistan has the 6th largest population in the world, ( with a young population of 180 million people) the demand for automobiles has a huge potential to rise in the coming years, especially given the increasing infrastructure and development taking place in the major cities of the country, making owning a car a necessity in this day and age.

CONTRIBUTION TO GDP IN YEAR 2015As per State Bank of Pakistans Annual Report 2014-2015 (State of the Economy),The automobile industry falls under Large scale manufacturing (LSM) After declining for the two consecutive years, the auto sector recorded a strong and broad-based recovery in FY15 ,please see figure 2:

Figure 2One of the factors in the improvement of GDP was the steps taken by the government; the government reduced the sales tax on tractors from 17 percent to 10 percent; and removed 10 percent excise duty on more than 1800cc cars. Furthermore, Punjab government introduced Apna Rozgar Scheme that led to a surge in demand for Suzuki Bolan and Suzuki Ravi.The contribution to GDP can be analyzed through the below table obtained from the SBP report (fig 3):

Figure 3As per the SBP annual report, the Industry sector contributed 20.3% to the GDP in 2015.In which the share of LSM was 10.6%. As per The Financial Daily newspaper the contribution of auto industry to GDP was 2.8 percent only in 2011-12. In 2015 as per the article published in Carmudi Pakistan on August 12, 2015; the contribution of the auto sector was approximately 3% of the GDP.

2015 -STATISTICS OF THE MAJOR PLAYERS IN THE AUTO INDUSTRYPak Suzuki Motors Limited, lead in terms of car sales depicting a substantial growth of 75.8% YoY (comparing year 2014-2015)Indus Motors posted a growth of 18.7% (YoY) (comparing year 2014-2015) which can be attributed to a rise in corolla sales.Honda Atlas Car sales grew by 49.0% (YoY) (comparing year 2014-2015)Source PAMAAs per State Bank of Pakistans Annual report 2014-2015, with in the passenger car segment there was a high demand for the new Toyota Corolla Model, that can be seen from the below chart(fig 4):

Figure 4

As per PAMA, from the period of July 2014-June 2015, the total trucks produced were 4039 and sold were 4111.In case of buses the units produces were 575 and sold were 569 .The major players of Trucks and buses are Hino, Master, Nissan and ISUZU.In the 3-Wheel category: Sazgarss 3 wheeler production was 13713 and sold 13991; Qingqi produced 29252 units and sold 29230 units.

2016 - STATISTICS OF THE MAJOR PLAYERS IN THE AUTO INDUSTRY:Car sales posted 53 percent growth to 89,824 units during the first half of the current fiscal year According to Pakistan Automotive Manufacturers Association (PAMA) data the production of locally-assembled cars rose by 48pc to 92,514 units in July-Dec 2015-16 The sales of Suzuki Bolan jumped 192pc to 19,516 units thanks to Punjab Rozgar Scheme Suzuki WagonR registered 138pc increase to 4,065 units. Sales of Suzuki Mehran jumped by 42pc to 18,017 units Suzuki Cultus sales rose 20pc to 7,958 units In 1,300cc and above category Toyota Corolla remained in high demand with sales rising by 33.5pc to 27,681 units sales of Honda Civic and City increased by 24pc to 10,616 A total of 1,947 units of Suzuki Swift were sold Tractor sales dipped 41pc to 12,375 units during the first half of 2015-16 Millat Tractors sold 7,916 units in first Half of Fiscal Year 16 Al Ghazi Tractors witnessed a decline of 48pc in its sales to 4,020 units yoy.Light Commercial Vehicles: Sales of Suzuki Ravi, another beneficiary of Punjab Rozgar Scheme, rose to 18,952 units in July-Dec 2015-16 Toyota Fortuner sales dropped 22pc to 282 units 33pc fall in Sigma Defender sales to 140 units. Toyota Hilux sales rose by 40pc to 2,518 units.

IMPORT OF USED CARSCurrent position of the import policy (as per Car Junction Pakistan) Passenger Cars:According to Pakistan Used Car Import Policy, up to 3 years old passenger cars are allowed to be imported in the country.

Jeeps / SUVs and Commercial Vehicles:According to Pakistan Used Car Import Policy, up to 5 years old Commercial Vehicles are allowed to be imported in the country.Most Demanded Vehicles in Pakistan:Some of the highly demanded brands are as follows:Automobile Industrys Impact on Pakistans Economy

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1) 2) Corolla 3) Premio 4) Mark X 5) Land Cruiser Prado 6) Prius Hybrid 7) Vitz 8) Allion9) Mira10) Passo 11) Alto 12) Swift etc.

The import of used cars is allowed under three schemes 1) Personal baggage (once in two years), 2) Bringing the vehicle into the country on transfer of residence from another country, 3) Sending a vehicle as a gift to a family member residing in Pakistan (once in two years).In 2011-12, the import of used cars reached an all time high of 57,000 cars due to relaxation in age limit from three to five years. In the subsequent year, however, the age limit was reduced to three years and the imports dropped to 45,000 cars in 2012-13 and 29,000 in 2013-14.The age limit will continue to be three years under the new policy as per the government it has produced desired results and provided enough protection to local players.Impact of changing the limit to five years:Encouraged by a six-fold growth in volumes from 2001 to 2007, the automobile assemblers and their local parts manufacturers had invested billions of rupees to prepare themselves for achieving the 2012 target volume of 500,000 vehicles set by the government in the 5-year auto policy issued in 2007.However, the government opened up the import of 5-year-old used cars in 2006, in 2009, the total market crashed by almost 60%, from an annual volume of 254,000 units in 2006-7, to below 100,000 units in 2008-9. Some of the other factors included the depreciation of Pak rupee by 55% against the US Dollar, from Rs 61 in June 2007 to Rs 95 in June 2012. Inflation levels and interest rates exceeded 20% and consumer financing for automobiles dried up. As a result during this period, 4 car assembly plants (Hyundai, Nissan, Chevrolet and Adam) were forced to shut down their operations in the country.In 2007-08, the age limit was further slashed to three years.In 2015 the government had decided to continue allowing expatriate Pakistanis to bring cars up to three years old on reduced customs duty under the new Automotive Development Policy 2015-20. However, the age limit on the commercial import of special-purpose vehicles has been proposed to be restricted to five years under the new policy, In 2015, Pakistan imported around 45,000 used vehicles with sales value of Rs67 billion. The auto industry pointed out that had these vehicles been produced in Pakistan with local parts, a total of 143,000 jobs could have been created. At the end of it all, it is the car consumers of Pakistan who will suffer. The consumers will have to choose between higher taxes on car imports and high-profit local manufacturers which cant meet local demand.Why consumers are choosing imported Used Vehicle:The problem facing the Pakistani consumer is that the prices of these vehicles keep on increasing Indus Motor Company (IMC) and Honda Atlas raised prices by one to 1.5pc during the month of January 2016. Pak Suzuki Motor Company Ltd also increased prices by 1pc in January 2016.The prices were again increased in March 2016.with such price increases there is no improvement in the quality and variety of cars .For e.g. Mehran , which is mostly preferred by lower income groups due to its price there is no difference in shape, body and interior. Even the new Swift is still going on since 2010. This is one of the reasons people opt for imported cars despite holding ground for so long in Pakistan, they havent been able to introduce technology, safety equipment such as ABS and airbags, and neither have they been able to bring the emissions levels up to global standards. If we look at the imported used car Especially Japanese cars, they have more features and specifications then locally made new cars. Another reason is the lack of choices; the consumers have lack of choices when it comes to purchasing from the local market.

THE AUTOMOTIVE DEVELOPMENT POLICY (ADP) 2016-21Economic Co-ordination Committee (ECC) approved the much awaited Auto Policy on March 15, 2016. The ultimate goal of the policy is to address the existing drawbacks in the locally manufactured vehicles and help them in achieving the following goals:1. Modernization of overall auto industry2. Improvement of locally manufactured car quality and standard3. Enhancing consumers welfare4. Protection of local manufacturers5. Attraction of new entrants of the markets to enhance competition6. Getting in line with international quality practicesThe previous auto policy is highly criticized by the consumers for failing to providing value for money cars. For more than a decade, Pakistani consumers witnessed no improvement in quality, standard, safety and/or security of the locally manufactured vehicles. In addition, there was no compliance or a roadmap to international automobile standards; whereas the research and development (R&D) was almost useless during the last decade.

The new policy benefits the three major stakeholders (government, new car makers, and the consumers) in the following ways:1. Government1. Improved government image that they care for public.2. Enhance welfare of the consumers by providing much safer and better quality cars.3. Generate higher revenue. Increased production means higher income for the government in the form of income tax and sales tax.4. Stable auto industry environment as its long term policy.5. Enhancing inflow of foreign investment and market competition by entrance of new players.6. It provides vision for auto industry.7. increase cars production from the existing 150,000 to 350,000 by the end of this policy in 20212. New car makers1. Enable the new players to build their assembling and manufacturing units. As the policy allowed duty free imports of plant and machinery.2. New entrant would be able to import 100 vehicles at 50% off on import duty for market testing.3. Reduction of 50% import duty on localized parts for five years.3. Consumers:1. Competitive prices and value for money.2. New and improved models on regular basis.3. Instant delivery of new cars.4. Cheaper spare parts and its availability.5. Benefiting lower income groups by introduction of car finance schemes and manufacturing of 800cc or lower vehicles (small cars).6. Motorbike riders can switch to small cars, as the price gap would be reduced.Currently there are three major players in Pakistans auto industry, which have captured the local market: Indus Motors Company Limited (Toyota Motors) Pak Suzuki Motors Company Honda Atlas Cars (Pak) Limited ( Honda Motors)The expected new entrants that can benefit from the new policy are: Fiat: Largest and most famous carmaker in Italy. Audi: German car makers. Volkswagen: top selling German brand and second largest automaker in the world. Ford: American multinational car maker, produce variety of automobiles and commercial vehicles. South Korean car makers: Hyundai and Kia. Mazda

For the last three to four decades, three manufacturers have had the monopoly in the market, this group discouraged new entrants. The Big three have claimed the government is requesting auto companies to come and invest in Pakistan; on the other hand, it is not giving equal incentives to the existing players who are ready to invest billions.The government has mentioned that even though the current car manufacturers have been in business for so long in Pakistan, they havent been able to introduce technology, safety equipment such as ABS and airbags, and neither have they been able to bring the emissions levels up to global standards. The car assemblers have not yet introduced international quality technology, including air bags, environmental friendly engines and ABS brakesPeople of Pakistan have already realized the fact that locally assembled cars are below par. It is baffling to see that buyers consider a three years old Japanese used car to be superior than a brand new locally made one.SWOT ANALYSIS OF THE AUTO INDUSTRYSTRENGTHS Availability of low cost human resource OEMs quality standards are largely achievable High growth and demand in the market (Increasing demand for cars) Capability to produce low volumes competitively and capture niche markets Presence of world class automotive manufacturers in each segment Resale of locally assembled cars is better due to availability of spare parts and after sales services and warranty e.g. Suzuki, Honda, Toyota are classic examples in this regard.

WEAKNESSES Product design & engineering capabilities constrained No focus on R&D Lack of Tooling and die manufacturing facilities Lack of skilled manpower for modern machinery Lack of well equipped facilities for product testing and research & development High cost of utilities Too many regulatory & taxation agencies

OPPORTUNITY Potential for high market growth due to wide gap in population to vehicle ratio Export potential in niche markets Emerging Afghanistan, Nepal, Bangladesh, Iraq, Sri Lanka and central Asian markets Great potential all over the world for tractors market Have the ability to develop a Pakistani car (for e.g. Adam Revo) Can attract other Auto giants to Pakistan Like India

THREATS Poor image of the country Regional conflicts Smuggling, under-invoicing and dumping of auto parts Continuous depreciation of rupee against top world currencies Import of used cars Exchange rate fluctuation China and India are a great threat since they have the latest technology and are making the same products as Pakistan is making; but their quality as well as costs are better

TAX COLLECTION

Unfortunately due to lack of data on the internet an exact figure of the tax paid by the auto industry could not be found. Different reports and websites have claimed that the Auto sector is the second largest tax payer in Pakistan after Oil and gas sector. Some of the Tax figures of 2014 for the auto companies are as mentioned below, these figures were published in Dawn newspaper on April 10, 2015:COMPANYTAX COLLECTION IN PKR

INDUS MOTOR COMPANY LIMITED1822993007

MILLAT TRACTORS LIMITED1043149828

AL-GHAZI TRACTORS LIMITED960833557

THAL LIMITED604025223

PAK SUZUKI MOTOR CO. LTD513605147

ATLAS HONDA LIMITED494413732

The above companies fall under the list of top 100 tax paying companies.

RECOMMENDATIONS:1. If we compare our Auto sector with our neighboring country Indias auto sector, we can see they have many active players; Pakistan needs more active players for auto production so that we can see more competition and improvement in quality. This will also be a source of job creation .the latest entrant we have seen so far is AL-HAJJ FAW MOTORS in 2012.The new Auto policy will hopefully achieve this target.

Figure 5

2. the automobile sector of Pakistan is lacking behind the automobile sector of the developed world in terms of the reliability of its products , competitive prices , safety concerns etc .The big three (IMC, Honda, PSMC) have been in the business for so long and yet we have seen no improvement in terms of safety of the vehicle from these producers .

3. The government should encourage and support the production of locally manufactured vehicle. Adam motor project should re start; a Pakistani made car would even be cheaper than the cars currently produced by the auto sector. Once the vehicle has passed international quality checks Pakistan can start exporting this product as well.

4. The local industry needs to focus on R&D, the research and development (R&D) was almost useless during the last decade. The best example there is of Suzuki Mehran; there is no difference in shape, body and interior. Even the new Swift is still going on since 2010

5. The government should take measures to curb arrival of used cars to support the local industry. Even though imported cars provide competition, local car assemblers provide jobs and support other organizations in the country.

BIBLOGRAPHYhttp://www.paps.pk/paps2016/about-ushttp://propakistani.pk/2015/08/12/automotive-industrys-contribution-to-pakistan-infographic/http://www.oica.net/wp-content/uploads//Total-2015-Q2.pdfhttp://www.carjunction.pk/used-cars-import-policy-pakistan/http://wishstocks.com/2016/01/11/auto-sector-healthy-growth-in-car-sales-of-51-5-yoy-in-dec15/http://www.dawn.com/news/1207405http://epaper.brecorder.com/m/2015/12/05/18-page/546819-news.htmlhttp://www.dawn.com/news/589823/local-makers-vendors-slam-decision-import-of-used-cars-upto-5-years-allowedCluster diagnostic study Auto parts cluster Lahore

PAAPAM Rejoinder to SBP

THE ROLE OF AUTOMOBILE INDUSTRY IN THE ECONOMY OF PAKISTAN ITS GROWTH. ITS IMPACTS NEGATIVE AS WELL AS POSITIVE.

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