Economic crisis is engulfing auto industry

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Shabbir Ahmed

THE ongoing economic crisis has affected all the industries in the country. Large scale manufacturing is shrinking with every passing month. This crisis is engulfing Pakistan’s auto industry as well and as a result its earning capabilities are shrinking, and domestic demand is on the decline. Currency devaluation, higher taxes in the last budget, high custom duties on inputs, consumers’ low purchasing power and the higher fuel prices are some of the reasons behind the declining performance of automotive industry. Although this industry was one of the highest tax paying sectors until recent past but over the last two years, most of the prominent manufactures are showing deficits due to reduction in sales. They have also laid off significant number of employees. Several local manufacturers have either reduced their production to only a few days a week or started closing down their plants altogether for several days every month. Market sources have confirmed at least seven per cent decrease in sales during the fiscal year 2018-19. Among the aforementioned factors, higher taxes is considered as one of the major factors behind this crisis which resulted in high prices for vehicles. Government is of the view that higher taxes are necessary to generate revenue. However, there can be an alternative to higher taxes and high prices. The ongoing crisis can be compared to the Canadian auto industry crisis during and after the Great Depression. Canadian automobile sector was booming due to their tariff policy and preferential export status from the Commonwealth countries. However, during the Great Depression, this industry was facing a severe over-capacity in the face of a demand shock due to severe decline in consumer income. Reacting to this situation, Canada reversed their tariff policy and implemented a high tariff on imported vehicles along with introduction of new general tariffs and excise duties.
These measures backfired and the already dwindling consumer demand for automobiles dropped further significantly. Realizing the gravity of the situation, measures and policies were adopted to reduce prices and spur trade to mitigate the impact of the depression though greater capacity utilization. They reduced taxes and excise duties which paved way for foreign and domestic investment. The automotive industry has developed enormously since then. Pakistan has also resorted to protectionist policies over the years in order to give opportunity to local industries to flourish. Although these policies have helped in the short run but like many other countries such policies have not yielded the desired results in the long run. Automobile industry can be considered as one of the baseline industries for an economy. High-growth economies require better means of transportation and faster mobility. So, more vehicles are made and sold. This attracts more investment. The auto industry benefits from the cycle. The current abysmal state of Pakistani auto industry will adversely affect the overall condition of the economy. In developed and some of the developing countries it is a well-established fact that there’s a direct correlation between the size of a country’s GDP and its automotive industry. In 2013, four out of the five largest global economies also had the world’s biggest automotive markets in terms of units sold.
Since local and foreign companies are shutting down their manufacturing plants for brief or longer time periods, government need to analyse the situation and provide instant remedies. For a consumer, a car is usually the second most expensive purchase after a home. A car is a durable good. So, a consumer can defer the purchase of a vehicle if the economy isn’t doing well. This makes the auto sector highly cyclical. This is what happening in Pakistan at the moment. A high inflation level including the upward trend in fuel prices have significantly reduced the demand. Another major factor in the ongoing auto industry crisis is the decline in foreign direct investment and local investors reluctance to pump money in this industry. The industry depends on a number of broad-based economic indicators like unemployment levels, consumer confidence, disposable income and credit availability. Economists suggest that the best time to invest in auto companies is when these indicators start looking better. Furthermore, as mentioned earlier, real consumption expenditure on used vehicles tends to move inversely with fuel prices. As gasoline prices decrease, price sensitive customers move forward with their purchasing decisions.
It is also worth mentioning that depending on government alone would be unwise. Automobile companies also need to take responsibility and explore options to bring the industry back on track. We have two different models which can be followed. The Latin American Model which has involved import-substitution industrialisation through massive Foreign Direct Investment primarily from the US and Europe. By contrast, the Asian Model has involved joint ventures with Japanese and American car makers, with strong export orientation. Joint ventures and making technological and financial links with multinational companies are some of the other viable options. In order to overcome economic crisis and uplift all the industries including the auto industry, the government need to formulate a comprehensive national productivity coalition in order to create high-performance work systems and business models. Autoworkers must be part of such a coalition enabling innovation bottom up mobilising workers with hands-on knowledge and workplace experience about state of production processes. Creating a more dynamic automotive cluster through productivity enhancement and strengthening of innovation processes is still a workable option for Pakistan.
—The writer is freelance columnist.

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