Pakistan direly needs a comprehensive auto policy especially in the two-wheeler segment that could attract new foreign manufacturer and create a healthy competitive business environment. Presently, the country is a Japanese-dominated market. Volkswagen, the Germany’s biggest and the world’s second largest automobile manufacturer in terms of market share, has shown its willingness to do business in Pakistan, provided a competitive business environment is available. Plan to break the monopoly of existing car assemblers will not succeed unless and until the unholy alliance of assemblers and bureaucrats is not broken. It is this nexus that has ever blocked preferential incentives for new foreign players in the auto sector.
The country lacks a comprehensive automobile policy covering two-wheelers. The present automobile policy only covers four-wheelers, hence making it ‘not feasible’ for any foreign company to manufacture bikes in the country. The country is likely to lose a proposed investment of $150 million by Japanese giant Yamaha Motors because of its unclear automobile policy. In 2009, Yamaha Motors announced to establish motorcycle manufacturing plant in the National Industrial Park at Bin Qasim in southern port city of Karachi with an investment of $150 million. Yamaha had reportedly submitted the proposal with Board of Investment five years ago, but it was facing delays due to confusion about Islamabad’s automobile policy. Japanese company not only wanted to assemble and manufacture motorbikes and engines in Pakistan, but also planned to export these to the Middle East, Africa, Afghanistan and other countries. In the wake of the investment, 25,000 Pakistani engineers and technicians could get jobs in the automobile industry. Besides, many small industries could get a chance to produce auto parts.
Owing to the rising competition with their Chinese counterparts, the Japanese bike makers have slashed prices of various models for improving their sales volume, which have been on the decline for the last many years. The Japanese makers of Honda, Yamaha and Suzuki motorcycles are losing their sales to Chinese bikes, which have started improving their quality. By offering bikes at very competitive rates, the Chinese have captured market in Karachi, the country’s financial and commercial hub. The sale share of Chinese bikes in Karachi has been more than 80 percent.
Experts say all over the world automobile policy-makers always include four-wheel and two-wheel vehicles in the policy but Pakistan’s policy only covers four-wheelers. If Pakistan includes two-wheelers in its automobile policy, it would have to reduce import duty and taxes on machinery and raw material. Yamaha requested Pakistan to include two-wheelers in the automobile policy and allow foreign vehicle-makers to come and invest, but still no reply has come from the government.
In 2016, the government approved a new Automotive Development Policy for five years (2016-21). The new auto policy was announced by the Economic Coordination Committee (ECC) of the cabinet after a delay of almost two and a half years. The policy offers tax incentives to new entrants to help them establish manufacturing units and compete effectively with the three well-entrenched assemblers. There is, however, no change in the policy for used car imports. The Federal Board of Revenue had proposed that import of up to five-year-old used cars should be allowed compared to the current three-year ceiling.
Under the new policy only the new investors will be entitled to the benefits, while the existing three car manufacturers will not enjoy the incentives that have been offered to the new players. The definition of medium knocked-down unit has been removed from the policy. The greater localization of auto parts has been ensured in the policy. The government hopes that Fiat, Audi or Volkswagen should establish its plant in the country. Under the new policy, the Board of Investment will provide a single point of contact for all new investors. They will be required to submit a detailed business plan and relevant documents to the Engineering Development Board (EDB) for assessment. The Ministry of Industries, on recommendation of the EDB, will approve the new investor under the relevant category.
In order to attract new investors, the one-off duty-free import of plant and machinery for setting up an assembly and manufacturing facility has been allowed under the new auto policy. The government has allowed the import of 100 vehicles of the same variants in the form of completely built units (CBUs) at 50% of the prevailing duty for test marketing after the groundbreaking of the project. The reduced 10% customs duty on non-localized parts for five years against the prevailing 32.5% is a major incentive for the new investors. The duty will, however, be reduced by 2.5% to 30% from the fiscal year 2016-17 for existing investors. Under the new policy, the new investors have also been permitted to import localized parts at 25% duty compared to the current 50% for five years. For existing players, the duty on import of localized parts has been reduced to 45% from the current fiscal year.
For revival of sick auto units, the government has allowed the non-localized parts to be imported at 10% and localized parts at 25% duty for three years. In the CBU category, customs duty on cars up to 1,800cc engine capacity has been reduced by 10% for two years – 2017-18 and 2018-19. The present duty structure will continue for seven years for the new investors. A single duty rate will be applied to the localized and non localized parts after five years of the new policy.
The officials claim that policy is aimed at enhancing consumer welfare and boosting competition besides attracting new entrants in the domestic market.
The country can attract investments of $4-5 billion over the next three to four years in the automobile industry, according to Pakistan Association of Automotive Parts and Accessories Manufacturers (PAAPAM). The government’s new auto policy, however, discourages the existing Japanese manufacturers on the ground that it prefers outside investment to their own, and removes many incentives for them to invest in the country. Officials, however, contend that the government wants foreign car makers to shake up the Japanese-dominated market because locally assembled cars are sold at relatively high prices but lag behind imported vehicles in terms of quality and specifications. The government believes that no new foreign manufacturer such as Volkswagen or Audi can establish footprints in the country without getting preferential treatment, due to a strong network of the three existing assemblers.