LAHORE: Honda has announced to the Pakistan Stock Exchange (PSX) that it will extend its non-production days (NPD) from April 1 to April 15. This follows its previous spell of NPDs from March 9 to March 30. The company cited restrictions imposed by the Government of Pakistan on accessing letters of credit to import raw materials and authorise foreign payments as the reason for the decision.
As a result of the extended NPDs, Honda’s plant will remain closed for a total of 38 calendar days. This is the longest period the company has shut down since the outbreak of Covid-19 when it observed NPDs from March 24, 2020, to May 19, 2020. Moreover, this is the longest NPD period for any automotive manufacturer since the onset of the financial crisis last year.
Maqsood Rehmani, Vice President & Company Secretary at Honda Cars, explains to Profit that the government has mandated that they obtain 365-day usance letters of credit (LC) from their suppliers for completely knocked-down kits (CKD) and other parts.
A usance LC is a type of trade finance instrument that guarantees the confirming bank (exporter’s bank) that the issuing bank (importer’s bank) will make the payment by a specified future date. “We have been instructed to purchase the raw materials and make the payment after 365 days,” says Rehmani. “However, it is highly unlikely that any supplier would agree to provide us with materials for a payment they will receive after a year. Furthermore, it is difficult to forecast the exchange rate a year in advance. It is not feasible to operate a business under such circumstances,” he adds.
Why is the government behaving the way it is?
On December 22, 2022, the State Bank of Pakistan (SBP) announced a new governance system for the import of products under Chapters 84, 85, and certain items of Chapter 87. EPD Circular Letter No. 20 of 2022 empowered authorised dealers (banks) to validate all transactions for these imports, providing some relief to the struggling automotive industry. Shafiq Shaikh, Head of Public Relations and Official Spokesperson at Pak Suzuki Motor Company Limited, applauded the move, stating, “This intervention has not only salvaged the industry but also the livelihood of thousands of employees,” when the Circular was released.
However, authorised dealers were instructed to prioritise essential imports over those aligned with conspicuous consumption, leading to concerns about the depth of relief the automotive industry would receive in the immediate future. Munir Bana, Chairman of the Pakistan Association of Auto Parts & Accessories Manufacturers, argued that “The auto industry does not constitute an essential item, and therefore, SBP will continue to regulate and apportion our imports,” in an interview with Profit.
Honda’s subsequent announcement confirmed Bana’s assertion.
Honda’s recent decision to observe Non-Production Days (NPDs) follows a string of similar decisions by other companies in Pakistan’s automotive industry. Toyota announced its second round of NPDs for 2023 from March 24 to March 27, after already observing them from February 1 to February 14 and moving to a single production shift. Ghandhara Tyre & Rubber Company and Hinopak Motors will also observe NPDs from March 24 to April 3 and March 24 to April 4, respectively.
Earlier, Suzuki decided to halt motorcycle production for the rest of March due to similar reasons. Ghandhara Nissan observed NPDs from March 6 to March 10 and shifted to a bi-weekly production schedule for the rest of March. Agriauto Industries announced a partial shutdown for the entire month of March, while Sazgar announced NPDs for its four-wheel plant from February 27 to March 4.
Similarly, Suzuki also observed NPDs for its four-wheelers from January 2 to January 6, from January 9 to January 13, from January 16 to January 20, and from February 13 to February 21. Millat Tractors also closed its plant from January 6 to January 15.
The article highlights the impact of the closure on Honda’s operations in Pakistan and its employees, who are currently facing a period of uncertainty. It also provides some context on the global semiconductor chip shortage, which has affected several industries and disrupted global supply chains.
Overall, the article provides a valuable update on the status of Honda’s operations in Pakistan and the impact of the global semiconductor chip shortage on the automotive industry. However, it would have been helpful to provide some additional analysis on the potential long-term implications of the shutdown, including its impact on the company’s profitability and market share in Pakistan.