Pak­istan auto in­dus­try :

In 2011, Pak­istan im­ported 54,800 used cars from Ja­pan at a cost of $272 mil­lion whereas there are only a few thou­sand Pak­ista­nis liv­ing in that coun­try.

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The au­to­mo­tive in­dus­try has been an ac­tive and grow­ing sec­tor in Pak­istan and has con­trib­uted hand­somely to the GDP. It has also at­tracted con­sid­er­able for­eign di­rect in­vest­ment as a num­ber of for­eign auto man­u­fac­tur­ers have in­vested some Rs10 bil­lion in re­cent years in the in­dus­try. The re­duc­tion of age limit for im­port of used

cars from five to three years was good news for the lo­cal auto and al­lied in­dus­tries. But re­cently, the re­port pub­lished by the Com­pe­ti­tion Com­mis­sion of Pak­istan (CCP) on the lo­cal auto in­dus­try does not au­gur well for the sec­tor. The rec­om­men­da­tions made in the re­port are flawed as they are based on com­par­ing lo­cally man­u­fac­tured new cars with il­le­gally im­ported used cars. Im­ported used cars are a ma­jor threat to the lo­cal auto in­dus­try and it is claimed by in­dus­try in­sid­ers that this may harm the sec­tor if the rec­om­men­da­tions are im­ple­mented.

The CCP Re­port states that do­mes­tic mar­kets should be opened up for im­port of news cars at rea­son­able tar­iffs; age limit on im­ported used cars should be in­creased from three years to more than three years; used cars should be al­lowed to im­port apart from the per­sonal bag­gage, trans­fer of res­i­dence and gift schemes; en­try bar­ri­ers should be re­moved by low­er­ing tar­iffs and be made uni­form across all au­to­mo­bile cat­e­gories and the re­cent mea­sure of low­er­ing the de­pre­ci­a­tion al­lowance should be re­con­sid­ered.

For any de­vel­op­ing econ­omy, an im­por­tant fac­tor is pro­tec­tion­ism but some­how suc­ceed­ing gov­ern­ments in Pak­istan have failed to pro­vide an en­vi­ron­ment of pro­tec­tion to the lo­cal auto in­dus­try, leav­ing it to fend for it­self. In­stead of pro­vid­ing lo­cal play­ers with ac­cess to cap­i­tal plus tax ben­e­fits and other nec­es­sary fa­cil­i­ta­tion, the govern­ment has cre­ated hur­dles in the growth of a per­fectly well-func­tion­ing sec­tor. The big­gest ex­am­ple is the im­port of used cars. An in­dige­nous in­dus­try which is al­ready of­fer­ing in­ter­na­tion­ally-com­pet­i­tive prod­ucts has to con­tend with an in­flux of sec­ond-hand im­ported goods as well.

Prospec­tive car buy­ers are lured by the flashy im­ported cars that ap­pear to of­fer more com­fort and gad­getry com­pared to lo­cally pro­duced mod­els at rel­a­tively lower prices. It is only later that buy­ers of im­ported cars re­alise the fu­til­ity of pur­chas­ing the for­eign-made cars, which are ac­tu­ally old mod­els that have been ar­ti­fi­cially spruced up, or re­con­di­tioned, to at­tract cus­tomers in the Pak­istani mar­ket. It is ob­vi­ous that the im­port of th­ese cars neg­a­tively im­pacts sales of lo­cally pro­duced ve­hi­cles and dims the progress of the lo­cal auto in­dus­try.

The Pak­istani auto in­dus­try is faced by var­i­ous other prob­lems too, such as ris­ing in­ter­est rates, de­pre­ci­at­ing ru­pee, de­clin­ing pur­chas­ing power and paucity of auto fi­nanc­ing by banks. Prices of raw ma­te­ri­als and util­i­ties also con­tinue to in­crease, re­sult­ing in thin mar­gins. The govern­ment’s long promised Auto In­dus­try De­vel­op­ment Pro­gramme (AIDP) has also not sur­faced so far.

The ab­sence of a long-term and con­sis­tent auto pol­icy makes the en­vi­ron­ment dif­fi­cult to op­er­ate in and also dis­cour­ages for­eign in­vest­ment.

A pro­posed ban on used car im­ports makes com­plete sense be­cause they do not en­tail any in­flow of for­eign in­vest­ment, cre­ate no em­ploy­ment op­por­tu­ni­ties and no tech­nol­ogy trans­fer oc­curs. To the con­tracy, a lot of pre­cious for­eign ex­change is be­ing wasted on th­ese cars. Cus­tomers also suf­fer as they pur­chase on the coun­try’s for­eign ex­change re­serves. The re­duc­tion of age for im­ported used cars will lower the bur­den on re­serves and also help

In­dus­try sources have also re­futed the claim by the Fed­eral Board of Rev­enue (FBR) that re­duc­ing the age limit of used cars may cost the govern­ment Rs17 bil­lion per an­num, based on

du­ties in­crease of 26 per cent).

It is also in­ter­est­ing to note that while, tech­ni­cally speak­ing, the im­port of used cars is banned in Pak­istan, a cer­tain dealer mafia is im­port­ing used cars through mis­use of car im­port fa­cil­i­ties pro­vided to over­seas Pak­ista­nis, such as per­sonal bag­gage, gift scheme and trans­fer of res­i­dence (ToR) fa­cil­i­ties. For in­stance, in 2011 Pak­istan im­ported some 54,800 used cars from Ja­pan at a cost of $272 mil­lion whereas there are only a few thou­sand Pak­ista­nis liv­ing in that coun­try. It used cars at high prices and then end up pay­ing high main­te­nance and re­pair costs for pur­port­edly ‘bet­ter qual­ity’ cars. Spare parts of th­ese im­ported cars are also high priced and dif­fi­cult to find in the lo­cal mar­ket. Th­ese cars are not backed by any war­ranty and have very limited af­ter sales ser­vice sup­port. The de­pre­ci­at­ing Pak ru­pee wors­ens the ef­fect of th­ese im­ports as ex­pen­di­ture of for­eign ex­change per ve­hi­cle is high and the coun­try al­ready suf­fers from fast de­plet­ing for­eign ex­change re­serves. As such, it can­not sus­tain this ad­di­tional bur­den.

Ac­cord­ing to a for­mer chair­man of the Pak­istan As­so­ci­a­tion of Au­to­mo­tive Parts and Ac­ces­sories Man­u­fac­tur­ers (PAAPAM), lo­cal au­to­mo­tive parts and ac­ces­sories man­u­fac­tur­ers in­curred a cu­mu­la­tive loss of Rs25-30 bil­lion dur­ing 2011-12 due to im­port of used cars in Pak­istan. Ac­cord­ing to in­dus­try sources, the im­port of used cars places a heavy bur­den gen­er­ate more taxes for the national ex­che­quer.

The im­port of a used car is said to cost $10,000 on an aver­age against $5,000 for man­u­fac­tur­ing a car lo­cally. The lo­cal car in­dus­try is said to have paid Rs80 bil­lion in taxes in 2011-12 against Rs17 bil­lion con­trib­uted by the im­port of used cars. and taxes col­lected dur­ing 2011-12 on ap­prox­i­mately 54,800 im­ported used cars.

In fact, they say, the rev­enue gen­er­ated by the govern­ment on a sim­i­lar vol­ume of ve­hi­cles man­u­fac­tured by the lo­cal in­dus­try would have been Rs21.5 bil­lion, ex­ceed­ing the levy on used cars by Rs4.5 bil­lion per an­num (an is dif­fi­cult to un­der­stand how th­ese few Pak­istans liv­ing in Ja­pan could have pur­chased and ex­ported so many cars to Pak­istan?

The his­tory of govern­ment poli­cies with re­spect to im­port of used cars has been in­con­sis­tent through­out. The age limit for im­ported used cars was re­duced to five years in 2006-07 and im­ports fell to 42,000 units. This age limit was fur­ther cut down to three years in 2007-08. Later, the govern­ment im­posed 50 per cent reg­u­la­tory duty fol­lowed by 12.5 per cent in­crease in cus­toms duty and also cut de­pre­ci­a­tion to 1% from 2% in 2008-09. Im­port of used cars of up to five years of age was again al­lowed in 2010. The govern­ment has now re­versed its ear­lier de­ci­sion and has fixed the im­port age limit at three years.

Even though lo­cal man­u­fac­tur­ers are pro­gress­ing to­wards lo­cal­i­sa­tion at an im­pres­sive pace, poor mar­gins are de­creas­ing the im­pact of such

lo­cal­i­sa­tion. One sen­si­tive as­pect of in­di­g­e­niza­tion is that ex­pen­sive com­po­nents have to be de­ployed that re­quire huge fi­nan­cial flex­i­bil­ity. This is why lo­cal­i­sa­tion on a big­ger scale re­quires eco­nomic as­sis­tance from the govern­ment in the shape of lower du­ties and taxes. It will grow when greater vol­umes are sold but im­port of used cars in no way helps this ob­jec­tive.

The govern­ment needs to pay more at­ten­tion to Pak­istan’s sec­ond high­est tax-pay­ing sec­tor. The lo­cal auto in­dus­try pro­duced its first ve­hi­cle in 1953, when National Mo­tors Limited in Karachi started as­sem­bling Bed­ford Trucks. Sub­se­quently buses, light trucks and cars were as­sem­bled at the same plant. The in­dus­try was highly reg­u­lated un­til the early 1990s. Af­ter dereg­u­la­tion, ma­jor Ja­panese man­u­fac­tur­ers en­tered the mar­ket and cre­ated some com­pe­ti­tion. Th­ese in­cluded HINO Trucks, Suzuki Cars (1984), Mazda Trucks, Toy­ota (1993) and Honda (1994). Assem­bly of Dai­hatsu and Hyundai cars (1999) and var­i­ous brands of LCVs and a range of mini-trucks com­menced sub­se­quently.

From 1953 to the present, the jour­ney of the Pak­istani auto in­dus­try has been rough for the most part but also smooth at times. The in­dus­try ex­pe­ri­enced a ver­i­ta­ble boom in 2006-2007 when sales touched a record high of 180,834 units, boosted by car fi­nanc­ing by banks on low in­ter­est rates and rise in buy­ing in ru­ral ar­eas. The in­dus­try has been slid­ing down since then due to the gen­eral eco­nomic de­cline, high in­ter­est rates and ap­pre­ci­a­tion of the Yen against the Pak ru­pee. The govern­ment’s hos­tile poli­cies have also had a ma­jor im­pact on the in­dus­try’s poor per­for­mance.

The auto sec­tor pro­vides em­ploy­ment to 200,000 peo­ple di­rectly and 1.2 mil­lion in­di­rectly. Huge in­vest­ments have been made in it by the global au­to­mo­bile brands. The to­tal con­tri­bu­tion of the auto in­dus­try to GDP is likely to in­crease up to 5.6% and con­tri­bu­tion to the man­u­fac­tur­ing sec­tor is likely to in­crease up to 25% in the next few years.

There is a lack of com­pe­ti­tion in Pak­istan’s auto in­dus­try as there are only three ma­jor car as­sem­blers dom­i­nat­ing the mar­ket – In­dus Mo­tors (Toy­ota), Pak Suzuki and Honda. Pak Suzuki is the mar­ket leader with a mar­ket share of 64.4%; Toy­ota en­joys a share of 30%, fol­lowed by Honda with 3.1%.

While the govern­ment’s longterm pol­icy for the de­vel­op­ment of the auto in­dus­try is still in wraps, short-term poli­cies are put in place from time to time. How­ever, auto as­sem­blers do not man­u­fac­ture parts lo­cally to avoid giv­ing de­sign and man­u­fac­tur­ing de­tails to the lo­cal ven­dor in­dus­try. Also, it is quite dif­fi­cult for any for­eign au­to­mo­bile man­u­fac­turer to pro­vide man­u­fac­tur­ing tech­nol­ogy to Pak­istan due to lack of lo­cal re­search and de­vel­op­ment fa­cil­i­ties, skilled man­power and well-de­vel­oped in­fra­struc­ture.

The im­por­tance of the auto in­dus­try can­not be over­looked as it plays a sig­nif­i­cant role in the de­vel­op­ment of the en­gi­neer­ing base of the coun­try. There are still se­ri­ous chal­lenges faced by the in­dus­try, such as the need for im­proved mod­els, fuel ef­fi­ciency, en­hanced user com­fort and high qual­ity stan­dards, for which a more vi­brant mar­ket is re­quired.

The au­to­mo­tive in­dus­try is among the fastest grow­ing sec­tors in the national econ­omy and, given the req­ui­site sup­port, it can at­tract more for­eign in­vest­ment and be­come a dy­namic com­po­nent of the coun­try’s man­u­fac­tur­ing sec­tor, con­tribut­ing to the econ­omy in a big way.

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