Carmakers to cut production until economic picture clears

It has been reported that car assemblers in Pakistan have decided to either reduce the manufacturing or in some cases completely halt the production of vehicles. The most notable names include Honda, Kia, and Suzuki. And Toyota is on the brink of completely shutting down its assembly line and might even have to refund new customers the booking amount. As per the latest news, the company might will be shutting down for 15 days, starting from 1st August to 15th August, next month. The company has already stopped taking new orders since 18th May 2022 because it was unable to acquire all parts on time for already booked orders in the given financial crisis. 

The reason is said to be the non-issuance letter of credit by the State Bank of Pakistan (SBP). Letter of credit or LC is a financial instrument issued as a guarantee from one bank to another on the behalf of a buyer of goods from a different country that the buyer will pay the seller. And has held the issuing of State Bank of Pakistan considering the rapidly falling Pak Rupee compared to the US Dollar in the international market. Pakistan is rapidly bleeding foreign reserves in these last couple of months or so. And there’s fear in the market that the country might end up in bankruptcy; something similar to Sri Lanka.

All these car companies rely on completely knocked down car kits imported from various countries. None of these auto companies bothered to fully localise the production and they are basically glorified assemblers. They bring major parts from other countries and put them back together and then sell them at exuberant prices. Parts like engines, gearboxes, chips and ECUs, and in some cases even sheet metal is imported from other countries. There is some localisation like seats, lights, carpeting and upholstery etc., but nothing significant.

 

Public Accounts Committee has already grilled and questioned Pakistani auto assemblers on their failure to localise. In the same meeting, Pak Suzuki representative boasted that the company has as many as 20,000 orders at a time. The chairman of the committee did not like the statement and scolded the representative for the lack of safety features in most of their cars. 

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Keep in mind these car companies are one of the top importers in the country. The import bill for completely knocked down kits reached an all-time high of 1.7 billion USD. To put it in perspective, Pakistan’s 2022-23 annual budget presented by the current government was $47 billion. Car sales have also been pretty high, and companies sold the most number of cars (234,180 units) despite the inflation and the sector saw a growth of 55%.

 

And since we only deal/trade in US dollars, buying parts/kits from other countries means all your foreign reserves that are in USD, are going to those countries. And we end up with a Civic costing nearly as much as 7 million after all the taxes. This is one of the major reasons why car prices rise whenever the dollar’s rate rises. The companies just shift all the burden of inflation towards the end buyer. Hyundai has increased the price of Tucson by 1 million PKR, and similar prices of Elantra models have as well.

Here are new Elantra prices in Pakistan:

Old Price Increase New Price
Elantra 1.6 Rs. 4,341,990 Rs. 757,010 Rs. 5,099,000
Elantra 2.0 Rs. 4,998,490 Rs. 500,510 Rs. 5,499,000

The decision to halt production by Honda is specially noteworthy considering the company celebrated outselling Corolla in the month of June, 2022. Honda sold 2,764 units of City whereas Indus Motors sold 2,626 units in June.So when these assemblers don’t have all these kits to assemble here, they will be going into non-production days (NPDs) considering the high operating costs of running an assembly line. Toyota is already suffering from this. And now other carmakers are considering joining Toyota. Keep in mind only 2-3 months ago, Toyota celebrated selling most cars in a month since its inauguration back in 1993. And now it has come to a position where it does not have parts to assemble cars anymore and might even be returning the customers their booking amount and as mentioned above, will be closing its assembly line for 15 days next month. Keep in mind Toyota Pakistan already halted the production from 1st July to 17th July, this month, 2022.

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If that happens, think of extended delivery times. And in some cases, your orders are just not being honoured. Many companies are already not taking anymore new car bookings since they do not have means to honour already booked orders. And if there is no business, they are unable to sell cars, which is their primary business, that means people losing their jobs. All these companies are massive employers and employ thousands of people combined. 

The automotive industry in Pakistan needs a massive shakeup. The old practices need to be discarded and they really need to take a long, hard look at themselves. The blame also lies on the concerned departments and ministries of government who did not enforce localisation and let these car companies get away with their ways which in return not only hurt the customers in the shape of eye watering high car prices, but also hurt the country in the form of bleeding foreign reserves.

Pakistan’s auto industry is facing some intense turbulence, there might be some causalities on the way, but hopefully it survive the storm and come out better and stronger in the end. And hopefully it will also wake the authorities up and they will form better policies and procedures to implement for the betterment of Pakistan and Pakistanis. 

Originally posted 2022-08-29 21:33:43.

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