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Economy

Auto industry robust despite chronic energy, tax, labor woes

Workers assemble motorcycles on the production line of Yamaha Motor Pakistan's plant in Bin Qasim Industrial Park in the eastern outskirts of Karachi. (Photo by Go Yamada)

KARACHI, Pakistan -- This country's auto industry has seen sharp increases in production and sales lately, following a long period of doldrums since their previous peak in 2007. This shows that the sector is well ahead of other industries in taking advantage of the country's burgeoning economic recovery. But Japanese automakers operating here continue to face tough challenges, including chronically unstable power and gas supplies, a shortage of skilled workers, and the negative impact of the tax system on their sales.

     In April, Japanese motorcycle manufacturer Yamaha Motor resumed assembling motorcycles in Pakistan for the first time in seven years at its new factory in the Bin Qasim industrial park in the outskirts of Karachi, Pakistan's commercial hub. The new assembly line is turning out Yamaha's new YBR125 sport bike, equipped with higher-end features, such as an electric starter and cast wheels. The YBR125, a top-of-the-line model from Yamaha, costs approximately 129,000 rupees ($1,238), roughly double the average price for the 70cc models that are the most popular in Pakistan. The company expects the model's first year shipments to reach 30,000 units. Yasushi Ito, managing director of Yamaha Motor Pakistan, said the company aims to produce up to 400,000 units annually by 2020.

Cheaper auto loans

Hirofumi Nagao, managing director of Pak Suzuki Motor, a Pakistani subsidiary of Japanese automaker Suzuki Motor -- which holds a 54% share of the domestic automobile market -- said: "The Pakistani rupee is holding steady, inflation has calmed down and auto loan rates have dropped to 11% per annum after climbing to around 20%. If loan rates fall below 10%, it will help boost sales significantly." Output at Pak Suzuki is likely to surpass 130,000 units and reach an all-time high this year, thanks in part to "special demand" from the Punjab state government, which has ordered from Pak Suzuki 50,000 cabs under its taxi scheme to boost employment in the province.

     Indus Motor, a joint venture between the Habib group, one of the leading business groups in Pakistan, and Toyota Motor, registered sales of over 57,000 units in fiscal 2014, up 70% from the previous year, thanks to brisk sales of a new Corolla model.

     Another headache for automakers in Pakistan is the crippling energy shortage. Indus Motor relies for 90% of its power on off-grid generation, in the form of gas turbines and light oil. Yamaha's Ito lamented that because gas lines have not yet been installed as promised at the company's new factory, it has no choice but to use LPG-powered boilers to treat paint.

     Indus Motor faces particularly high employee turnover in June every year, the end of the company's fiscal year, when many are hired away by other companies or go abroad to work, said Keiichi Murakami, the company's vice chairman. At the same time, "it's easy to fill a vacancy," he added, smiling.

     Foreign companies operating in Pakistan's special economic zones receive tax incentives, but if they ship products to Pakistani domestic markets, these items are sometimes treated as exports subject to tariffs, due to the deficient legal framework. Amid the country's insufficient investment environment, Japanese companies will continue to face immediate problems, including the country's 17% sales tax on vehicles, which has pushed prices, as well as sluggish demand for auto financing due to the generally unstable employment situation.

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