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Tuesday, May 21, 2024

Pakistan’s automobile industry in recovery with increased localization

The Pakistani Automobile industry is recovering rapidly, as the Original Equipment Manufacturers helped mitigate the plight of the vendors

The automobile industry has shown the greatest recovery, according to Mansoor Ahmed, writing for the News today. This may be because its vendor base was protected against the mitigating capabilities of the pandemic by liquidity from original equipment manufacturers.

Other industries reliant on their vendors have been unable to recover as swiftly because the vendor vase is suffering. This despite there being a demand in the country.

The automobile industry in the country had been suffering

The automobile industry in the country had been suffering after the arrival of this government. Sales had dropped drastically, and production had all but halted. However, the accumulated reserves from the last government’s time kept the industry going.

This was not the case with vendors in the industry, however, who due to strict competition had been suffering, having low-profit margins, to begin with.

Seeing this and imminent losses if this continued the Original Equipment Manufacturers decided that they would have to help the vendors in order to have a healthy and robust catering of demand.

Read more: Pakistani auto-industry thrives during 2017!

The OEMs had also invested in the development of molds and other equipment by the vendors. The vendors were also according to the report considered reliable for a timely delivery. In view of these facts, it was decided to intervene on behalf of the vendors, to mitigate their plight.

Indus Motor (Toyota) for instance provided the vendors with equivalent cash of the average orders they placed with each vendor. This was provided as an interest-free loan.

It resolved the vendors’ liquidity problem, and the loan would be adjusted against future supplies under a plan. The supplies have already started as the economy recovered and the pandemic subsided.

“It is natural for the automobile sector to grow in the coming months because it had hit ground level a few months earlier,” said JS Global analyst Ahmed Lakhani. He recalled that for the first time in April 2020, the automobile sector of Pakistan recorded zero sales of passenger cars while the following month, May 2020, registered only 25% sales growth compared to the same month of last year.

Suzuki Motor Company had a different approach, and fully paid the costs of the tools developed by the vendors.

Ingenious ways to mitigating vendor’s plight

Usually, the company pays some percent of the cost of the parts it wants to be produced but then pays the rest in amortized payments. The increased payment upfront, provided the vendors with the needed liquidity to keep going.

The increased business has led the Pakistani auto vendors to specialize and become more efficient at developing auto-parts with the precision needed by the OEM, encouraging OEMs to go for localization of the production of parts.

Read more: Auto industry pleads against new Trump tariffs

It goes without saying that the localized parts are much cheaper than similar imported parts. These parts match the quality of imported parts and are used by the principals of these OEMs.

The industry now is dominated by three Japanese brands that have developed the vending base, these companies have been present in Pakistan for a long time. Other brands are likely to come to Pakistan as well.

New Brands coming to Pakistan

Some new entrants mainly from Korea and China have introduced their brands in the Pakistani market under the new entrant’s policy given in Auto Industry Development Policy (program) 2016-21.

These brands are currently importing completely build up units at very low duties. For assembling they can import all parts used in their vehicle at highly concessional rates. These brands are also likely to localize their parts soon because they are required to match the localization levels of existing brands by five years.

GVS News Desk