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Putting into effect the deletion plan for low priced cars essential

Putting into effect the deletion plan for low priced cars essential

Automobile sector well poised for future investment; opportunity must also be given to import of used cars
Interview with Mr. H. M. Shahzad – Chairman, All Pakistan Motor Dealers’ Association

Profile:
Mr. H. M. Shahzad
is in the automobile business since 1980 and owns Shahzad Motors at New M. A. Jinnah Road Karachi. His business is about 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 at 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. He is a frequent guest/speaker and analyst on auto sector for 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.

Pakistan & Gulf Economist had an exclusive conversation with Mr H. M. Shahzad about the auto sector of Pakistan. Following are the excerpts of the conversation:

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. It is essential to revive and strictly enforce the deletion program to realize the requirement of low priced cars for the Pakistani consumers. In the current 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 would enter the Pakistani market 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 consumers the right to purchase a vehicle of their choice and affordability which is at present denied to them.

The sad fact is that the peoples’ car remains a distant dream even after 70 years of our independence. In the absence of any pressure from the government, local assemblers are not pushed or willing to increase production and they would rather increase price. So as the saying goes, “Whenever I make both ends meet, someone moves the ends”. The government should enforce its writ in the automobile industry and stop this indiscriminate increase in prices and force the assemblers to increase production and sales volume thereby reducing prices instead.

New entrants will enjoy good business because due to the lack of interest in increasing production by the present assemblers, the supply/demand gap continues to increase. There is a lot of potential in the market for new investment in this sector.

 

The incumbent government has not engaged with the automobile industry with any seriousness. The only measure they have taken is to restrict the non-filers from purchasing cars. This is a counter-productive measure, because this will further reduce the number of consumers. It may be taken into consideration that the non-filer is paying high rates of taxes in every walk of life whether in the form of tax on purchase of vehicles or property or anything else. To stop them from purchasing cars is to severely reduce the revenues of the government. The government should first segregate the taxpayers and the non-taxpayers. The tax payers must first be transformed into filers by facilitating them. And the non-taxpayers must be given the stick. It may be realized here that there are only 1,200,000 filers in the country of 220,000,000. Out of these there are mostly salaried persons who are small spenders. Most of the other non-filers are potential big taxpayers who should be the target of government policies.

The size of the business can be gauged from the fact that the total value of imported used cars is PKR 100 billion annually. Locally assembled automobiles cost PKR 650 billion annually. 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% advance payment at the time of booking, delivery is made in 4 to 6 months, unrestricted black marketing and concessional duties are few of the incentives that are available to the local assemblers.

The current demand of automobiles in Pakistan is about 1,000,000. About 275,000 vehicles are supplied by the local assemblers while 70,000 used vehicles are imported. The balance, 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 the market is there. Used cars are also costing more due to government policy which restricts age of used cars to 3 years only. Duties/taxes are also very high. If 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 without any adverse effect to sales of local assembled cars but substantial increase in revenues.

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.

The auto parts vendors are a significant stake holders in the auto industry and comprise 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 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 and vendors; the duties on import of parts were substantially reduced and import duties on CBUs were enhanced. These facilities are in vogue even today.

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