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Imports of used cars a key impediment to bring in new investments in auto sector

Dire need to generate extensive jobs for young workers, technicians, engineers and management professionals

Pakistanis spent around Rs75 billion on the import of used cars in the last fiscal year of 2015-16. This sale number is enough to enable investment of around $600 to $700 million in two plants of a size equivalent to Honda Atlas Cars Pakistan whereas these plants produce around 25,000 units in a year.

The share of used imported cars and light commercial vehicles (LCVs) in the auto market was 19 percent in 2016. The past year witnessed the arrival of 46,500 used cars and commercial vehicles while the local industry rolled out 203,500 vehicles.

In 2015, the import of used vehicles stood at 43,400 units while the local industry produced 247,500 units partly because of 50,000 units of Suzuki Bolan and Ravi purchased by the Punjab government in 2015-16. The share of imported vehicles in 2015 remained 15 percent.

POSITIVE AND NEGATIVE ASPECTS

The total market size has grown. There are both positive and negative aspects of the import of used vehicles. The positive aspect of used car imports include additional revenues to the government, availability of choices for car buyers, immediate delivery with no lead time and continuous pressure that keeps a check on the local industry. The negative aspect of used car imports include payments remitted through hawala, undocumented sale activity, misuse of various import schemes for overseas Pakistanis, negative effect on auto sector investments, no manufacturing job creation, lack of after-sale service, lack of spare parts’ availability, cost problems and low resale value.

MEAGRE LOCAL PRODUCTION

Local car manufacturing involves three million jobs in assembly and vending units and provides an avenue for massive long-term investment by global auto giants.

About 2,000 companies produce up to 70 percent local parts, with a completely documented supply chain. In contrast, locally produced vehicles offer a small volume per model and limited choices for consumers.

Prices of local small cars are higher than ones produced in India, with capacity limitations resulting in the delay in vehicle delivery. Local small cars also lack features like automatic transmission and airbags.

The vacuum created by the absence of local assembling of below-800cc cars in Pakistan is being filled by higher imports of small cars. Small cars constituted almost half of the total imports of used cars in July-August.

With the availability of only Suzuki Mehran in the locally produced 800cc segment, consumers have shown increased interest in imported vehicles of below-800cc and 800-1,000cc categories.

SURGING IMPORT

Imports of total used cars surged 32.6 per cent to 8,476 units in July-August from 6,390 units in the same period of the last fiscal year.

Below-800cc cars, cargo vans, pickups and jeeps hold a big share in the total imports of used vehicles, statistics show. Their imports jumped to 4,417 units in July-August, up 70.2 percent from 2,595 units in the comparable period of the preceding year.

As many as 1,584 used cars in the 800-1,000cc category hit the roads in July-August, up 15 percent from 1,377 units imported a year ago.

In the 1,500-1,800cc category, 1,549 units arrived in July-August, which shows an annual increase of 4.7 percent over 1,479 units imported one year ago. However, imports of above-1,800cc vehicles saw a decline to 2.9 percent year-on-year to 912 units in July-August.

With no sign of the beginning of the local assembly in the below-800cc category, car imports are expected to thrive given their rising demand.

Consumers have shown tremendous response to smaller imported cars, as 660cc vehicles are highly popular.

The share of used car imports in the 660-1,000cc segment in total imports is 80-85 percent. Their safety features and the automatic option lure buyers.

The government should allow the limited commercial import of used cars in the below-800cc category, as these cars are not being assembled in Pakistan.

These cars do not need the CNG option, as their average petrol consumption is 18-22 kilometers per litre.

More than 54,000 units were imported in 2015-16 compared to 30,000 units in the preceding year.

Over 300,000 vehicles were imported in the last 10 years. This has captured a big chunk of the market besides causing the closure of plants of Hyundai, Nissan, Chevrolet, Fiat and Adam.

The fixed duties are ‘highly suppressed’ and are causing a loss of tax revenue to the government. This also effectively subsidizes imported used cars while damaging the domestic auto industry.

The sale of locally produced vehicles jumped almost 20 percent year-on-year to 181,145 units in 2015-16 despite huge imports.

CHECK ON MISUSE OF SCHEME

Commerce Ministry’s schemes by commercial importers and encouraging new investment in auto industry, Pakistan’s annual import of used cars is around 30,000 units, mainly from Japan.

The government should probe the misuse of baggage and gift schemes for the import of used cars. The misuse is causing huge losses to the national kitty.

Three-year used cars are imported into Pakistan through informal channels. However, Federal Board of Revenue (FBR) earns huge revenue on illegally imported used cars and insists on import of used cars on a commercial basis.

At the same time, new entrants as well as existing players are urging the government to take measures to curb misuse of three schemes of Commerce Ministry by the commercial importers.

This scheme was introduced to facilitate Overseas Pakistanis and many individuals have benefited from it.

The spirit of this scheme is to make available vehicles to Pakistanis without having to use the foreign exchange resources of Pakistan and payments from Pakistan are not required.

State Bank of Pakistan (SBP) understands that this facility is being misused by individuals and commercial car importers in Pakistan since importers of used vehicles are purportedly importing vehicles on the passports of overseas Pakistanis.SBP maintains that the importers remit funds through informal channels i.e. Hawala/Hundi to pay for the cost of vehicles, which ultimately results in a surge in smuggling of foreign currencies out of Pakistan and diversion of inward remittances through Hawala channels, which has a negative impact on the economy.

“This practice, in fact, has defeated the spirit of the scheme,” the sources quoted SBP as saying in one of its recent communications on import of used cars. In order to curb the chances of misuse of this scheme and to ensure payments through formal channels, SBP has proposed that the Ministry of Commerce should suitably modify the scheme in consultation with SBP and Finance Ministry.

At this critical time Pakistan needs to focus on the automobile industry to generate extensive jobs for young workers, technicians, engineers and management professionals. The auto sector employs almost three million people and can become an engine of growth as happened in other Asian countries, such as Japan, Korea, Thailand, Indonesia, Malaysia, India and China.

In 2015-16, the auto industry returned to a production level which was last witnessed in 2006-07. Pakistan is only one out of 40 automobile producing countries of the world, in which de-facto commercial import of used vehicles is undertaken under the garb of schemes for overseas Pakistanis.

Import of used cars is the biggest impediment to bringing new investments in auto sector, either by new entrants, assemblers or auto part vendors.

Even after the auto development policy’s announcement, the foreign investors are undecided as to why they should make long-term investments worth hundreds of millions of dollars in a country, where they have to compete with over 50,000 used vehicles imported every year in blatant violation of the law.

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