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.
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.