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Pakistan’s auto parts is an emerging business but need prompt reforms under covid lockdown

Pakistan’s auto parts is an emerging business but need prompt reforms under covid lockdown

The country has competitive advantage in manufacturing or assembly of auto parts

Govt should form separate bailout plan, cut taxes, utility bills and import duty for automobile industry growth

Under the Covid-19 pandemic automotive industry will face a dip of 12 to 15pc in 2020

Interview with Mr Sohail Shamim Firpo, Director Firpo Group of Companies

PAGE: Tell me something about yourself and your business, please:

Sohail Shamim Firpo: I am Director of Firpo Group of Companies. I am also holding Chairmanship of Pakistan-Romania Business Council (PRBC) since its formulation. I also hold position of Senior Vice Chairman of Customs and Valuation Sub-Committee of Karachi Chamber of Commerce & Industry (KCCI) since 2012. I also shoulder the responsibility of Trade Wing of Pak-Ukraine Trade & Culture Information Center as Chief Coordinator since its formation in 2009. I am also Member of Diplomatic Missions & Embassies Liaison, WTO Intellectual Property Rights, and Labour & Social Welfare Sub-Committees of Karachi Chamber.

My father Shamim A. Firpo started business in 1968 and I joined him at my very young age. We have completed 52 years of business and now known as Firpo Group of Companies. We have our sales office and showroom at M. A. Jinnah Road Karachi and manufacturing plant at Korangi Industrial Area Karachi. Firpo Group has an extensive track record in providing products and services across the globe.

Since last 52 years the Firpo Group has been building a strong and valued clientele across both the public and private sectors. Firpo Group deals in all kind of automotive bulbs and parts. We always focus on consumer satisfaction with the motto of “Only the Best is Good Enough”. “Firpo” is registered brand name which is well known amongst automobile industry in Pakistan all the top auto manufacturing industries purchase and use its bulbs for lighting and automotive parts.

PAGE: Could you tell us about the manufacturing and import of auto parts?

Sohail Shamim Firpo: The auto part industry supports the supply chain of the rapidly growing automobile assembly industry in Pakistan. There is a significant diversity in the type of auto parts demand and hence immense opportunity and incentive to produce such parts in Pakistan. This is especially true because of heavy tariff structure on imports of spare parts, consequently incentivizing localization of parts. As per auto parts statistics and trends in 2018, 4% of the auto-parts manufactured in Pakistan are exported, whereby the major export market was Europe and Asia. Due to the lower cost of production, Pakistan has a competitive advantage in the manufacturing or assembly of auto parts. Multinational companies are already localizing a number of spare parts used in the assembly of their vehicles.

The influx of new automotive companies to Pakistan is also leading to a higher demand for auto parts as there are significant incentives for localizing parts. The auto policy provides tax and duty incentives for 5 years to the new entrants. During these 5 years, these new entrants will need to establish their supply chains to compete with the existing players in the market. Therefore, there are immense opportunities for auto part manufacturers to partner with these new entrants to establish their supply chains.

During recent years, the technology in this sector has developed significantly which has led to an increased growth rate. Auto parts manufacturing was confirmed as a growing sector in a study conducted by the Punjab Skills Development Program. In their survey, they found that 85% of the sector experts project the growth rate to be positive. Further is that the trade route, which is going to build under (China Pakistan Economic Corridor (CPEC) will have a significant impact on Pakistan’s automotive sector. After the development and initiation of the One-Belt, One Road initiative, Pakistan can import automotive parts and CKD kits from China at a cheaper cost, reducing the cost of production and increasing competitiveness.

In Pakistan, the auto industry is governed by the Automotive Development Policy (ADP) 2016-21 under this policy, all APMs (auto parts manufacturers) are registered with Engineering Development Board (EDB), who govern and monitor all imports of their raw materials to safeguard against misuse of concessionary duties fixed in the ADP. Levying high Regulatory Duty upto 35% on import of auto parts is discouraging their import and encouraging local manufactures to increase their production to meet market demand. However Pakistani automakers mostly import parts and assemble them in Pakistan, contributing to the ever-growing import bill.

In April 2020, assemblers imported $62 million worth of CKDs/SKDs, as compared to $43m in March 2020 and $39m in February 2020, in anticipation of good sales ahead of Eid but they had to sit with huge parts inventory at plants due to coronavirus lockdown. Manufacturers usually give orders for imported parts, raw material and kits 2-3 months earlier, keeping in view 30 days for arrival of shipments at the port followed by at least 10 days in clearance of goods and advance booking orders from the customers. But the manufacturers made higher imports as they did not expect two-month closure under the lockdown. The import of CKD/SKD kits for two-wheelers plunged to $2.6m in April, from $7m in same month last year and $4.7mn in March.

I am also of the view that government should not give tariff concessions on import of spare parts and accessories that are locally manufactured under the proposed trade agreements with some countries. For localized parts, offering concessionary custom duties in the FTAs would be incomprehensible, as they would compel the entire auto parts industry to shut down their units and this would also deprive the national exchequer of tax revenues.

PAGE: What are the logistics issues for manufacturing and import of auto parts?

Sohail Shamim Firpo: We all know that the coronavirus pandemic has affected all the businesses around the globe. So, the auto parts industry is also facing issues. According to a research report, they estimated that the current Covid-19 crisis will severely affect the global automotive industry resulting in a 12%-15% dip in market in 2020. The supply chain of automotive manufacturers is spread across the globe, which is one of the major contributors to this market dip. At the start of the outbreak, the supply of auto parts from China stopped, as over 300 automotive parts suppliers outside Hubei stopped production. Now, although they have resumed production at a reduced level, there is a dearth of orders from manufacturers in other regions and logistics problems.

The automotive supply chain for manufacturing cars, trucks and other vehicles is one of the most complex in the world. Globalization adds some unique complexity to the automotive supply chain, and demands practical solutions from vehicle manufacturers and brands. Automotive supply chains are among the most complex in the world, with each vehicle containing more than 20,000 parts originating from thousands of different suppliers.

Logistics is the collection of activities associated with acquiring, moving, storing and delivering supply chain commodities (i.e., products in all stages of manufacture, service and information). Logistics encompasses the business functions of transportation, distribution, warehousing, material handling and inventory management, and interfaces closely with manufacturing. Logistics is a critical component to the total cost for any product sourcing. Automotive logistics is entity flow of automotive producer’s raw materials, components, vehicle and spare parts on steps of automotive purchase, production, sales. Automotive logistics include inbound logistics of raw materials and components, garage logistics of production process, sales logistics of vehicle and spare parts logistics that is including object purchasing, transportation, storage, loading and unloading, distribution processing delivery and information processing. Automotive Logistics must play a much more important role in automotive industry, and reduction of automotive cost. Automotive and its parts industry is a just-in-time market, the complexity and dynamics that go along with that. A lot of people believe the automotive industry is a straight line, making the same products all day, every day. But just think of all the things within your automobile: the steering wheels, seats, colors, carpets. Maintaining a level of consistency and error-proofing, to ensure that the right part gets to the right location just in time, every single time, is a challenge for any automotive supplier.

Ideally, in the just-in-time market, you want to be within three to five miles of the plant’s location. Any time you can cut out distance, you’re going to reduce cost. You get better utilization out of equipment, tractors and drivers. You can also reduce lead time and keep inventory levels low by having the last location of warehousing parts within proximity of the location. A lot of OEMs these days are building their own locations closer to the assembly plant.

PAGE: What kind of efforts are required to promote this sector?

Sohail Shamim Firpo: Auto parts business is growing and emerging business in Pakistan. The auto spare parts industry is an allied of the auto industry. The auto & allied industry form a major manufacturing sector in Pakistan. The automobile industry in Pakistan includes companies involved in the production/assembling of passenger cars, light commercial vehicles, trucks, buses, tractors and motorcycles.

Pakistan is producing up to 70 percent auto parts of cars & HCVs, 90 percent of tractors, motorcycles and three wheelers locally for Original Equipment Manufacturers (OEMs) to export and supply in domestic market. There are approximately around more than two thousand companies operating in the automotive parts market in Pakistan and a large number of these are involved in the production of aftermarket parts 200-240 companies supply parts for OEM (original equipment manufacturer) production.

Auto part manufacturers, which are working as vendors for global car manufacturing companies, are now looking to enhance their stake in the rapidly developing auto market of Pakistan. At present size of the auto industry stands at around Rs.370 billion in which around Rs.20 billion has been invested by the domestic vendors, who are providing spare parts and accessories for different automobile categories, according to statistics. Automobile and Allied Industry play an important role within the large-scale manufacturing sectors in spurring economic growth having enormous investment opportunities with positive growth in the sector.

Pakistan is among the 40 automobile producing countries and 4 of the top 10 global car makers have plants in Pakistan. Earlier, in the first eight months (Jul-Feb) of 2019-20, automobile sales dived 44% to 90,834 units compared to 162,240 units in the same period of previous fiscal year. On the other hand, sales of trucks, motorcycles, jeeps and pickups also fell in the period under review. But after Feb 2020 due to corona virus outbreak and following the directives given by the government to stop the spread of coronavirus, a majority of automobile manufacturing plants have halted production in March 2020.

More than a million people are directly and indirectly employed in the automobile sector; hence, the government should draw up a separate bailout plan for this sector. I would suggest that under the package, the government may eliminate the turnover tax for the ongoing year and slash utility bills to half till the full resumption of production plants. I also suggest the government to cut import duty to 10% on completely knocked-down (CKD) units for February to December 2020. Apart from this, sales tax should be slashed by 50% for the same period. The present situation is like a natural disaster, which has added to the woes of auto parts sector so that the reduction in petroleum prices would have a positive impact on the auto sector.

Prior to the outbreak of coronavirus, the rupee devaluation was the main reason behind the deteriorating situation of the auto parts sector as it turned auto parts and raw material expensive, thus raising the cost of production of carmakers. Initially, the companies bore the additional cost, however, later they passed it on to customers, which severely impacted their sales. In addition to that, a steep interest rate hike had also gravely impacted the automobile sector as car leasing became costlier, which discouraged people from purchasing vehicles.

PAGE: Could you tell about the taxes on the automobile parts?

Sohail Shamim Firpo: At present motorcycle spare parts are subjected to 35 percent custom duty, 11 percent additional duty, 17 percent sales tax, 6 percent income tax and 3 percent additional sales tax, which is terribly raising the cost of these spare parts and make them unaffordable for the masses and encourage parallel import. These unnecessary and exorbitant taxes and duties imposed on the imports of motorcycle spare parts are needed to reduce with a view to discourage smuggling and provide relief to common man.

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