The sector experts are of the consensus that the policy governing the automobile industry in Pakistan has remained ‘OEM centric’ from day one. This includes incentives for the new entrants, lopsided indigenization policy, nominal difference in the duties on CKD kits and basic raw material and above all failure of the government in containing the influx of parts as ‘scrap’. As a result, the vendor industry has been fighting for its existence.
The biggest proof is that the annual turnover of the replacement market (parts market) in Pakistan is estimated at around PKR35 billion. Ironically out of this, only 5% is being met by the local industry. Most of the parts are imported as ‘scrap’. High-end electronic components are being ‘smuggled’. As a result, local vendors fail to achieve economies of scale.
If I peep into history, disbanding the manufacturing of Bedford trucks and buses in Pakistan is the ‘assassination’ of the units which were manufacturing engine blocks, gear, rings and pistons. This genocide was done soon after the nationalization of the unit manufacturing Bedford trucks and buses in Pakistan and the commencement of assembly of a Japanese brand at the facility. This also led to the ‘financial demise’ of the Pakistan Machine Tool Factory operating in Karachi-Sindh.
Analysts also refer to the ‘absurd’ policies of the Government of Pakistan. Lately, the number of OEMs (original equipment manufacturers) in Pakistan has exceeded 18, from around half a dozen. All the new entrants were allowed to import completely built units (CBUs) in significantly large quantities and given a long period to even commence local assembly. They were also allowed to import many parts on the premise that local vendors are incapable of producing parts as per their global standards.
A question arises if the local vendors are incapable of producing parts of international standards, who is to be blamed, OEM or vendor? Sector analysts say that the GoP facilitates the OEMs the maximum because they have brought foreign investment. However, even tier-one parts manufacturers are not given that kind of VVIP status.
At this time headlines are appearing in local media that the OEM is facing problems in opening letters of credit, due to the limited availability of foreign exchange with the State Bank of Pakistan (SBP). However, there is little talk about problems being faced by the vendors, which mostly fall in the category of SMEs and micro-enterprises. There are approximately 2,000 vendor units, which employ nearly 100,000 people.
A point that needs to be deliberated is that OMEs have borrowed heavily from financial institutions, whereas vendor units, particularly third-tier units having the largest population and employment have invested their own money. Any deviation/concession to the OEMs to import parts that can be produced locally renders these units economically unviable.
Although some of the readers don’t appreciate the reference or comparison with India, it must be remembered that for decades it kept models which did not have high ecstatic value, only to support the vendor units.
Another problem faced by Pakistan is that at present no steel manufacturing plant is operating in the country. Most of the units are ‘re-melting’ units which mostly use scrap. The output is below ‘prime quality’, which also lowers the quality of the body of the CBUs.
It may not be out of context to say that the two leading tractor manufacturing units face intermittent closure, because of high inventory levels. The incumbent government has allowed the import of second-hand tractors, which is highly detrimental to the local manufacturers. It is ironic because the indigenization level is more than 95%.
One also fails to understand that the GoP has a fixed Agri lending target of PKR 1.8 trillion. The country needs the use of machinery in agriculture, and the tractor is the basic machine used for ground leveling, particularly laser-guided tractors. Appropriate field leveling also helps in the prudent use of water, which is in short supply in the country.