Study On The Automobile Industry Of Pakistan Finance Essay

Abstraction

During the decennary 1995-96 to 2005-06 car industry of Pakistan has contributed significantly in the economic development of Pakistan. During this clip period this industry has play a important function in economic development of Pakistan. The whole car industry during this period was under monopoly or duopoly tendency. There were merely seven Original Equipment Manufacturers in the whole industry and there market shear in the context of different merchandises was in the scope of 40 % to 80 % . More over protection policy of the authorities has farther strengthened their monopoly power. During the period under reappraisal Effective Protection Rate ( EPR ) for different merchandises was ranged from 36 % to 425 % . So-on this footing it can be said that, the whole development of car industry in Pakistan during this period was non the consequence of any healthy and just competition, but it was due to monopoly and protection policy adopted by the authorities.

Cardinal words: Car Industry, Economic Contribution, Vendor Industry, Protection Policy.

JEL Codes: L62, O19, L60, L52, L38

Introduction

Car industry throughout the universe plays a important function in the economic development of the state. Automobile industry in Pakistan is besides making the same occupation. In Pakistan this industry is divided in two chief sections i.e. car assembly programs or Original Equipment Manufacturers ( OEMs ) , and car parts providers or sellers. The former assemble the parts to fabricate different vehicles and the latter provides assorted accoutrements and parts to the assembly programs. The industry as a whole or its sections both contribute in the economic system in two signifiers i.e. direct and indirect. The variables related to direct part are:

I ) Share of Industry in GDP

Creation of occupation chances

Share in exports

Whereas the variables of indirect part are:

Development of fabrication sector

Investing

Share in gross coevals

Transportation of engineering

Foreign exchange salvaging

Car industry in Pakistan has contributed in the economic system of Pakistan from all of these facets during the decennary of 1995-96 to 2005-06. But this development was chiefly due to two grounds i.e. due to monopoly power and protection policy of the authorities adopted to safeguard this industry. To turn out this hypothesis this treatment is divided in two parts, foremost the part of car industry in the economic system both from direct and indirect point of positions is being analyzed, and so the axial rotation of monopoly and protection policy is discussed.

2. Direct Economic Contribution

The direct economic part of this industry during the mentioned period is as follows:

2.1 Contribution to GDP

The part to GDP is measured in Pakistan by two governments i.e. Federal Bureau of Statistics, and Ministry of Industries and Production. Both governments use different methods for processing of informations and obtaining the consequences. Contribution of car industry from both of these beginnings is as follows:

Share of Automobile Industry in GDP

Harmonizing to Federal Bureau of Statistic ( FBS ) this part is as follows:

Table ( 1 )

Contribution of car industry to GDP ( in PKR. Million )

Year

Motor Vehicles No. of Unit of measurements

GDP Share

Motorcycle Rikshaw No. of Unit of measurements

GDP Share

Auto Industry No. of Unit of measurements

GDP Share

1995-96

76

4967.987

9

121.527

85

5089.514

2000-01

83

9805.245

7

185.468

90

9990.713

2005-06

139

51122.998

51

16831.757

190

67954.755

Beginning: Adopted from Census of Manufacturing Industries 1995-96 & A ; 2000-01 Federal Bureau of Statistics, 1995- 96, 2000- 01, 2005-06.

The tabular array ( 1 ) shows that during the period 1995-96 to 2005-06 the entire figure of mills were increased from 85 to 190 i.e. 123 % addition, and portion in GDP was increased by 1235 % during the same period.

The statistics of Ministry of industries and production for the period 1998-99 to 2004-05 are as follows:

Table ( 2 )

Overall part of car industry to GDP ( in PKR.Milion )

Year

Car assembly programs

Car sellers

Car industry

Share in entire GDP

1998-99

2003-04

2004-05

% addition

25

129.08

159.89

540 %

23

24.81

38.37

65 %

48

153.89

198.26

312 %

7.17 %

3.39 %

4.26 %

N.A.

Beginning: Adopted from PAAPAM website aa‚¬A“Overview of Automobile Sectoraa‚¬A? website hypertext transfer protocol: //www.paapma.com.pk/industryoverview.html

2.2 Contribution to Employment

The function of car industry in proviso of occupation chances is important. Harmonizing to Federal Bureau of Statistics ( FBS 1996 ) 23,653 workers were employed in car industry. The no. of mean day-to-day workers including contract labor was 6,396. This figure was 11288 in 2000-01 and was increased to 27003 in 2005-06 ( FBS 2005-6 ) . Harmonizing to same beginning entire employment cost for the twelvemonth 1995-96 was PKR 740.250482 1000000s, this calculator was increased to PKR 2105.426 1000000s in the twelvemonth 2000-01, and reached to PKR 4757.221 million in 2005-06 ( FBS 2005 ) .

2.3 Contribution of Automobile Industry in Exports

Rather the portion of car industry in the entire exports of Pakistan was non so important but the volume of exports of car parts has shown a important addition of 343 % during the old ages 1998-99 to 2002-03.

Table ( 3 )

Export of Auto parts ( in $ Million )

Old ages

1998-99

1999-2000

2000-01

2001-02

2002-03

Exports

7

12

23

27

31

Beginnings: Digest of Industrial Sector. 2004, p.57, Ministry of Industries & A ; Production

website hypertext transfer protocol: //www.pakistan.gov.pk/division/industriesandproductiondivision.media sectorfile.pdf

A tendency of rapaid addition in exports was besides observed in other merchandises of this industry. It can be shown in the undermentioned tabular array.

Table ( 4 )

Exports of cars ( in PKR. million )

Year

Road Motor vehicles

Road vehicles other so motor vehicle

Export of vehicles

Share in entire exports

1995-96

2000-01

2004-05

63.473

284.870

984.984

14.521

148.566

362.334

77.994

433.439

1347.318

0.015 %

0.080 %

0.160 %

Beginning: Pakistan Statistical Year Book 2005, pp 207-208 Islamabad, Statistics Division FBS. Government of Pakistan.

3 Variables of Indirect Contribution

Car industry throughout the universe has a batch of forwarded & amp ; backward linkages to other sections of economic system. The indirect part of this industry in the economic system of Pakistan is as follows.

3.1 Development of Auto Parts Suppliers or Sellers

In the fabrication of car a big figure of parts & A ; constituents are normally required e.g. Sur, radiators, battery, suspension cogwheel box, spectacless, electronic points etc. These parts are supplied by sellers. Due to development of this industry there were 2000 car sellers in Pakistan in 2005, whereas in unorganised market, this figure was 840 ( Ministry of Industries & A ; Production 2004 ) . This industry was bring forthing about 96 classs of parts for autos and LCVs, 69 classs for bike and 83 classs for trucks & A ; coachs. Following tabular array shows the assortment of parts for different vehicles produced in Pakistan.

Table ( 5 )

Number of locally produced parts 2005

Title

Car/LCV

Motorcycle

Truck/Bus

Types of organic structure parts ( In Nos ) .

15

33

23

Types of engine parts ( in Nos ) .

26

23

30

Types of Electrical Parts ( in Nos ) .

16

13

16

Types of power train and human body parts ( In Nos ) .

15

N.A

8

Types of interior spare parts ( In Nos ) .

24

N.A

6

Entire ( in Numberss )

96

69

83

Beginnings: Pakistan Automotive Industry, An Overview pp.24-25 Pakistan Automobile Parts and Accessories Manufacturing Directory 2005 Lahore, PAAPAM

Economic part of sellers

Economic part of seller industry during the period 1998-99 to 2004-05 clears from following tabular array.

Table ( 6 )

Economic Contribution of sellers

Year

Contribution to GDP

( PKR. B )

Employees Numbers

Investing ( PKR. Billion )

Gross to GDP ( PKR. B )

Foreign Exchange Saving ( 1 $ m )

Import permutation ( 1 $ m )

1998-99

2004-05

Percentage Change

23.00

38.37

+66.82 %

116,200

187,500

+61.35 %

28.6

82.0

+168.71 %

5.00

12.27

+145.4 %

84

639

+661 %

210

338

+61 %

Beginning: Overview of Automobile Sector 2005, PAAPAM.

Web site: hypertext transfer protocol: //www.paapam.com.pk industry.overview.html

3.1.2 Increase in Level of Production

During this decennary a important addition in the degree of production of different merchandises of car industry in ascertained. Following tabular array ( 7 ) indicates the overall tendency of production of different merchandises of this industry.

Table ( 7 )

Production of cars ( in Numberss )

Year

Cars

Jeeps

( 4×4 )

L.C.V

Trucks

Buss

M/cycles

Tractors

Entire

1995-96

2000-01

2004-05

31,079

39,573

126,817

2,274

459

1,564

6,834

6,965

23,613

3,030

952

3,204

438

1,337

1,762

121,809

117,858

571,145

16,093

32,553

43,746

181,557

199,697

771,851

Beginning: Pakistan Statistical Year Book 2007, p. 208, Islamabad Statistics Division, Govt. of Pakistan.

It means that, during the period 1995-96 to 2005-06 the production of autos increased by 308 % , LCVaa‚¬a„?s by 245 % trucks by 575 % , coachs by 302 % , bikes by 369 % , and tractors by 172 % , merely the production of Jeeps was decrease by 31 % the overall growing rate was 325 % .

3.2 Investing in Automobile Sector

During the period under reappraisal there was an increasing tendency in foreign direct investing and domestic investing as shown in the undermentioned tabular arraies.

Table ( 8 )

FDI influx in car sector ( in $ Million )

Title

2000-01

2001-02

2002-03

2003-2004

2004-05

Conveyance

45.2

21.4

87.4

8.8

10.6

Entire

322.4

484.7

798.0

949.4

1523.9

% of Entire FDI

14 %

4.4 %

10.95 %

0.93 %

0.7 %

Beginning: Board of Investment ( 2007 ) Government of Pakistan, Retrieved. hypertext transfer protocol: //www.pakboi.gov.pk/pak/xdetail.asp? comlD6534

Whereas the investing in OEMs is concerned it is as follows:

Table ( 9 )

Investing in Original Equipment Manufacturer ( in PKR.million )

Title

2000-01

2001-02

2002-03

2003-2004

2004-05

Investing

7,955

8,560

8,987

11,661

11,471

Beginning: Investing and Employment 2009 Retrieved March 25, 2009 from PAMA web site: hypertext transfer protocol: //www.pama.org.pk/investmentem.ployment.htm

It was the consequence of investing friendly policies.

3.3 Contribution to National Exchequer

This industry has contributed one million millions of PKR. to national treasury in the signifier of gross revenues revenue enhancement, excise responsibilities, corporate revenue enhancements, usage responsibility and other caputs. Contribution in the signifier of gross revenues revenue enhancement for the under position period is given in tabular array ( 10 ) .

Table ( 10 )

Gross saless Tax paid by car industry ( in PKR. Million )

Year

Assembling of Motor Vehicle ( Carriers )

Assembling of Motor Vehicle ( Passengers )

Car Partss

Auto Cycles including Rikshaws

Entire Gross saless Tax from Auto Sector

Shares in Total Gross saless Tax

1995-96

30.882

123.461

96.068

94.942

345.353

0.69 %

2000-01

2.679

3.583

1004.087

38.221

1048.570

0.68 %

2004-05

26.594

95.547

2238.279

52.241

2412.660

1.01 %

Beginning: Commodity Wise Collection of Gross saless Tax, pp. 151-159 CBR Year Book 1989-90 & A ; 1999-00 and 2004-05 Islamabad.

Directorate of Research and Statistics, CBR, Government of Pakistan.

3.3.1 Other revenue enhancements paid by the industry

The entire sum generated by car industry to the authorities treasury was PKR. 7.233 billion in 1996-97 ( Honda Atlus 1997 ) . This figure was increased to PKR. 20 billion in 2002-03 ( Ministry of Industries & A ; Production 2004a ) and it was moved to PKR.64 billion in 2005-06 ( PAA PAM 2005a ) which is demoing a net addition of 814 % in 2005-06 as comparison to 1997-98.

3.4 Transportation of Technology

Development of car industry in Pakistan is mostly the consequence of proficient coaction and joint ventures with foreign houses. The joint venture appeared to be a major beginning of foreign investing & A ; transportation of engineering. Nipponese companies have the largest portion in this proficient co-operation. This is the ground that except in few merchandises portion of Nipponese trade name vehicles were 50 % to 100 % in the market. Table ( 11 ) summarizes the market portion of Nipponese merchandises and others.

Table ( 11 )

Market portion comparing of Nipponese and non Nipponese trade name vehicles.

Types of Vehicles

Share

Share

Car

LCV

Motorcycle

Truck /Bus

Tractor

90 %

50 %

90 %

100 %

0 %

10 %

50 %

10 %

0 %

100 %

Beginning: Digest of industrial sector 2004, p. 53, Ministry of Industries & A ; Production Retrieved June 5, 2008 from Government of Pakistan functionary web site.

hypertext transfer protocol: // www.pakistan.gov.pk/divisions/industriesandproductiondivision media sectors file.pdf

On the other manus this laterality of Nipponese trade name has created a monopoly in the market this monopoly is making serious jobs for the other rivals who want to come in in the market.

Salvaging of Foreign Exchange & A ; Import Substitution

Indigenization of an industry is the manner to salvage foreign exchange. The car industry has saved $ 95.5 1000000s in 1996-97 ( Honda Atlas, 1997 ) and this economy was reached to $ 750 million in 2002-03 ( Ministry of Industries & A ; Production 2009 pp.22-23 ) and this degree touched the tallness of $ 3304 million in 2004-05 ( PAAPAM 2009 ) demoing an overall addition of 1211 % from 1996-97.

Whereas as the import permutation is concerned it was $ 909 million in 1998-99 ( Ministries of Industries & A ; Production, October 2000 ) . It was $ 1265 million in 2002-03 and $ 1623 million in 2004-05 ( PAAPAM 2009 ) demoing a net addition of 78 % from 1998-99.

In fact, this public presentation is rather important but it is mostly due to the two chief grounds i.e. monopoly power and protection policy of the authorities Analysis of these factors is as follows.

4 ) Role of Monopoly Power

During this clip period Original Equipment Manufactures had dominated the market under tight monopoly or oligopoly. The market portion of different OEMs during this decennary was as under.

Table ( 12 )

Market portion of taking companies ( 2005 )

Vehicle type

Name of vehicle

Company

Market

Car 1300-2000 milliliter

Toyota Corolla

Indus Motors

42.99 %

Car 1000 milliliter

Cult

Pak Suzuki

45.85 %

Car 800cc

Mehran

Pak Suzuki

66.31 %

Jeep 4 tens 4

Potohar

Pak Suzuki

73.12 %

Pickup /L.C.V

Shehzore

Hyundai

49.15 %

Motorcycle

Honda

Honda

68.85 %

Truck

Nissan Truck

Nissan

39.64 %

Bus

Hino

Hino

80.56 %

Farm Tractor

Massey Ferguson

Milat

51.44 %

Beginning: Adopted from Historical Data 2009. Pakistan Automobile Manufacturers Association Retrieved March 25, 2009 from PAMA web site. hypertext transfer protocol: ///www.pama.org.pk.historicaldata.htm.

These statistics show that car market was to a great extent occupied by a few OMEs and there was non just and healthy competition. On this footing it can be said that development of car industry up-to a big extent was the consequence of this monopolist conditions. This fact can farther be proved by Herfindahle index, ( HHI ) which is used for the measuring of grade of competition and the size of houses in the market.

The consequence of application of this index was 4,948 for autos, 5,400 for LCVs, 3950 for trucks & A ; coachs and 4,250 was for tractors ( Quratul-Ain -2005 ) . These figures show that industry was under tight oligopoly conditions, with really high concentration ratios, in surplus of 60 % .

5 ) Protection Policy

Government of Pakistan has provided a heavy shelter to automobile industry. This protection was started in 1949 from the beginning of this industry and remains integral during the period under reappraisal. During this period import of new and used autos was discouraged by the infliction of heavy import responsibilities.

The development of this industry was due this protection policy. It was cleared from the fact that, when the xanthous cab strategy was announced by the authorities in 1990, under which the import of zero- rated autos were allowed, the sale of local vehicles were declined to 45000 from 65000 per annum. This daze was intolerable for the industry and the consequence was that, this strategy was closed and authorities has announced different steps to further protect the industry. These steps were, prohibition on import of used auto, increasing the rate of usage responsibility on Completely Built Units ( CBU ) , making a spread between the responsibility construction of CBU and CKD kits. In the undermentioned old ages the same policy was followed with some minor alterations. In conformity with the WTO ordinances duty barriers are reduced during the period 2001 to 2005. It can be cleared from the tabular array ( 13 )

Table ( 13 )

Custom responsibility on autos

New Passengers Cars

2001-02

2002-03

2003-04

2004-05

1801 cc –

250 %

200 %

150 %

100 %

1601 -1800cc

150 %

125 %

125 %

80 %

1501-1600cc

150 %

100 %

100 %

70 %

1301-1500cc

150 %

100 %

100 %

100 %

1001-1300cc

120 %

100 %

100 %

50 %

-100cc

100 %

75 %

75 %

50 %

Beginning: from the Auto Industry Continues to Turn. ( July 18-24,2005 ) Retrieved August6, 2008 signifier Pakistan & A ; Gulf Economist hypertext transfer protocol: //www.pakinstaneconomist.com./

Table ( 13 ) shows the worsening tendency in usage responsibility on wholly Built Up Unit of measurements for different engine capacities, but this diminution was to a great extent criticized by local industry. In their sentiment it is unsafe for local car industry.

Another cogent evidence that this industry is under the shelter of heavy protection can be given from the effectual protection rate. Table ( 14 ) shows the effectual protection rate for this industry during 1997.

Table ( 14 )

Effective protection rate to automobile industry.

Vehicle Type

Import % CKD/RM

Duty

CBU

Duty CKD/RM

EPR

1500cc

70 %

150 %

32 %

425 %

800cc

40 %

110 %

32 %

162 %

Tractors

20 %

35 %

32 %

36 %

Sellers utilizing S-Form

30 %

45 %

20 %

56 %

Without S-form

30 %

45 %

65 %

36 %

Without S-form and viing against smuggled points

30 %

20 %

65 %

1 %

Beginning: Automobile choice policy. An analysis ( October 1997 ) by Ghani Working Paper No. 97-15: Centre for Management and Economic Research, Lahore University of Management Sciences.

EPR for the industry in 2001 was increased significantly in the scope of 701 % to 5000 % ( Sharif and Ahmed 2001 ) . Due to this excess ordinary EPR, industry was non able to accomplish targeted indigenization degree. Due to this high EPR the industry is uncompetitive and net income oriented. This is the ground that industry is right criticized for uncompetitive cape, creative activity of monopoly, high pricing and few picks to clients.

Decision

Automobile industry of Pakistan during the decennary of 1995-96 to 2005-06 has shown a singular advancement. From the point of position of direct & A ; indirect part its public presentation was important. But all of this part was mostly due to the monopoly factor and the high protection provided by the authorities. Due to this shelter industry becomes dull, non- competitory, net income oriented and to a great extent criticized from different weak facets.