Economic Meltdown and Its Impact on Automotive Industry

7/28/2019 Economic Meltdown and Its Impact on Automotive Industry

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ECONOMIC MELTDOWN AND ITS IMPACT ON AUTOMOTIVE INDUSTRY

HOMETECH NEWSCAR ARTICLES ECONOMIC MELTDOWN AND ITS IMPACT ON AUTOMOTIVE

INDUSTRY

With the recent economic crunch being faced globally, inflation has taken over all progress and each

sector of the economy is facing major crisis in the name of business growth. In its definition an

economic meltdown is a situation where a countrys economy experiences a sudden downfall due to

financial crisis; this causes the economy to also go through a falling GDP (gross domestic product), a

dry liquidity period and fluctuating rates of inflation and deflation.

ECONOMIC MELTDOWN AND ITS IMPACT ON AUTOMOBILE INDUSTRY

An economic crisis is called a period of depression or recession for any economy that it hits. This

economic meltdown is partially due to the fact that the credit situation of money is largely falling,

banks have stopped loaning money to each other and hence the economy is going down. Not only

does such an economic meltdown affect consumers, it also affects businesses and people in everyday

life trying to make ends meet. Since money is our sole and basic need to survive in this world, with

bad value and lack of it, survival of mankind starts to seem really difficult on this planet.

Like all other business that are being badly affected by an economic meltdown; the motor vehicle

industry is affected somewhat badly too. In the case of Pakistans automobile/motor vehicle industry,

it can be said that it is one of the booming industrial sectors as compared to the other sectors; this is

due to a rising demand of all types of vehicles.

The reason why motor vehicles are still in demand despite the bad economic condition is because of

the ease of payment that banks have made for the common man to lease cars. This rising demand of
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automobile is not high on a local level, but has become a global concern. The reason it is a concern is

because the demand for motor vehicles is way higher and has caused the production to rise higher

also in order to meet this rising demand; it should be noted that this follows for all kinds of motor

vehicles, be it commercial or personal. Talking about Pakistan in specific, the motor vehicle industry is

facing what is known as a Development phase from 2005-2012. Import tariffs have been revised and

auto manufacturing policies have been adjusted owing to this development phase, which can be

called the growth of the industry.

After the oil and petroleum sector in Pakistan, the second largest tax payer is the automobile

industry; this goes to show the amount of sales it makes. The fact that supports this growth is that a

major percentage of manufacturing of automobiles still happens on Pakistans own land, even though

it is still dependent upon a number of imports of various spare parts and other components. These

imports are what end up increasing the prices for the entire local auto industry in Pakistan. Despite

the fact that a lot of motor vehicles in Pakistan are imported from abroad, those produced locally are

not being adversely affected by the economic meltdown. So the auto industry in Pakistan has received

phenomenal growth, despite the economic meltdown pulling all other industries down.


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Auto Industry Development Programme: Auto industry seeks government assurance on consistent

policies

* AIDP to expire in June 2012 industry believes a new policy is critical for its growth

ISLAMABAD: Auto Industry of the country has demanded from the government that similar to AutoIndustry Development Programme (AIDP), which is to expire in June 2012, a new long term consistent

policy is critical for the industrys growth to restore investors confidence and save the foreign exchange

and earn substantial revenues.

In a presentation, the auto industry has stated that the industry is generating substantial government

revenues contributing significantly to the countrys gross domestic product (GDP) and saving a huge

foreign exchange by import substitution through localisation of the parts through transfer of technology

to vendors. A consistent long term policy for the auto industry will create more investment and job

opportunities in the industry which already has an investment of over Rs 92 billion and giving

employment to 0.4 million people directly.

More importantly, a better policy is meant for addressing the issues like most liberalised used cars

imports policy in the region, proposal on tariff rationalisation, under invoicing, mis-declaration in auto

parts imports and limited consultation with Original Equipment Manufacturers (OEMs) on free trade

agreements, etc, which are badly hurting the industry.

Localisation is the key factor meant for progress and growth of the national economy, however, tariff

reduction and used car imports are two major issues of the local manufacturers that must be considered

prior to formulation of any policy.

Any reduction in duty structure will make local nascent industry uncompetitive, which will lead to

complete collapse of the industry, therefore, causing more unemployment.

Similarly, the government should monitor the misuse of used car policy. Some changes in the policy is

required like registration should remain in importers name for at least 2 years, while the policy should

be reverted back to 3 years and 1 percent depreciation with maximum depreciation cap of 36 percent to

discourage abuse of the policy. According to some facts in this regard, the used cars importer enjoy 60

percent depreciation allowance while in India the basic duty on used cars is 100 percent with some

additional duties and taxes of 32 percent.

Although there is a very short term benefit in the imports of used cars in the country but on the long

term basis this policy is against the national interest and we should understand what national interest in

the import of used cars is, said Munir K Bana, Vice Chairman Pakistan Association of Automotive Parts

and Accessories Manufacturers (PAAPAM).

It is pertinent to mention that the used cars imports are expected to exceed 40,000 in 2011-12 that is 25


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percent of the total industry volume for 2010-11.

The policy of used cars offers very little employment opportunities and there is no possibility of

technology transfer. On the other hand, the local auto industry had employed over 400,000 and

technology transfer to OEMs, vendors and dealers, said a vendor, Muhammad Ashraf Shaikh, adding

that flight of capital from the country is a serious issue in the import of used cars policy mainly at the

time when the local currency is already under pressure and government earns very little revenue.

Shaikh M Aslam, Secretary PAAPAM, while pointing out one very important factor said that frequent

shift in policies on the part of the government along with security risks and high input costs have been

conducive for incessant decline in the Foreign Direct Investment (FDI) in the country.

There is only a short term benefit in car imports and trading with very little employment generation, in

fact the government will lose millions of rupees of its revenue and foreign exchange in the long term in

spare parts also as there are no arrangements for technology transfer to the local industry, he added.

This shift in policies related to auto sector is evident from the decisions of ECC that has allowed the

import of five-year old used cars, allowed depreciation allowance raise from 50 to 60 percent, and

considers allowing new entrants on much relaxed policy, said Shaikh.

This was also admitted by the Board of Investment (BoI), while giving a briefing to the Economic Co-

ordination Committee (ECC) of the cabinet recently that frequent changes in policy are scaring the

investors away from Pakistan.

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Economic Meltdown and Its Impact on Automotive Industry