Automobile Industry: Problems and Constraints

Economic Review, April 2001 | Go to article overview

Automobile Industry: Problems and Constraints


The market conditions for truck and bus industry have deteriorated during the past few years to a seemingly irreparable extent. The capital and operational cost of commercial vehicles has increased to an alarming limit while the revenue did not increase accordingly. The manufacturing of medium and heavy transport equipment has become an unprofitable business, according to an industrialist. Therefore, the capacity utilisation of truck and bus industry is less than 7 per cent as the production is 1000 compared to annual installed capacity of 15,000. Currently all passenger car plants' combined installed capacity is around 100,000, of which overall utilisation is 35 per cent.

The automobile industry is an oligopoly with seven major assemblers/manufacturers, mostly set up as joint ventures. The total auto market is over $1 billion, of which over half belongs to local production. Pakistan imports motor vehicles worth $300-400 million annually which is 3 to 4 per cent of total import bill. In a country where the foreign exchange reserves are low, any saving by expanding local production or earning through export would have salutary impact upon the balance of payments. The annual size of the market of automobiles (eg. cars, trucks and buses) is around 100,000 while two-wheelers and three-wheelers aggregate to quarter million. The industry has the potential to fabricate all automotive components locally, given proper milieu and therefore eliminate the need for import. A host of problems and constraints, enumerated below, are enervating the auto industry in the presence of which, its potential could not be fully realised.

Speaking at the inaugural ceremony of the 850 cc Daihatsu Cuore at Indus Motor Company in the lastweek of March, 2000, Mr. Abu Shamim Arif, Secretary, Ministry of Industries has urged the automobile industry to explore ways and means to assist the government in boosting exports. He criticised the inexorable jump in prices of car in the short span of time, rendering it beyond the reach of common man. He observed that local car market particularly for small brands is much bigger but it remained limited due to high prices.

Like other industries, automobile industry suffers from high cost of production because of heavy import component as the plants are merely engaged in assembling rather than "manufacturing", escalating input prices such as power and raw materials, mounting taxes, exorbitant wages relative to productivity and above all, small size of the market. Automobile industry does not enjoy economies of large scale production in Pakistan contrary to USA and Japan where the production of cars runs into millions resulting in lower cost per unit.

A fundamental cause of high prices in recent prices is the steep decline in rupee against Japanese yen. Since 1995-96, yen has appreciated by 47 per cent from Rs.0.3376 to Rs.0.4959. Such a soaring yen is bound to have an impact on the prices of automobile as most of the imports are from Japan.

A cogent element which must be taken notice is the high wages in proportion to labour productivity, compared to the general notion of low wages. Our labourer is more wage - conscious but less productivity - prone, a fact which renders our manufactures uncompetitive. This is true for automobile industry as well.

Lack of buoyant vendor industry is hindering the growth of auto industry as all the components are not manufactured under one roof. Development of vendor industry would be able to expand employment opportunities, reduce cost of production, pre-empt imports and help achieve deletion programmes.

A slew of vehicles have been smuggled or imported illegally through dry ports in the country. A deadline was given by the present government for getting smuggled vehicles registered by March 15 upon payment of duty. A few but not all vehicle owners have turned up so far and the government agencies are on the lookout for such vehicles. …

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