European, Chinese and Korean models likely to roll out
The auto sector in Pakistan, so far dominated by Japanese assembly lines, is likely to expand significantly with the arrival of new entrants such as Renault from France, Volkswagen from Germany, FAW from China, KIA from South Korea and European, besides Chinese auto allied industries.
Actually the government is actively considering broadening of the industrial base by offering attractive incentives to the global players in the auto sector and the initiative taken by the government are likely to yield tangible results.
In fact, the Pakistan auto policy announced in 2016 has attracted attention of many international automotive companies and they have decided to set up assembly plants in Pakistan. The China-Pakistan Economic Corridor includes projects for setting up industrial plants along its entire area, which has already attracted direct foreign investments into our country. Part of the investment is expected to be channeled into the auto sector, including heavy trucks and commercial vehicles.
The arrival of new entrants would prove an effective check on the influx of used cars being imported as the commercial imports, which has become a lucrative business in Pakistan, however the flood of the imported used cars has an impact on the existing auto industry as the existing assemblers feeling a threat from the unchecked import of used cars, they were in a fix and finding no option but to shelve their expansion and investment plans for the last many years.
According to well informed sources, the government is currently holding discussions for investment in Pakistan with Renault of France, Volkswagen of Germany, FAW of China, Kia of South Korea and other Chinese auto assemblers and manufacturers.
In order to accelerate the pace of investment, the government has offered to support both existing car assemblers and the new entrants with the promising incentives, which will be in addition to those provided in the Pakistan Auto Policy 2016-21.
The incentives offered in the policy included several tariff and tax concessions. It may not be out of place to mention that the current level of taxation is one of the major factors responsible for increasing the car pricing as according to industry sources over 40 percent of the taxes are included in car pricing making the car prices extra higher side in Pakistan. A slash in the taxes can bring down the car prices as well as would be a check on import of used cars. Some of the incentives offered to the new assembly lines would be available as additional relief to the existing assemblers including Toyota, Suzuki and Honda Motors.
The policy offered several more tax concessions to attract new foreign automakers as demand for new models and luxury models is on the rise in Pakistan in the backdrop of fast emerging middle income groups and better returns on the agriculture yields, increasing returns on big trade and industry houses in Pakistan and as a result of improved income there is a noticeable demand growth for cars while historic low of interest rate is yet another positive factor for investors in the auto sector.
It is interesting to note that despite the policy rate 5.75 percent of the State Bank of Pakistan which is at 40 year low the interest rate charged by the banks on auto financing, personal loans and other consumer financing is extremely on higher side and in some cases it exceeded to 18-20 percent. However despite the expensive financing rate by the banks and other leasing companies the auto financing by commercial banks rose 32 percent to Rs30.7 billion in financial year 2015-16. This prove yet another indicator behind increasing demands for vehicles in Pakistan.
According to Ghulam Murtaza Khan Jatoi, Federal Minister for Industries and Production, the government would support Pakistan-based auto assemblers and auto part manufacturers to increase their exports and help them capture international markets.
The auto market is estimated to have a 30 percent growth potential in Pakistan, which need to be streamlined through facilitation to this industry is considered as the ‘mother of industries’ around the world.
According to Prime Minister’s Special Assistant on Investment, Chairman Board of Investment, Dr. Miftah Ismail, the government will also consider PAAPAM’s proposal for removal of Regulatory Duty on ‘auto grade steel’ in the forthcoming budget 2017. Chairman Board of Investment Dr. Miftah Ismail said that car market is expected to grow by 30 percent as existing OEMs are also investing in new plants. He said that Foreign Direct Investment is also coming to Pakistan through CPEC projects. He reiterated the government’s stance towards ensuring the laying of proper groundwork for FTAs between Pakistan and other countries in a manner that does not affect the production and export of local auto parts.
Pakistan Association of Auto Parts and Manufacturers (PAAPAM) has established a strong industrial base in Pakistan, which is already exporting auto parts worth several billion rupees to car assemblers in Germany, France and China, besides catering to the Pakistan-based foreign car assemblers such as Toyota, Suzuki and Honda. A large number of auto parts have been exported to foreign countries by the Pakistani assemblers of cars, motorcycles, light commercial vehicles and tractors. The demand for these products is growing rapidly, with an increase in personal incomes and bigger demand from the farm, commercial and industrial sectors.
Chairman of PAAPAM, Mashood Ali Khan, said auto manufacturing ranks among the top three tax-paying industries in Pakistan but the industry’s performance and growth is being threatened by some issues that can be solved if the government follows its commitment in the Policy 2016-2021.
Although the auto industry has successfully developed a strong industrial base in Pakistan yet it is still relying heavily on the imported high tech parts for assembly of cars in Pakistan. It is the need of the hour that in order to make the auto industry self reliant in manufacturing of high-tech parts, the government should consider to provide taxation relief which are available to the investors in special economic zones and that would mean business in real terms.