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Auto import vs local assembly: Finding a workable balance

Pakistan started assembling of brands of American and European vehicles in fifties and Japanese brands in sixties. Despite lapse of more than half a century, the industry remains heavily dependent on imported parts. Some analysts attribute the prevailing situation to bad government policies and others hold the local assemblers responsible, who have failed in developing a dependable indigenous vendor industry. It is a common complaint that over the years the government has been facilitating the assemblers and failing in protecting the interest of vehicle users. This demands a dispassionate analysis of the industry and coming up with amicable solution acceptable to all the stakeholders.

Those holding the government responsible for the current dismal situation say that inconsistent policies have never allowed the local companies to go for progressive manufacturing. The local manufacturing of automobiles commenced in Pakistan in fifties and over the two decades got reasonable footprint. However, in seventies the worst dent was caused, when the elected government of PPP headed by Zulfikar Ali Bhutto nationalized industries, bank and insurance companies. In early nineties the government opted for liberalization, deregulation and privatization. Soon the market became an oligopoly dominated by the Japanese manufacturers.

Over the last quarter of century various attempts to induct more assemblers failed in yielding the desired results, mainly because of feeble local vendor industry. ‘Egg or chicken’ story prevailed over because assemblers blamed the local vendor industry being inefficient and uncompetitive.The successive governments also supported the local assemblers by extending indigenization program.

Pakistan completely failed in learning any lesson from the development of automotive industry in India. For a considerably long period India allowed production of a few brands on the condition of progressive manufacturing and achieve complete protection program. Initially, Indians didn’t like the government’s decision but now they are reaping the real benefits in the shape of lower prices.

Though, some of the local assemblers have achieved reasonable level of indigenization, but certain quarters demand import ofcompletely built units (CBUs). There are two opposite points of view. Since the import of these variants are in small numbers and used by those enjoying access to power corridors the policy didn’t face much opposition. However, the opponents of this policy say, ‘since the country suffers from omnipresent trade deficit, import of all sorts of unnecessary items, particularly luxury cars should be stopped’.

 

Over the last decade there has been pressure on the successive governments to allow import of second hand vehicles. Two points are offered in the support of this policy: 1) high cost of locally assembled vehicles and 2) long delays in the delivery. However, critics of this policy say that both the incidents are the outcome of groups having vested interest, especially those investors who book cars. As the delivery period are long, those wishing to buy cars in cash are also ready to pay ‘on money’ or premium. Therefore, those who have to book car and wait for long period are often annoyed.

Some analysts say that delay in delivery is a myth and it has prevailed over because of the investors and depreciating Pak rupee. They also say that assemblers are also not able to give a plausible reason for the long delivery period. These critics say that the local assemblers operate at 50% capacity utilization, mainly because they don’t operate on three shift basis. On top of all the assemblers say that market size in Pakistan is too small which does not bodes well with long delivery periods.

Those pleading import of cars term these low cost as compared to locally assembled cars. However, they tend to ignore a fact that second hand cars look low cost because of low duty charged to facilitate the low income groups. Small engine capacity cars constitute a large share of total import and the point view that these are for low income groups is a fallacy. It may not be true about rest of Pakistan, but it is true for Karachi that smaller cars are often used as ‘second or third car’ in the family. Therefore, the major buyers of smaller second hand cars are rich people and not the poor.

Analysts cite another reason for higher cost of locally assembled cars as disparity in the import duties on raw material and CBUs. If the government is serious in bringing down cost of locally assembled cars, it will have to decrease the rate of duties charged on raw material and increase duties on CBUs. According to a critic, “We are talking about progressive manufacturing of automobiles in a country which does not produce steel, a basic raw material. Pakistan Steel Mills is closed for years and even when it was operating it could meet only one-fifth of country’s total demand.

To promote use of locally assembled cars following steps needs to be taken by the government: 1) rationalization of duties on raw material and CBUs, 2) exempt SKD and CKD kits completely tax free, 3) the GoP should scrap Pakistan Steel Mills and grant permission for another steel mill in the country in the private sector, 4) convince auto assemblers to extend operating hours and above all, 5) stop import of CBUs completely. However, assemblers must be told clearly that if they fail in rationalizing cost after the stipulated time, the flood gates will be opened.

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