The participants of a seminar have asked the Original Equipment Manufacturers (OEMs) to pass on at least 10% of net profit to the vendors, besides reevaluating all frozen variables of cost, as the parts manufacturers are gaining no benefit instead facing huge losses due to high production cost amidst rising energy prices, constant hike in markup rate and the mounting cost of raw material.
The OEMs only increase the rates of materials, leaving all other variables frozen. The well-established principle of economics that, in the long run, fixed costs become variable has never been addressed by the OEMs, leaving their business partners in the lurch. This inequity has led the vending industry to dwindle its working capital to nil.
This seminar was arranged by the Pakistan Association of Automotive Parts & Accessories Manufacturers (PAAPAM) as advised by its Executive Committee, under professional consultation with M/S UHF, on ‘Identifying business challenges way forward ‘ to assess their financial health and profitability of the businesses.
The members from various cities of Punjab joined the event, despite abnormal weather conditions to pack the hall. The tremendous turnout showed the quantum of gravity and unity.
The charged members were one voice to resolve that the OEMs should pass on at least ten percent profit on invoice value to vendors; ensure indexing of frozen variables; indexing within 15 days whenever a variance of +-5 percent occurs. The participants emphasized that the matter affected vendors across the board that required the immediate intervention of PAAPAM.
Besides PAAPAM Chairman Abdur Razzaq Gauhar, the session was addressed by PIEDMC Chairman Mr. Nabeel Hashmi, Ex chairman PAAPAM Usman Malik, Capt (r) Muhammad Akram, CEO M/S UHF Consultants Faisal Jallal, Convenor 2-3 Wheelers Mohammed Nasim, and Convenor Tractor Committee Irfan Qureshi. Other participants, representing car, tractor, and motorcycle sectors, expressed their grave concerns over the squeezing profit margin of auto parts suppliers of the OEMs in Pakistan.
The speakers pointed out that average raw material prices have been risen by more than 159% (2.59 times) during the last five-year period while basic wages, including EOBI and Social Security expenses, have been jumped by 33.3%.
Moreover, electricity cost has been skyrocketed by more than 76%, while gas prices have been risen by a whopping 158% (2.58 times). In the same way, the rupee value has been depreciated by almost 70% against the dollar. The petroleum products, including lubricants and chemicals prices, have soared by 95% during this period. They said that international freight costs had unprecedentedly been increased by 712.5% (8 times), proving destructive for the auto parts SMEs.
PAAPAM Chairman Abdur Razzaq Gauhar, on this occasion, observed that 10-15% of vendors were on the verge of closing their business. The rest were also under tremendous financial constraints due to their squeezed profit margin, reducing to an almost negligible level due to the high cost of inputs and rising cash flow demand.
Senior member of the Auto parts manufacturing industry, Adil Mansoor, pointed out that the hard-earned setups during the past 30 years had drained the sector in the last 03 years.
Mr. Gauhar criticized the continuous rise in the key policy rate, calling it too high for borrowing industries to handle, owing to its onerous implications on the cost of doing business already heading north.
He said that the State Bank of Pakistan had recently jacked up the policy rate to 9.75 percent, terming it a negative development, which would further burden the industry in the wake of the high cost of business and prices of inputs. He expressed sheer dismay over the excessive increase in the prices of petroleum products and appealed to the government for action to save the industry from the impact of high fuel prices.
He said that the automotive parts manufacturers are worst affected due to higher markup rates on loaning while having no financial support from the OEMs. He added that the situation had further aggravated due to freezing most of the input costs, e.g., overheads and the profit by the parts purchasing companies.
The chairman appreciated the M/s. UHF for conducting a professional study and presenting a detailed analysis for finding out the root causes of the problem.
He showed his resolve that PAAPAM would fully support its member companies to present their cases for unfreezing capped heads of overheads and profits and bring all the input costs on actual while calculating parts prices.