An insight into Automobile Industry

Engineering Post Report

According to the facts and figures now available from the official sources concerned, with  the exception of Buses, there has been a significant decline in the productivity  of  all sectors of the automobile industry during July-March FY2023 as compared to the same period in FY2022.

The decline in growth was primarily attributed to the import restrictions  on the automobile industry,  considering  automobiles as luxury items,  with the aim of reducing the current account deficit. In May 2022, the State Bank of Pakistan (SBP) had imposed restrictions  on  the auto industry, requiring  prior permission for the import of raw materials and crucial parts in Completely Knocked Condition (CKDs) needed for local  manufacturing of automobile parts the federal government  initially allowed  the auto industry  to operate at about 50 percent of production  capacity until  foreign exchange constraints  eased. However, with the deteriorating  situation of Pakistani rupee exchange rate the restrictions on auto imports continued to persist, which in turn   severely impacted the growth of the industry. As a result of these restrictions, the industry’s size  almost halved resulting in substantial revenue loss for the federal government  and  significant job losses in the society on the whole.

There were additional contributing factors also. The policy rate, which was at 10 percent  one year, had  gradually increased  to 21 percent. During this time, the value of the Pakistani rupee  had  also significantly  declined and inflation  continued to soar . As a result, auto financing became more  expensive, and inflation  alo drove up the prices of the automobiles, dampening   demand in the market due to reduced  disposable incomes. Furthermore, the auto industry also faced challenges  due to the upward revision  of sales tax, capital value  tax, and withholding tax rates.

As briefly stated above, with the exception of buses, there had been  a substantial decline in the local auto industry during July-March FY2023 as compared to the corresponding period last year. The growth  in the case of  buses was  an anomaly, primarily  due to the existing demand and  available  reserve stocks of parts and CKDs for buses. Next to buses, heavy commercial vehicles, particularly trucks,  also experienced a decline of as much 39.8 percent as demand diminished.

The production and sales of passenger cars saw a significant  decline during the period under report herewith production down by 47.3 percent to 87820   units and sales down by 50 percent to 857765 units, compared to 166768 units and 172612 units   produced and sold during the corresponding period of the previous year. This decline in the production and sales was observed across all segments of passenger cars, and was primarily attributed to import restrictions that resulted in intermittent non-production days, leading to a loss in the growth for the auto industry. Despite the addition of two new products, Cherry Tiggo and Sazgar Haval, the production and sales of  the light commercial vehicles (LCVs) and sports utility vehicle (SUVs) had also experienced a decline of 20 percent and 25 percent, respectively, due to the import restrictions.

The farm tractor sector also experienced  a significant decline during  the period with production and sales declining by 46 percent and 49 percent, respectively. Sales amounted to  21233 units compared to  41603 units  sold in the corresponding period  of the previous year. This sharp decline can be attributed to various factors, including  constraints on the import of raw  materials and critical parts, which   impacted the overall  productivity  of the farm tractor sector. Additionally, the .industry had also been grappling with a persistent  tax anomaly, where billions of rupees were locked up in refunds, hindering the natural growth of  the industry.

The two/three wheelers sector was no exception and also experienced a quite  significant  and unprecedented decline  both in production and  sales, with  a decrease of 33.3 percent and  33.00 percent, respectively. 

Notably ,all units within the two/three wheeler sector  showed negative growth during the period, as they faced  supply constraints of crucial parts due to import restrictions. Two/three wheelers are known to offer a cost-effective  mode of public  transportation for the lower income  group among the people at large, but at the same time, they are higher price-sensitive as well. The massive exchange rate  losses during July-March FY2023  had resulted  in rampant inflationary  conditions, leading to the inevitable price increases, which in turn reduced  the demand in the market  for two/three wheelers.

Cars had installed capacity for 341000 against production of 166768 units during July-March 2021-22 which declined by as much as 47 percent to 87820 units  during July–March 2022-23.

LCCV/Jeeps/  SUV/ Pickup had installed capacity  52000 units. Against this, the production was  32341 units during July-March 2021-22 which further declined by 19.8 percent to 25938 units during 25938 units.

Buses installed  capacity was 5000 units. Against this production was o0nly 459 units in July -March 2021-22 which, however  increased by 32.00 percent to 606  units during July-March 2022-23.

Trucks  installed capacity  was  29000 units against which production was 4445 units in  July-March 2021-22  which declined by   39.8 percent to 2677 units during July—-March 2022-23.

Tractors installed capacity was 100,000 units against production was only 41872 units during July-March 2021-22 which further declined by as much as 46.00 percent to 22626 units in   July-March 2022-23..

2/3 Wheelers installed capacity was the highest in the auto industry sector 2500000 units. Against this high figure, production was almost half at 1389027 units during July-March 2021-22  which further declined by 33.3 percent  during  July-/March 22-23 to 925943 units. On the whole, the sources pointed out , the automobile  sector in the country contributes approximately  4 percent to the Gross Domestic Product (GDP) and  constitutes around  15 percent of the  Largest Scale Manufacturing  (LSM) sector making it a quite  significant  contributor  to the industrial out of the country on the whole  and capable of meeting  automobile demands domestically. It was also a major revenue generator and jobs multiplier. Over the past four decades, it may  be pointed out, the country has developed  a strong  engineering base with investments from international brands  and technology transfers.