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Pakistan is a heaven on earth for local assemblers

Commercial import of used cars should be allowed to bring transparency in the business, suggests APMDA

Interview with Mr H. M. Shahzad – Chairman, APMDA

Profile

Mr. H. M. Shahzad is in the automobile business since 1980 and this is the year when he established Shahzad Motors at New M. A. Jinnah Road where it is still located. They are mostly involved in the used car import business.

He is the Chairman of the All Pakistan Motor Dealers’ Association (APMDA) and has been representing the association at government level and also at other forums for a long time. Due to his frank and candid demeanor, he has earned the respect in the government and non-government circles.

Nowadays he is mostly engaged in the work of the APMDA and has left the day to day business to his sons. Besides the affairs of the APMDA members, he is also involved in welfare work from the platform of the World Memon Organization of which he is the Vice President. He is also the Chairman of Memon Industrial & Technical Institute, which is a project of the World Memon Organization and imparts vocational training to the needy youth.

PAGE: WHAT IS YOUR TAKE ON AUTO PARTS IMPORTERS AND MANUFACTURERS?

H. M. SHAHZAD: There are two kinds of auto parts dealers in the market. On the one hand there are the importers who import all kinds of parts from all over the world at the cheapest price. These parts are of all categories from good sources as well as sub-standard. Most of the time they are of sub-standard quality, which fetch the highest profit for the importers or dealers. Most of the time the consumer is unaware of this fact. Only after experiencing the situation, they become knowledgeable. Used auto parts are also available in the market which are available at low prices.

Another category is those parts which are manufactured locally and are available in the spare parts market. These are of no significance as they are not only cheap but also of low quality and also of small volume.

PAGE: WHAT ARE YOUR EXPECTATIONS FROM THE UPCOMING BUDGET?

H. M. SHAHZAD: APMDA has submitted its proposals for the upcoming budget. We have proposed that the used car import should also be treated as an industry and important stake holder. As such, commercial import of used cars should be allowed, which is in line with the government’s policy of documentation of the economy. This would also bring transparency in the business while bringing it in the tax net and result in substantial revenue increase. It has also been proposed that the age of the cars being imported should also be increased up to 5 years. This would increase revenue of the government 100% as well as break the hegemony of the local assemblers who are always increasing their prices arbitrarily and resorting to black marketing as well known in the market as premium or On Money. The government is aware of these nefarious practices and we expect that something will be done in the next budget because competition from used car imports is the only way to way to curtail these anti-consumer activities.

PAGE: YOUR VIEWS ON THE PERFORMANCE OF AUTO PARTS MANUFACTURERS:

H. M. SHAHZAD: As we all know, Suzuki has now been in business of assembling and localization of Suzuki vehicles in Pakistan for 30 years while Toyota and Honda for 20 years but the low cost People’s Car is still a dream.

The above was to be achieved under the aegis of the deletion program which required that the company would enter into a transfer of technology agreement with their principals and localize complete vehicle within 5 years through local manufacturing of parts..

During this period extra ordinary incentives were given to the assemblers; the duties on import of parts were substantially reduced and import duties on CBUs were enhanced. These facilities are in vogue even today. The time limits got extended innumerable times on one pretext or the other but without any progress. During all this time these so called OEMs continued to enjoy the facilities provided by the government at the expense of the consumer.

Except for Suzuki, which has carried out some tangible deletion in their 800 cc models, the other two assemblers have made no noticeable achievement. However, none of them have made any progress in localization of engine, transmission or electrical components/assemblies. The last nail in the coffin is the Tariff Based System (TBS), under which parts are freely importable from any country. This TBS was a big mistake as it has completely demotivated the assemblers from any little intention they had for deletion and thus has given impetus to a continuous price hike of locally assembled cars.

Unfortunately, PAAPAM and their member vendors, under pressure from the assemblers also agreed to the TBS although it is the main reason for losses and stagnation in their business. The adverse situation is further compounded by the corrupt practices of appointing their own subsidiaries as vendors. These vendors have been involved in importing finished parts misdeclared as raw materials or CKD. Several cases in this regard are pending in Customs. Per force we have to quote Indian situation for comparison in every segment of life and business.

Indian government has already adopted liberalization policy long time ago and as a result the price of Maruti 800 CC car was brought down to about Rs225,000 as compared to Pakistan’s Suzuki Mehran, which is a compatible model of Indian Maruti being sold at more than Rs650,000. Indian auto industry is operating without any subsidy and resultantly they are a major exporter of vehicles in the world. Maruti vehicles made in India had achieved more than 90% deletion whereas in Pakistan still we could not achieve deletion more than 60% to 70% and that too in only 800cc vehicles although the whole car industry including PAAPAM is enjoying high subsidies from the government.

Furthermore we started local assembly of same segment vehicles far before India. Progressive deletion of local manufacture of high-tech components was the ultimate aim of allowing these plants here in Pakistan.

Still our automobile industry is doing welding and painting and manufacturing parts from local vendors of cosmetic nature like tires, batteries, seats, some body parts and few engine attachment parts. These items can hardly be termed as high-tech components. Interestingly, local vendor industry used to produce these parts even since early sixties and the deletion program cannot take credit for this. Generally industry means an establishment which converts raw materials in to finished or semi-finished products through a specific process.

However, our industry is still importing engines and transmissions mostly in CBU/SKD condition; most of the body components are still coming in imported CKD kit except in Suzuki. Third most important category for car manufacturing is glass and plastics but window glasses, windscreens, headlights, taillights are still a part of imported CKD kit.

Can we call our automobile parts manufacturing sector an industry in real sense? The above situation of Pakistani auto vendor industry indicates the uncompetitiveness and incapability of our local auto parts vendor industry, as the local vendors are hardly meeting demand of auto parts for the replacement market while most of the parts requirement is being met by the imports. A cursory study reveals that there are more than eight to ten million vehicles in the country of which about six million are old and always need replacement parts. The requirements of these vehicles are also being met by Chinese and other origin parts rather than the local auto vendor industry. It means that our auto vendor, automobile industry is standing on a sand foundation and living in oxygen tent of over protection.

PAGE: YOUR COMMENTS ON IMPORT OF CARS, PLEASE:

H. M. SHAHZAD: Due to the rising prices of the cars in the domestic market, the government has allowed the import of used cars up to 5 years old under Transfer of Residence and Gift Schemes but there is the necessity to allow import of cars used for up to ten years to further bring down the prices and set up an environment of competition in the domestic automobile market.

Government should also allow commercial import of cars of all types. This would curtail bad practice and bring the used car dealers also in the tax net and increase government revenues. It may be seen that there is virtual monopoly of local assemblers in the market. For example, in the category of 800cc only one car is available. Similarly, in 1000cc, 1300cc, and 1500cc only one or two cars are available.

The Competition Commission of Pakistan have placed the local assemblers on their watch list and have recommended severe penalties on them which have yet to be implemented. It may be interesting to note that as reported in the press, the Competition Commission of India has imposed a fine of INR 420 million on three automobile manufacturers in India for monopolistic operational policies. Similar action is required in Pakistan also. It is quite clear that used cars are the only means to provide competition to the local assemblers. The used cars are subject to the highest tax, which are even in violation of the WTO injunctions. Although they do provide the customer a wide choice of cars of high quality, it is necessary to review the tax regime and increase their affordability.

PAGE: IS SMUGGLING AN ISSUE IN PAKISTAN?

H. M. SHAHZAD: Smuggling is a major crime and should be treated as such. In the amnesty scheme a couple of years back, 54000 smuggled vehicles were regularized which earned the government 16 billion rupees in tax revenues. Had these vehicles been imported under the legal TR, Gift or Baggage schemes, the government would have earned about 50 to 60 billion rupees.

On the one hand it violates the law of the land, robs the government of huge revenues curtails legal sales while on the other hand it increases corruption. Government should reassess the tax regime on used cars, which is very high. It is obvious that the higher tax rate makes the smuggling attractive and profitable. It should be made unfeasible by reducing taxes and enforcement of law. Kabuli cars as they are widely known are swarming the markets of Quetta and other cities. This business is at its highest peak nowadays and the business goes on unchecked. Government should untie the hands of the used car importers so that they can give real competition to the local assemblers as well as smugglers.

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