Agriculture is the mainstay of Pakistan’s economy; it therefore follows that agricultural machinery holds significant value for the country. Tractors account for most of the farm mechanisation in Pakistan and we are now on the verge of complete localisation in terms of production.
The tractor market is growing and in 2017, over 60,000 tractors were sold. The market is dominated by three manufacturers. Millat Tractors (Massey Ferguson), Al-Ghazi Tractors (New Holland – formerly Fiat) and IMT Tractors; their market share is 60, 35 and one percent respectively. Smaller brands, such as Belarus Tractors, John Deere and others, import tractors as completely built-up units (CBU) and semi knocked-down (SKD) units and cater to the remaining four percent. Production capacity stands at 70,000 units per annum and models range from 55 to 85hp. Thanks to an indigenisation programme initiated in the eighties by the Pakistan Tractor Corporation, the industry has achieved 95% localisation in terms of production.
“Labour is cheap and we indigenised production a long time ago. We are only importing five percent of the components, mainly pistons and fuel pumps as completely knocked-down (CKD) units. So there is no amortisation cost; hence, we only have the variable cost of production. This is why, Pakistan makes the lowest priced tractors in the world. A 55hp tractor that costs about $7,000 in Pakistan would cost in the region of $20,000 in Turkey, $25,000 in Europe and $30,000 in USA” said Saeed Mushtaq, Head of Marketing, Al-Ghazi Tractors.
Despite the lower prices, penetration in Pakistan still stands at 0.9hp per hectare of cultivable land, much lower than the international norm of a minimum 1.7hp per hectare.
The low prices of Pakistani tractors have given manufacturers an edge in international markets who are exporting to Afghanistan and many African countries. However, exports are limited to certain countries due to internal agreements between the brand owners and their Pakistani producers and because of the lack of technological advancement in Pakistani tractors.
Yet, despite the lower prices, penetration in Pakistan still stands at 0.9hp per hectare of cultivable land, much lower than the international norm of a minimum 1.7hp per hectare. This is because the sales depend on the interplay of numerous factors, including the availability of capital for the farmer, interest rates on lease, government subsidy programmes for the purchase of tractors and fertilisers as well as the presence of small and scattered landholdings.
Growth in this sector is still not stable and there are spells of extremely high and low sales. Sales decline considerably when farmers bear losses and bounce back when the government initiates farmer-friendly policies or there is a bumper crop. The average agricultural landholding size is approximately 12.5 acres, due to which it is not viable for most farmers to invest in a tractor unless banks provide leasing facilities on low mark-up rates or the government provides subsidies on their purchase.
“The mark-up on agricultural loans is about 14%, which is very high and explains why the share of loans for tractors is just about 10%. Currently, the only subsidy scheme available is the Sindh Tractor Scheme by the Government of Sindh, and the largest public sector agriculture development financial institution in the country, Zarai Taraqiati Bank, have shifted their focus from agricultural financing to commercial activities,” says S. M. Irfan Aqueel, CEO, Millat Tractors.
The Federal Government did provide some respite by slashing GST by a further five percent in 2016, down from the initial 16%. This brought prices down by Rs 32,000 to 50,000, depending on the model/horsepower, boosting sales considerably. Another boost came from the China-Pakistan Economic Corridor (CPEC), which is using a large number of tractors in its construction projects. Thanks to CPEC, 38,620 tractors were sold in the first nine months of 2017, compared to 22,169 units during the same period in 2016.
A big bottleneck that the industry had long ignored is the underutilisation of tractors due to the lack of implements for various agricultural activities, including tertiary (harvesting), secondary (agronomic practices) and primary (soil preparation) and the lack of awareness among farmers about these implements.
According to Mushtaq, if the boost provided by CPEC continues for a significant period of time and the government provides further support in the form of abolition of customs duties and a reduction in input tax, the industry will be in a position to invest in capacity building and further reduce prices, making tractors more affordable.
However, a big bottleneck that the industry had long ignored is the underutilisation of tractors due to the lack of implements for various agricultural activities, including tertiary (harvesting), secondary (agronomic practices) and primary (soil preparation) and the lack of awareness among farmers about these implements. This limits the benefits of a tractor and as a result, makes its purchase a less attractive prospect.
“To address this issue, Millat has put great focus on awareness building among farmers and most of our marketing budgets are dedicated to BTL activities such as farmer education programmes, equipment demos and agricultural ‘melas,’” explained Aqueel.
Al-Ghazi are also making efforts in this direction. “In addition to BTL activities, our 80 sales and service centres across the country are spreading awareness and facilitating farmers in moving towards mechanisation,” added Mushtaq.
There is ample evidence that mechanisation can increase agricultural productivity by as much as 30% and reduce costs by 20%, by eliminating labour shortages, improving the timelines of agricultural operations, allowing inter-cropping, reducing tillage and ensuring efficient use of resources. Hence, it is believed that the tractor industry has the power to drive the country towards the next phase of agricultural growth.
Although Pakistan’s tractor industry may be facing challenges of growth on several fronts, the extensive cultivable land that is still untouched presents a strong opportunity for growth.