Limited LC Quota of Auto Industry Oppressed To Shut Plants As Slumps Production

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LAHORE: The auto sector is bracing for a massive decline of up to 60% in capacity utilisation due to the negative impact of Letters of Credit (LC) quota set by the State Bank of Pakistan for the import of completely knocked down (CKD) kits, say auto sector stakeholders.

The central bank has placed a quota on CKD Auto Sector  imports at 50% of the average imports over the last four months. The ceiling is now expected to be increased to 70%.

“This situation has forced leading auto makers to opt for plant shutdown and the impact of production issues is likely to be very damaging for the sector,” said a former office-bearer of the Pakistan Automotive Manufacturers Association (Pama).

He pointed out that the auto industry was already bearing the brunt of escalating production costs, lower demand for auto financing, measures taken by regulators and devastation caused by floods.

As a result of the limited import quota for CKDs, Indus Motor Company is currently operating at 40-45% of its capacity. Other automakers like Suzuki, Honda and KIA have halted their production previously.

Moreover, Indus Motor is gearing up for a steep decline of around 40% in volumes during FY23 as the company saw its gross margins wash away in the fourth quarter of FY22. Auto manufacturers have faced escalating production costs due to devaluation of the rupee that dropped 10% against the dollar in the fourth quarter of FY22, and higher freight rates.

Volumes of original equipment manufacturers (OEMs) are fading away rapidly and their gross margins are likely to have a tough time recovering from current levels. OEMs are expecting heavy losses in the upcoming quarters.

“Import conditions are denting the auto sector’s performance. They will cause revenue loss to the government as well in the long run. Therefore, the government needs to ease the import conditions to create a smooth and viable business environment for the auto sector,” said SM Engineering CEO SM Ishtiaq.

Total industry sales (including non-Pama members) grew 51% to 379,000 units in FY22 with Pak Suzuki Motor grabbing the largest chunk (40%) followed by Indus Motor (20%), Honda Atlas Cars (10%), Hyundai (4%). Other assemblers including KIA had a market share of 26%.