Home / Interviews / Balance approach with policy incentives promptly required for domestic auto assemblers and importers

Balance approach with policy incentives promptly required for domestic auto assemblers and importers

To curb smuggling of parts need to set out action plan

Interview with Engineer M. A. Jabbar — Chief Executive, Qaim Automotive Manufacturing (Pvt) Ltd

Profile

Engineer M. A. Jabbar is the Chief Executive of Qaim Automotive Manufacturing (Pvt) Limited, Chairman Karachi Tools Dies & Moulds Centre MOI&P-Karachi, Member of Board of Governors Sustainable Development Policy Institute (SDPI), Honorary Consul General to Ukraine, Member Director Board SMEDA, Member Board of Director PSQCA, Member Privatization Commission of Pakistan, Member Senate NEDUET and Life Member SAARC CCI.

He has held the positions of Vice President FPCCI, Chairman Site Association of Industry and chaired important committees including R&D and WTO in FPCCI for several years. He is also a former member Board of Governors Pakistan Institute of Management, Member Board of Export Processing Zone Authority, National Fertilizer Corporation, SSGC LTD, Exide Ltd Pakistan and former Member Syndicate Karachi University.

He has Bachelors in Engineering and has specialized in Power Systems and certified Safety Engineer. He has over three decades of experience in engineering industries, power generation and has represented private sector before public sector on matters of trade and fiscal policies. He was also a member in numerous government delegations including WTO Ministerial Conferences, G-77-Havana, IPR China, ISO General Assembly Geneva, National Institute of Standard Body-USA, ISO standards making in DIN, Berlin Germany.

Qaim Automotive Manufacturing (Pvt) Ltd is incorporated under the Companies Ordinance 1984. The Memorandum and Articles of Association mandates to setup industrial undertaking to manufacture all kinds of automotive parts, products and to do all other acts which are necessary for establishment and operation of industrial unit. The company presently is manufacturing filters for automotive, industrial, power & customer design applications with major focus on automobiles. The manufacturing in major encompasses filters for oil, air, fuel, water fuel separator applications of automobiles along-with giving responses to the needs of customized required filters.

PAGE: WHAT ARE YOUR VIEWS ON AUTO PARTS IMPORTERS AND MANUFACTURERS IN PAKISTAN?

ENGINEER M. A. JABBAR: Unfortunately, the tendency to keep supplies of consumption and in use products stable through liberal import policies have adversely impacted domestic manufacturing sector in Pakistan. The so-called public appeasing approach to check the prices has on the contrary retarded growth of domestic producing units.

The imports have constantly increased by widening the trade deficit with development of current account deficit and likely to be adversely impacting macroeconomic stability. This owns and generates reasons from the supply side approach of our policy and decision making public sector. When the demand for vehicles increased, the chance to allow the auto sector to increase capacities and economies of scale to reduce the unit price was least considered to be a way forward for the real economics to work with in the interest of domestic needs of employment and socio economic prosperity by facilitating increase in domestic production through policy interventions. The space for increasing the domestic capacity was filled in by the imports of vehicles including used ones.

The import facilitating policies come in the way of available utilization of the domestic potential, in specific in a country of 50% demographically dominated by youths. The domestic consumption with increase in economy of scale results in available exportable surpluses, which arrangement also could not work with, being hostage of liberal policies including barter of house needs to increase domestic production by picking up 500 million US dollars from World Bank to direct the public sector policies to reduce the domestic production.

The liberal imports have been often offered by donors in the name of increasing the competitiveness of indigenous production without realizing the circumstances surrounding the specific issues which cannot be link refer to the level of developments in the developed countries. The FDIs have helped in strengthening domestic production, which eventually with increase in the economy of scale of domestic production converted into export helped by FDIs. The buyer driven FDI is also fundamental to the needs of domestic production, so is the vertical needs of FDI. The FDIs and co relationship of the same in improving the domestic production and increasing the investments in domestic manufacturing is complex but workable to the needs of national requirements if are carefully routed through by public sector directions and given national policies.

The government providing incentives on imports is always at the cost of its domestic manufacturing sector. The over imports have forced government to gradually bring in many imports against 100% cash margin, a sign which shows that rising imports are disproportionate to the balance of trade and above to all it is also unhealthy in a country wherein population grows at about 2% with domestic manufacturing and overall economy growth numbers yet lower than 5% in years to be claimed from this year to onwards.

Therefore the increase in imports of auto parts against the share of domestic manufacturing would simply conclude that we are not giving any policy incentive to the domestic manufacturing. The vendor industry developed by the vehicle assemblers has yet to improve its assembling share by/amongst from domestic automotive vendor industry, itself another correction required through public policy interventions. The domestic auto parts industry is held hostage of slow growth of indigenization in/for vehicles and as well as faces the wrath of cheaper imports further compounded by other odds and evils not limit to but also unofficial cross bordering trade. The public sector policies though are expressed in the form of statutory regulatory orders issued including the expression contained in public procurement authority bills do ask the public sector procurement to be not at disadvantage for procurement of locally manufactured auto parts. In reality it is not happening so. The public sector advertises to restrict the procurement to only imports by just mentioning genuine only. The parts being procured in negotiated tendering is definitely infringing upon the state made policies but the public sector organizations hardly are tuned to the need of providing at least leveling playing field to allow the procurement of locally made parts as well to be inclusive for domestic development of economy of auto part industry.

The word equivalent auto part in procurements as to be mandatory from/by the application of public procurement regulatory rules is not being in most cases provided space in public procurement advertisements by public sector organizations. The surging of imports definitely would account for the reason that intents of the government to see Pakistan a stronger and developed country is least looked into for required implementation. The domestic manufactured auto parts are being used in assembling of vehicles, which itself certifies the filtration of the same through quality assurance required so for the use.

One can give an example of increase in local production of two wheelers, which has gradually brought down the unit cost due to increase in localization of parts.

Government must provide space to domestic industry including of auto parts to help in increasing the economy of scale generated by the increase in local assembling/manufacturing of auto machines so that the price stability and consumer satisfaction are achieved simultaneously, an objective achievement of the prudent policy of any government to be acting in the well being of the people who vote the governments to have the powers to regulate the economy.

Tractor industry and its development is another example that 90% of the parts are produced domestic. Therefore, it is now the choice of government to seek balance approach by policy interventions to provide incentives to domestic manufacturing of auto parts as further liberal approaches by signing FTAs is also getting growth, which will scale down the tariffs to almost close to zero level as a differential value in manufacturing of goods locally wherein raw materials are imported from overseas.

PAGE: WHAT ARE YOUR EXPECTATIONS FROM THE UPCOMING BUDGET REGARDING TAXATION ON AUTO PARTS?

ENGINEER M. A. JABBAR: Unfortunately Auto Development Policy Program 2007-12 could not steer its objective due to interventions by ECC, which stopped the implementation of well conceived and structured cascaded objectives of the policy, which merited to be let the work as was agreed amongst all stakeholders privy to the policy of auto development.

The taxation structure for development of auto parts also was part of the policy, which often was stalled by ECC decision. The taxation structure for manufacturing auto parts is again in macro management part of Automotive Development Policy 2016-21.

The budgetary measures and taxation in principle has to be reflected in coming and later coming budgets on the basis of tariff structure given in the ADP 2016-21. The tariff rationalization, tariff systems, rationale for tariff structures are fairly expressed in the policy. The localization of auto parts will further be classified in statutory regulatory order 693, thereby the gradual and onward addition of locally manufactured parts will also reflect the integration of domestic value addition in local assembling/manufacturing of cars, SUVs, LCVs, motorcycles, motorcycle rickshaws, auto rickshaws, 3-wheelers cargo loaders, agriculture tractors, prime movers, buses, heavy commercial vehicles and trailers.

The present agitating problems which would be taken up during budget are lifting of the regulatory duties on import of raw materials which are not locally manufactured but are used in manufacturing of domestic made auto parts. The import in specific of ferrous category raw materials with higher rate of regulatory duties, which are not locally manufactured for the purpose of manufacturing auto parts as supply chain to auto industry needs to be dismantled to create the cost competitiveness and discourage the auto assembling/manufacturing industry to engage in imports of as use-able auto parts. The import rates of finished and as use-able auto parts made of ferrous materials are at lower rates of duties than those applicable on import of ferrous materials inclusive of present regulatory duties as raw materials for manufacturing finished and as use-able auto parts.

This does not sound a fair taxation policy being discouraging for domestic value additions as locally manufactured auto parts. The additional point which also will be agitated is higher sales tax on auto parts i.e. Standard 17% + Extra 2% + unregistered 2%, which cumulative aggregate is over 20%. Moreover the extra 2% on account of sales of auto parts is also non adjustable, which makes the philosophy of providing incentive to domestic manufacturing held in negation of otherwise requirement of helping the domestic production base and potential.

The HS codes of auto parts have to be under respective headings as presently there are many auto parts, which have been brought under the HS not appropriate to required placement under respective sub headings.

Example is 8708.2932

(A) Following components for motor cars of sub-heading 8703.2119 and 8703.3112 –(1) Sash Front Door Rear R/L (excl. door windows); (2) Sash Rear Door Center (excl. door windows).

(B) Following components for motor cars of heading 87.03: (1) Knuckle Steering; (2) Water Pump; (3) Fuel Filter; (4) Seat Recliner; (5) Air Cleaner Assembly; (6) Steering (Manual); (7) Engine; (8) Transmissions (Manual).

The expression of respective headings for the appropriate descriptions will also be in the interest of transparent system applications of taxation whereby import duties as should apply per taxation policy on imports of the similar products which are locally manufactured products would prevail upon.

Regulation of economy through taxation also spaces to act as catalyst to reason to increase in engagement of domestic manufacturing of auto parts on being provided just and fair taxation to help in cost competing imports. It is a great challenge for policy makers to balance the interest of liberalized imports against hard hit given conditions in which domestic manufacturing is taking place in yet to be improved enabling environment to conduct business of manufacturing in Pakistan.

PAGE: HOW WOULD YOU COMMENT ON THE PERFORMANCE OF PAKISTAN ASSOCIATION OF AUTOMOTIVE PARTS AND ACCESSORIES MANUFACTURERS (PAAPAM)?

ENGINEER M. A. JABBAR: The Association comprises of members who are in diversified engineering manufacturing discipline. It is very interesting and encouraging to note that the automobile vending industry is being run by qualified engineers, with business discipline.

Above to all; the nature of ownerships and shareholding belongs to the people who are managing these companies. The appropriate managing HR always prefers to have more appropriate HR to work with. The Companies manufacturing auto parts believe in trainings, adapting to the changes and above to all the association and its bondage with members remains non controversial. It conducts the business of interests of members as collective and dedicated bargaining agent. With registered membership base of over 300 tier-1 parts manufacturer out of over 3000 units itself shows the strength of managing knowledge available with the auto parts manufacturing companies. It has auto parts makers of cars, motorcycles, tractors, trucks and buses who weave their business interest with multinational companies of repute like Toyota, Suzuki, Honda, Hino, Nissan, Isuzu, Fiat, Massey Ferguson.

The performance of any trade body should be viewed from its work efforts to invite the attention of policy makers on fiscal and monetary material matters and in specific to make available support from the associated companies using auto parts. In this respect, the PAAPAM has established cooperation on programs of training in Pakistan through supporting agencies from Japan like JICA and others. Besides it has also support of available middle management and higher management training and educational facilities facilitated by government of Japan.

In addition to that continuous sessions and workshops towards the need of quality assured product/productions and well managed production plate forms are held to support the industry. I may be biased but let me say that it is one of the very few best associations representing the members since its being licensed by Government of Pakistan two decades back in recognition of strength of functionality of the association. It is represented on many government and semi government NGOs and committees and as well as it is present on private and public sector institutions by its members.

The vision of the association is to emerge as strategically viable indigenized source of supply of automotive parts through maximization of local contents and by meeting the industry norms of quality, price. The delivery continues to be pursued and adhered to with changes and approach according to the changing timings.

The mission of the association to build a competitive edge in the local automotive parts is accepted by considering innovations, required modernization. It tries to synchronize with research based developments. In overall assessment, I can voice that the otherwise objective purpose of the association directed by Memorandum and Articles of Association remains alive and the presence of highest offices inaugurating the PAPS show 2017 is itself registration of the efforts of the association in keeping the need based requirement of managing contacts with the highest executive office to move the discussions of the required state policy support.

PAGE: WHAT MUST BE DONE TO INCREASE THE EXPORT FOR PAKISTANI AUTO PARTS AND VEHICLES?

ENGINEER M. A. JABBAR: The association and its members keep participating in international exhibitions to bid introduction of locally manufacture auto parts for export market requirements. The 3000 estimated vending units with small and cottage units of about half of this estimated vending units with continued improvements as are required by the manufacturers of cars, tractors, motorcycles, three wheelers is a well founded preparation for exporting parts from Pakistan.

Pakistan’s exports of engineering sector to various regions include Africa, America (Continent), Asia, APEC, APTA, ASEAN, Central Asian Republics, CIS, Developed & Developing Market Economics, ECO, Europe, EU 25, Middle East, NAFTA, OPEC, OIC and SAARC.

The export including auto parts and accessories amount quarter of a billion dollar and includes articles made from the same engineering applications available with parts manufacturer for automobile. The engineering manufactured exports have more-than 60% share in world trade. We must focus by providing state support to create exportables for a large size market of engineering goods.

On the other side continued being provided subsidies including prohibitive and others for textile sector have been of considerable decision making by state for a sector having less than 2% share in the world trade of textile and clothing.

The exports of 12 billion dollars about exports in textile and clothing against the market of over 600 billion dollars with continued state support has not passed on to any expected results against which continued focus sustains by state on supports.

The 6% of the world trade in textile against over 60% in engineering goods trade needs to be looked into for a just and fair state taxation and others support policies interventions required on the basis of rationalization itself of the world trade pattern and trend in the global wealth.

It is the time that support if any should be considered by all exportable and not limited to exports of textile or not over focused only for textile.

Under the trade policy review mechanisms by World Trade Organization (WTO), Pakistan has been advised to diversify its trade for diversification in exports. That is the way policy and decision makers have to work with to bid entry into the large size market of engineering goods, automobile and auto parts manufacturing is the biggest industry in the world whereby consumption of auto parts is also biggest size within in the world trade.

Four of top 10 global car makers have plants in Pakistan. The quantum of local value addition: about more-than 50% of vehicle cost. GOP taxes 37% of vehicle price is paid as taxes inclusive of domestic manufactured auto parts, direct & indirect employment for 03 million skilled manpower, documentary economy and PAAPAM members supply local parts worth Rs100 billion+ per annum to cars, motorcycles, tractors, trucks & buses assemblers in Pakistan.

Therefore, in view of some of the foregoing features, it is imperative that government should focus on required state policy support to value the considered opinion of 4 top 10 global car makers having presence in Pakistan in which localized parts are also consumed and can be spaced in aftermarket sales in Pakistan. The exportable surpluses on account of cost competitive edge from the point of view of economy scale of manufacturing can also become integrated part of the world trade in consumption of auto parts for automobiles.

PAGE: IS SMUGGLING A BIG ISSUE FOR AUTO PARTS BUSINESS IN PAKISTAN?

ENGINEER M. A. JABBAR: The menace of connived and managed back imports from Afghanistan is not a new history. The consumption for Pakistan market has always remained part supply or full supply of such un-documented imports from Afghanistan. The spare and auto parts are no exception in this regime of not legal imports. This constitutes also in major back imports from Afghanistan without any legal channel requirements otherwise should apply on imports.

The word illegal imports can fairly apply to such goods imported from Afghanistan but consumed in Pakistan without any tax documentation. The pattern of such backward flow of auto parts depends on the pattern of demand consumptions in our market and as well as low volume high cost auto spare parts remain attractive regime for such back flow from Afghanistan. The vendor industry, which is providing auto parts or parts for manufacturing and assembly of vehicles of many types in Pakistan produces parts as to the satisfaction of original equipment manufacturers. Thus, technically speaking or based on differences amongst genuine, OEM and aftermarket parts, one can say that our manufacturers produce genuine parts, which they can offer for aftermarket as OEM without logo of vehicle manufacturer and as well as can offer similar parts of same quality for after market without embossing the logos. This satisfaction of car manufacturers and assemblers in Pakistan primarily is facilitated by tariff based system. Meaning by that government is providing tariff level on imports of completely built units, against which vehicles are being assembled in Pakistan through integrating the domestic manufactured parts. Difference in import tariffs on raw materials for manufacturing parts for car manufacturers serve the economic reason to work with TBS based system for indigenization.

This protected concept is being circumvented through back imports without documentation. Illegal imports from Afghanistan giving price preferred margin of unpaid duty/non documented imports of spare parts from Afghanistan provides huge space to aftermarket sales of auto parts of over billion of rupees.

This situation has frozen the option of managing a reasonable share of locally manufactured auto parts in aftermarket or replacement market already producing quality parts. The scale of economy is restricted for domestic industry with overwhelmed reliance on domestic vehicle manufacturers. The arresting of increase in domestic production of parts due to backward flow of parts from Afghanistan imported for actual consumption in Pakistan also remains non resolute evil in the field.

The trade of illegal imports earlier from Afghanistan was a chance based trade in which the imports for Afghanistan were more on a guess work exported back without documentation to Pakistan with assured making margins for preferred sales, however, presently this is highly organized sales for aftermarket of spare parts in Pakistan. The anticipated requirements are well tabulated against which imports from Afghanistan of spare parts takes place with promised re-entry in Pakistan. There have been innumerous reports with fairly well thought over and collected figures which definitely speaks of adverse impact on our domestic manufacturing including on spare parts manufacturing in Pakistan for vehicles and aftermarket.

In simple, the tax paid goods or tax paid manufactured goods cannot cost compete with un-taxed back entered goods from Afghanistan for consumption in Pakistan market. The concept of filer and non filer eventually considered as an approach to direct documentation of economy has yet to work.

We instead of making real time corrections are always engaged in finding the on/about solutions, which instead of promoting economy, sometimes suffocates and creates problems of law and order such as increasing trend on cash handling due to taxation on withdrawal of cash, considered to be absolute measure to document the economy.

In conclusion of the whole issue, land locked country in terms of international references may need our support to allow imports of goods to pass through our country, but it should also consider the win-win situation wherein we allow imports of goods to the level of requirements and consumption of the country we are facilitating our land while preserving and protecting our own interest to include promoting domestic industry, encouraging import substitutions and moving to self-reliance. If the situation of not performing real monitoring of misuse of ATT sustains, then we cannot manage performing required national objective to strengthen our domestic industry.

The dismal performance of domestic industry will continue and it is likely that in time to come we will be importing more and exporting less to sustain the syndrome of taking money from donors for making the figure numbers for our balance sheets in specific to manage percentage of GDP as deficits etc asked by the donors as our principle and foremost objectives.

The macroeconomic stability should not affect our micro/macro economic requirements, which provides employments, services and above to all, the spirit to consider domestic investment in value additions as the reason based on available business enabling and profit taking environment through indigenized production efforts. The consumption volumes for domestic needs through and by facilitating Afghan trade are fairly large as against domestic produced auto parts, whose consumption in aftermarket is limited due to some of the reasons aforementioned and discussed including non seriousness of state. The present interceptions in the name of checking smuggling on random basis needs to be changed to a national anti smuggling action plan in the interest of our domestic economy?

The way we are working on/against economic terrorism, in specific hunt for those considered to be financing outlaws should extend to this area of economy, which other is destroying factor for our economic interest, in specific impeding creation of physical assets/means of production assets to generate economy, employment, taxes, spillover for exportable surpluses. Without any doubt these efforts are to affect the pulling out poverty with passage of time on sustainable basis, if the domestic industry is performing. Eliminating the available lower cost competing similar products rebound from Afghanistan for actual consumption of Pakistan market facilitated by Afghan Transit Trade needs to be assured.

Leave a Reply