Dollarization domino effect: Auto parts industry facing crisis

By: News Desk
Published: 11:56 PM, 25 Jul, 2022
Dollarization domino effect: Auto parts industry facing crisis
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The Pakistan Association of Auto Parts & Accessories Manufacturers (PAAPAM) has said that the auto parts industry is facing the worst crisis in the history of Pakistan as the domino effect of dollarization-- spiralling inflation, rising freight rates, escalating utility tariffs, mounting bank interest, skyrocketing material cost, and crunch of working capital--has turned the SMEs of the country’s automotive parts sector into bankrupt.

These views were expressed by the speakers of a seminar, organized by the Pakistan Association of Auto Parts & Accessories Manufacturers (PAAPAM) and attended by a large number of members, who were in full agreement that it was the worst crisis in the history of the auto industry of Pakistan.

There was a sordid discussion on the current economic situation, especially the freezing of major cost elements by OEMs, which has become a burning issue for all the vendors. The Members’ fears were tabled by both small and large vendors, and it revolved around a single-point agenda as to how the vending industry can survive in the current circumstances because the entire auto parts sector is in gridlock.

The PAAPAM Chairman Abdur Razzaq Gauhar and Senior Vice Chairman Abdul Rehman Aiza asked the Original Equipment Manufacturers (OEMs) to justify their unwillingness to understand and implement vendors’ requests to maintain their historic profit returns, instead of freezing them permanently, in spite of rising input costs. They called for compensation for cost increases which cannot be recovered through their meagre profit margin, which has also been totally frozen for the last many years.

They unanimously sought urgent support from the automotive manufacturers (OEMs), who have been supplied high-quality parts by all the PAAPAM members, at reasonable prices for the last many decades.

The participants of the seminar conveyed to the OEMs that unless they rise to the occasion and support the APMs at this critical juncture, through adequate compensation to offset the worst impact of hyperinflation, rupee devaluation, freight/utilities/interest/material cost increases, and paucity of working capital, their production lines would come to a complete halt.

As a result, the OEMs’ assembly lines may shut down and the worst-case scenario could be that OEMs may have to import auto parts at exorbitant costs on account of heavy freight and high duties.

The general body of the members unanimously demanded an immediate increase in their margins through the restoration of 10% profit on the total cost of parts, working capital support through early payments of their bills (i.e. a weekly cycle of 15 days), and unfreezing of all frozen cost elements to compensate for the extraordinary increases in all production inputs.

The meeting ended with a unanimous resolution that the OEMs should ensure immediate indexation of all frozen costs like labour, electricity, GAS/RLNG, financial costs, tooling, exchange rate impact, consumables, like oil and tools, transportation, and packing, in addition to payments terms of seven days and a consistent level of profit, as per past mutually agreed to policy.

Categories : Business