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Competition environment in promising automobile industry needs to be strengthened

Competition environment in promising automobile industry needs to be strengthened

Pakistan is heaven on earth for local assemblers after huge supply/demand gap
Interview with Mr H. M. Shahzad – Chairman, All Pakistan Motor Dealers Association

Profile:
Mr. H. M. Shahzad is in the automobile business since 1980. He established Shahzad Motors at new M. A. Jinnah Road in 1980 where it is still located. His business is mostly involved in the import and sales of used cars. He is the Chairman of the All Pakistan Motor Dealers Association (APMDA) and has been representing the association in government and 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. As such he is a frequent guest/speaker and analyst on auto sector on the print and electronic media. 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. He is also the Chairman of Memon Industrial and Technical Institute, which is a project of the World Memon Organization and imparts vocational training to the needy youth.

 

PAGE had an exclusive conversation with him. The excerpts are as follows:

Total number of automobile selling outlets in Pakistan are about 10,000. Although sales outlets of automobiles are present in every nook and corner of the country, the quantity in major cities is as follows: Karachi (2000 to 2500), Hyderabad (300), Sukkur (200), Lahore (1500 to 2000), Faisalabad (350), Rawalpindi (250) and Islamabad (250). Total revenues of imported and used cars are about PKR 100 billion annually. Locally assembled automobiles have annual revenue of PKR 12 trillion.

For the local assemblers, Pakistan is a heaven on earth because there are no restrictions or problems of any kind from the government. Prices are increased at will, 100% advanced payment is taken from customers, delivery is made in 4 to 6 months, unrestricted black marketing and concessional duties are some of the incentives that are available to the local assemblers. New entrants will enjoy good business because thanks to the present assemblers, the supply/demand gap is huge. So there is lot of potential in the market. The current demand of automobiles in Pakistan is about 1,000,000. 250,000 vehicles are supplied by the local assemblers while 70,000 used vehicles are imported. The balance of about 700,000 old vehicles (5 to 20 years old) are transacted in the market in the absence of new vehicles. Production is not being increased by the assemblers although they can. Used cars are also costing more due to government policy restricting age of used cars to 3 years only. Duties/taxes are also very high. If rationalized, that is, age limit is increased to 5 years with 50% depreciation as was allowed not long ago, 2 to 3 lakh more vehicles will be available for the consumer.

As explained above, there is no problem at all for the local assemblers. And as far as doing business is concerned, the problems for used cars is restriction of 3-year age limit, high duties/taxes and not being allowed the status of an importer as for importers of all other imported products. There are two kinds of auto part 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 while most of the time the consumer is unaware of this fact but only after experiencing the situation once 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 for the assemblers 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 small volume wise. These are a mix of manufacturers of complete assemblies as well as importers of semi-finished parts. They mostly supply to the local assemblers. 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 and completely locally manufactured car is still a dream.

The above was to be achieved under the aegis of the government’s 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. For this purpose, 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 on payment of slightly higher duty. 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, Pakistan Association of Automotive Parts & Accessories Manufacturers (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 the assemblers’ own subsidiaries as vendors. These vendors have been involved in importing finished parts mis-declared 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, so also in automobiles. 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/or incentives. They were able to bring their costs down due to completely indigenous manufacturing and resultantly they have now become a major exporter of vehicles in the world. Maruti vehicles made in India had achieved more than 90% deletion whereas in Pakistan we could still not achieve deletion more than 60% to 70% and that too in only 800cc vehicles although the whole car industry including PAAPAM are enjoying high subsidies from the government.

Furthermore Pakistan 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 carrying out welding, painting and manufacturing parts from local vendors of cosmetic nature like tyres, 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 into 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. In real sense, our automobile industry including vendors and assemblers is standing on foundations of sand and living in oxygen tent of over protection. That is the reason why they cannot even think of exporting vehicles because they cannot survive in the most competitive international market. Brand competition is almost non existence. The only notional competition is from used car imports and the local assemblers are utilizing their energies to their business instead of making themselves technically and economically strong and competitive. Due to the rising prices of the cars in the domestic market, the government has allowed the import of used cars up to 3 years old under Transfer of Residence, Baggage 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 real competition in the domestic automobile market.

The real solution would be to also allow commercial import of cars of all types. This would curtail bad practices among the importers and bring the used car business also in the tax net and increase government revenues. It may also be seen here that there is virtual monopoly of individual local assemblers in the market. For example, in the category of 800cc only one car is being assembled. Similarly, in 1000cc, 1300cc, and 1500cc only one or two models in each category are available. Among the used cars imported under the various schemes, 80% are small 660cc engine cars. Local assemblers do not produce these cars. So there is virtually no competition from used cars either. The Competition Commission of Pakistan has placed the local assemblers on their watch list and has 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 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 subjected to the highest taxes, 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.

The local industry should be subjected to strict accountability for their failures of the last 30 years with government support during which they enjoyed high profits through frequent price increases and black marketing and once again revive and strictly enforce the deletion program to realize the requirement of low priced cars for the Pakistani consumer.

In such a free environment, the situation is most attractive for foreign investment in this sector. The government has fielded the much heralded Automobile Development Program which has opened the market for new entrants in this sector. It has been learned that two Korean and one European brands are planned in the foreseeable future. An environment of competition should be created by encouraging more new players in the automobile industry and the used car import should also be opened on commercial basis to bring this industry also under documentation This will provide a level playing field for all stake holders and most importantly allow the Pakistani consumer the right to purchase a vehicle of his choice and affordability which is at present denied to him.

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