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Automobile industry
1. 0
Automobile Industry’s Impact on
Pakistan’s Economy
SUFIA HUMAYUN KHAN
16839
MICRO & MANAGERIAL ECONOMICS
TERM REPORT
PRESENTED TO: SIR NABEEL LATIF
2. 1
TABLE OF CONTENT:
Introduction…………………………………………………………..………………….…………….Page 2
History of the Automobile Industry……………………………………….……….Page2-Page3
Impact on Pakistan’seconomy……………………………..………….…………….Page4-Page5
Contributionto GDP………………………………………………………….…..……….Page5-Page6
Statistics 2015………………………………………………………………….……………..Page6-Page7
Statistics 2016………………………………………………………………….………….………….…Page7
Import of UsedCars………………………………………………….…………………....Page7-Page9
Auto DevelopmentPolicy(2016-21)………………………………..……..……..Page9-Page11
SWOT………………………………………………………………………………………….……….….Page12
Tax Collection…………………………………………………………………………….……..…….Page12
Recommendations……………………………………………………………………………..……Page13
Bibliography………………………………………………………………………..………………….Page14
3. 2
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
withit.
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 d’Automobiles (OICA) there was a 48% increase in the production of
cars in 2015 as comparedto 2014.
The industry adopted the Tariff Based System (TBS), after elimination of Deletion Program, during the
year2006 to encourage local vendorindustryandnew playersinthe AutoIndustry.
This report focuses on the impact of the automobile industry on the Economy of Pakistan. How the auto
industry has contributed to Pakistan’s economy throughout the years, as well as ways in which it has
potential togrow.
HISTORY OF THE AUTOMOBILE INDUSTRY
A brief overviewof the AutomobileIndustryisasfollows:
YEAR COMPANY
1953 Pakistan 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
renamedtoGhandhara IndustriesLimited
In 60’s In Mid 60’s NayaDaur Motors established its plant
to assemble Jeep (4X4)(It was Originally Kandawala
Industries renamed NayaDaur after nationalization
of industries)
1964 Millat Tractors Limited (MTL) was established in
1964 to introduce and market Massey Ferguson
(MF) Tractors in Pakistan. An assembly plant was
setup in1967 to assemble tractors
4. 3
1976 In 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.
1983 Pak Suzuki motorswasfoundedin1983
1983 Al-Ghazi tractors Ltd started their operations in
Septemberof 1983.
1986 Hino Motors Japan and Toyota Tsusho Corporation
in collaboration with Al-Futtaim Group of UAE and
Pakistan Automobile Corporation (PACO) formed
HinopakMotors Limitedin1986
1988 Atlas Honda Limited (AHL) .A joint venture
between the Atlas Group and Honda Motor Co.
Ltd., Japan was created by the merger of
PanjdaryaLimitedandAtlasAutosLtd.in1988.
1993 Indus Motor Company(IMC) entered into business
in 1993; IMC is a joint venture between the House
of Habib, Toyota Motor Corporation, Japan (TMC),
and ToyotaTsusho Corporation,Japan(TTC)
1994 Honda started its operations in 1994; Honda Atlas
Cars Pakistan Limited is a joint venture between
Honda Motor Company Limited Japan, and the
AtlasGroup of Companies,Pakistan.
2012 New Entrant Al-Haj Faw Motors (Pvt) Ltd. started
theiroperationsin2012
5. 4
IMPACT ON PAKISTAN’S ECONOMY
The 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 government’s
revenue isaroundRs.7.5 billion.
The automobile industryhasalsostrengthenedmany associatedindustries /alliedindustries.The most
prominentalliedindustriesare as follows.
I. LubricantsIndustries
II. Air condition
III. Foam Industries
IV. PaintIndustries
V. SheetMetal parts manufactures
Etc.
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,BusesandTractors.
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
almost3 millionskilledworkers,technicians,engineers&managementprofessionals.
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
milliondirectand indirectjobs.
Figure 1
6. 5
Pakistan exports CBUs of LCV’s 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 Exportfiguresare 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, it’s 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,makingowningacar a necessityinthisdayandage.
CONTRIBUTION TO GDP IN YEAR 2015
As per State Bank of Pakistan’s 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 sectorrecordeda strongand broad-basedrecoveryinFY15 ,please see figure 2:
Figure 2
One of the factorsin the improvementof GDPwas the steps takenbythe government;the government
reducedthe salestax ontractors from17 percentto 10 percent;andremoved10 percentexcise dutyon
more than 1800cc cars. Furthermore,Punjabgovernmentintroduced‘ApnaRozgarScheme’thatledtoa
surge indemandfor Suzuki BolanandSuzuki Ravi.
The contributiontoGDP can be analyzedthroughthe below table obtainedfromthe SBP report(fig3):
7. 6
Figure 3
As perthe SBP annual report, the Industrysectorcontributed20.3% to the GDP in2015.In whichthe
share of LSM was10.6%. Asper The Financial Dailynewspaperthe contributionof autoindustrytoGDP
was 2.8 percentonlyin 2011-12. In 2015 as per the article publishedin Carmudi Pakistan onAugust12,
2015; the contributionof the autosector wasapproximately3% of the GDP.
2015 -STATISTICS OF THE MAJOR PLAYERS IN THE AUTO INDUSTRY
•Pak Suzuki Motors Limited, lead in terms of car sales depicting a substantial growth of 75.8% YoY
(comparingyear2014-2015)
•Indus Motors posted a growth of 18.7% (YoY) (comparing year 2014-2015) which can be attributed to a
rise incorollasales.
•Honda AtlasCar salesgrewby49.0% (YoY) (comparingyear2014-2015)
Source PAMA
As per State Bank of Pakistan’s Annual report 2014-2015, with in the passenger car segment there was a
highdemandforthe newToyota Corolla Model,thatcan be seenfromthe below chart(fig4):
Figure 4
8. 7
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 busesare Hino,Master, NissanandISUZU.
In the 3-Wheel category: Sazgars’s 3 wheeler production was 13713 and sold 13991; Qingqi produced
29252 unitsandsold29230 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-
assembledcarsrose by48pc to 92,514 unitsin July-Dec2015-16
The salesof Suzuki Bolanjumped192pcto 19,516 unitsthankstoPunjabRozgar Scheme
Suzuki WagonRregistered138pc increase to4,065 units.
Salesof Suzuki Mehranjumpedby42pc to 18,017 units
Suzuki Cultussalesrose 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
salesof Honda CivicandCityincreasedby24pc to 10,616
A total of 1,947 unitsof Suzuki Swiftwere sold
Tractor salesdipped41pcto 12,375 unitsduringthe firsthalf of 2015-16
MillatTractors sold7,916 unitsinfirst Half of Fiscal Year16
Al Ghazi Tractors witnessedadeclineof 48pc inits salesto4,020 unit’s yoy.
LightCommercial Vehicles:
Sales of Suzuki Ravi, another beneficiary of Punjab Rozgar Scheme, rose to 18,952 units in July-
Dec 2015-16
Toyota Fortunersalesdropped22pcto 282 units
33pc fall inSigmaDefendersalesto140 units.
Toyota Hilux salesrose by40pc to 2,518 units.
IMPORT OF USED CARS
Currentpositionof the importpolicy (asperCar JunctionPakistan)
PassengerCars:
According to Pakistan Used Car Import Policy, up to 3 years old passenger cars are allowed to be
importedinthe country.
9. 8
Jeeps/ SUVs and Commercial Vehicles:
According to Pakistan Used Car Import Policy, up to 5 years old Commercial Vehicles are allowed to be
importedinthe country.
Most DemandedVehiclesinPakistan:
Some of the highlydemandedbrands are asfollows:
1) Corolla
2) Premio
3) Mark X
4) Land CruiserPrado
5) PriusHybrid
6) Vitz
7) Allion
8) Mira
9) Passo
10) Alto
11) Swiftetc.
The importof usedcars is allowedunderthree schemes
1) Personal baggage (once intwoyears),
2) Bringingthe vehicle intothe countryontransferof residence fromanothercountry,
3) Sendingavehicle asa giftto a familymemberresidinginPakistan(once intwoyears).
In 2011-12, the importof usedcars reachedanall time highof 57,000 cars due to relaxationinage limit
fromthree to five years.Inthe subsequentyear,however,the age limitwasreducedtothree yearsand
the importsdroppedto45,000 cars in2012-13 and29,000 in 2013-14.
The age limitwill continue tobe three yearsunderthe new policyas perthe governmentithas
produceddesiredresultsandprovidedenoughprotectiontolocal players.
Impact ofchanging the limitto 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 vehiclessetbythe governmentinthe 5-yearautopolicyissuedin2007.
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,ChevroletandAdam) were forcedtoshutdowntheiroperationsinthe country.
In 2007-08, the age limitwasfurtherslashedtothree years.
In 2015 the government had decided to continue allowing expatriate Pakistanis to bring cars up to three
yearsoldon reducedcustomsdutyunderthe new Automotive DevelopmentPolicy2015-20.
However, the age limit on the commercial import of special-purpose vehicles has been proposed to be
restrictedtofive yearsunderthe newpolicy,
10. 9
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 jobscouldhave beencreated.
At the end of it all, itis 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 can’t meet local
demand.
Whyconsumers are choosingimported UsedVehicle:
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 haven’t 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) 2016-21
EconomicCo-ordinationCommittee (ECC) approvedthe muchawaitedAutoPolicyonMarch 15, 2016.
The ultimate goal of the policy isto addressthe existingdrawbacksinthe locallymanufacturedvehicles
and helptheminachievingthe followinggoals:
1. Modernizationof overall autoindustry
2. Improvementof locallymanufacturedcarqualityandstandard
3. Enhancingconsumerswelfare
4. Protectionof local manufacturers
5. Attractionof newentrantsof the marketstoenhance competition
6. Gettinginline withinternational qualitypractices
The previousautopolicyishighlycriticizedbythe consumersforfailingtoprovidingvalue formoney
cars. For more than a decade,Pakistani consumerswitnessednoimprovementinquality,standard,
safetyand/orsecurityof the locallymanufacturedvehicles.Inaddition,therewasnocompliance ora
roadmapto international automobile standards;whereasthe researchanddevelopment(R&D) was
almostuselessduringthe lastdecade.
11. 10
The newpolicybenefitsthe three major stakeholders (government,new carmakers,andthe
consumers) inthe followingways:
1. Government
1. Improvedgovernmentimage thattheycare forpublic.
2. Enhance welfare of the consumersbyprovidingmuchsaferandbetterqualitycars.
3. Generate higherrevenue.Increasedproductionmeans higherincome forthe governmentinthe
formof income tax and salestax.
4. Stable autoindustryenvironmentasitslongtermpolicy.
5. Enhancinginflowof foreigninvestmentandmarketcompetitionbyentrance of new players.
6. It providesvisionforautoindustry.
7. increase cars’productionfromthe existing150,000 to 350,000 by the endof thispolicyin2021
2. Newcar makers
1. Enable the newplayerstobuildtheirassemblingandmanufacturingunits.Asthe policyallowed
dutyfree importsof plantand machinery.
2. Newentrantwouldbe able toimport100 vehiclesat50% off on importdutyfor markettesting.
3. Reductionof 50% importdutyon localizedpartsforfive years.
3. Consumers:
1. Competitive pricesandvalue formoney.
2. Newandimprovedmodelsonregularbasis.
3. Instantdeliveryof newcars.
4. Cheaperspare partsand itsavailability.
5. Benefitinglowerincome groupsbyintroductionof car finance schemesandmanufacturingof
800cc or lowervehicles(smallcars).
6. Motorbike riderscanswitchto small cars, as the price gap wouldbe reduced.
Currentlythere are three majorplayersinPakistan’sautoindustry,whichhave capturedthe local
market:
IndusMotors CompanyLimited(ToyotaMotors)
Pak Suzuki MotorsCompany
Honda AtlasCars (Pak) Limited( HondaMotors)
The expectednewentrantsthatcanbenefitfromthe new policyare:
Fiat:Largest and mostfamouscarmakerin Italy.
Audi:Germancar makers.
Volkswagen:topsellingGermanbrandandsecondlargestautomakerinthe world.
Ford: Americanmultinational carmaker,produce varietyof automobilesandcommercial
vehicles.
SouthKoreancar makers:Hyundai andKia.
Mazda
12. 11
For the last three tofour decades,three manufacturershave hadthe monopolyin the market,this
groupdiscouragednewentrants. The Bigthree have claimedthe governmentisrequestingauto
companiestocome and investin Pakistan;onthe otherhand,itis notgivingequal incentivestothe
existingplayerswhoare readytoinvestbillions.
The governmenthasmentionedthateventhoughthe currentcar manufacturershave beeninbusiness
for solongin Pakistan,theyhaven’tbeenable tointroduce technology,safetyequipmentsuchasABS
and airbags,andneitherhave theybeenable tobringthe emissionslevels uptoglobal standards. The
car assemblers have notyetintroducedinternational qualitytechnology,includingairbags,
environmental friendlyenginesandABSbrakes
People of Pakistanhave alreadyrealizedthe factthatlocallyassembledcarsare below par.It isbaffling
to see that buyersconsiderathree yearsoldJapanese usedcarto be superiorthana brand new locally
made one.
SWOT ANALYSIS OF THE AUTO INDUSTRY
STRENGTHS
• Availabilityof lowcosthumanresource
• OEMs qualitystandardsare largelyachievable
• Highgrowth anddemandinthe market(Increasingdemandforcars)
• Capabilitytoproduce lowvolumescompetitivelyandcapture niche markets
• Presence of worldclassautomotive manufacturersineachsegment
• Resale of locallyassembledcarsis betterdue to availabilityof spare partsand after sales
services andwarrantye.g.Suzuki,Honda,Toyotaare classicexamplesinthisregard.
WEAKNESSES
• Productdesign& engineeringcapabilitiesconstrained
• No focusonR&D
• Lack of Toolinganddie manufacturingfacilities
• Lack of skilledmanpowerfor modernmachinery
• Lack of well equippedfacilitiesforproducttestingandresearch&development
• Highcost of utilities
• Too manyregulatory& taxationagencies
OPPORTUNITY
• Potential forhighmarketgrowthdue towide gapin populationtovehicleratio
• Exportpotential inniche markets
• EmergingAfghanistan,Nepal,Bangladesh,Iraq,Sri Lanka and central Asian markets
• Great potential all overthe worldfortractorsmarket
• Have the abilitytodevelopaPakistani car(for e.g. AdamRevo)
• Can attract otherAuto giantsto PakistanLike India
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THREATS
• Poorimage of the country
• Regional conflicts
• Smuggling,under-invoicinganddumpingof autoparts
• Continuousdepreciationof rupee againsttopworldcurrencies
• Importof usedcars
• Exchange rate fluctuation
• China and India are a great threat since they have the latest technology and are making the
same productsas Pakistanismaking;buttheirquality aswell ascosts 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
companiesare as mentionedbelow,thesefigureswere publishedinDawnnewspaperonApril 10, 2015:
COMPANY TAX COLLECTION IN PKR
INDUS MOTORCOMPANYLIMITED 1822993007
MILLAT TRACTORS LIMITED 1043149828
AL-GHAZITRACTORS LIMITED 960833557
THALLIMITED 604025223
PAK SUZUKI MOTORCO. LTD 513605147
ATLAS HONDALIMITED 494413732
The above companiesfall underthe listof top 100 tax payingcompanies.
14. 13
RECOMMENDATIONS:
1. If we compare our Autosectorwithour neighboringcountryIndia’sautosector,we cansee they
have manyactive players;Pakistanneedsmore active playersforautoproductionsothatwe
can see more competition andimprovementinquality.Thiswill alsobe asource of job creation
.the latestentrantwe have seen sofar isAL-HAJJ FAWMOTORS in 2012.The new Autopolicy
will hopefullyachieve thistarget.
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
improvementintermsof safetyof the vehicle fromthese 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
Pakistancan start exportingthisproductaswell.
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 inshape,bodyandinterior.Eventhe new Swiftisstill goingonsince 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
otherorganizationsinthe country.
