Carmakers May Be Forced To Use Local Parts in Order to Increase Localization

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It is believed that, if car parts are made in the same country they are used in, inflation may slow down..

However, to encourage more localization, the government is likely to use laws like these to bind automakers together. The management of Honda Atlas Cars (HCAR) gave a corporate briefing on the company’s efforts to localize various automobile goods and parts.

According to Honda Atlas, the company has localized all parts produced in Pakistan. For instance, Al Habib Capital Markets’ car expert Asad Ali reports that Honda City has a localization level of 70%, Civic has 60%, and BR-V is 50%. This percentage drops to 25% to 30% if auto-grade steel and high-end technologies are not there, which necessitates strong government support and significant expenditure.

However, according to Aba Ali Habib Securities’ automotive expert Ali Asif, CKD parts cannot be manufactured locally because of a lack of technology. The company’s management is planning a significant investment to accomplish this goal. Profits for the first quarter of the current year were $658 million, down from $928 million in the same period the previous year.

Rupee devaluation, higher material prices, and increased freight costs were all blamed for the drop-off in profits. Following other key industry participants, HCAR recently hiked prices by 22 percent to 24 percent due to a steep devaluation. After the sharp decline of the Pakistani rupee versus the U.S. dollar, the corporation adjusted its price parity to Rs235. However, the business anticipates gross margins to remain in the region of 3% to 3.5 % because they have not fully transmitted the cost constraints to consumers and therefore are suffering a blow themselves.

A consistent policy for long-term car industry growth is needed to foster localization. Local suppliers must be encouraged to produce high-tech parts, which demands a significant investment. Similarly, auto-grade steel players must be imported into the nation. However, it would not be easy to attract investment in this company if auto sales were fewer than 0.5 million.

PAAPAM Chairman Abdul Rehman Aizaz stated:

“More localization is the answer to the present skyrocketing pricing of autos”

He suggested that the government would impose some type of control on the original equipment manufacturers (OEMs). For the industry to get off to a solid start, say 5% localization annually. Automakers need to focus on technology to enhance utilization, according to an analyst at Topline Securities. This will also necessitate a sizeable financial outlay to provide the producers with materials of the same grade as the imported ones.

Due to the quick rise in interest rates and SBP revisions to auto loan duration, the percentage of automobiles sold on consumer financing has dropped from 40% to 30%. Furthermore, urban areas account for 65 percent of all automobile purchases. A 25% to 35% decrease in the automobile sector is projected in FY23, which is expected to be a challenging year. However, HCAR remains upbeat and plans to close the deficit by introducing new models.

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Nismah Naveed Bhatti
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