With the removal of the quota and the tariff barriers
less than 28 months away, it is imperative for the nascent auto industry
of Pakistan to find ways to retain the customer base once the protection
will no longer be available to it. The question is all the more
important as the Pakistan auto industry reels from absence of economies
of scale; heavy dependence on imported Completely Knock Down kits,
parts, accessories, raw materials, etc.; underutilization of production
capacity; and prices which are deemed unaffordable even by international
True, the industry has provided direct and indirect
employments to thousands and pumped in billions of investment and
contributed billions more in taxes and duties to the national economy.
It has also saved billions in import substitution laying down foundation
for many down-stream related industries as auto production requires all
sorts of materials — plastic, rubber, steel, glass, etc., etc. The
importance of developing a local auto industry can hardly be
However, that does not discourage one to question the
failure of the industry to fulfil one of its major premise — producing
affordable cars within the country. Over the years, the auto prices have
registered increases far above the rising rupee-dollar parity which took
a turn for reverse in the middle of last year as dollar kept shedding
its value and today trades for less than Rs 60 compared to Rs 67 then.
None of the assemblers, who never miss an opportunity to immediately
increase the prices of their products at the slightest depreciation of
the rupee, have seen it fit to reduce the prices despite the substantial
reduction in the value of the dollar. The only relief offered to the
customers is that the prices have not gone up.
For the time being the industry seems to be in a mood
for jubilation to celebrate the record sales during the fiscal 2001-02
ended June 30 this year. According to the statistics compiled by
Pakistan Automotive Manufacturers Association (PAMA) a total of 40,601
cars were produced by its members in 2001-02. During the same period
PAMA members sold a record 42,341 cars depicting 7 per cent increase
over the previous year. The sales of trucks and Light Commercial
Vehicles (LCVs) also increased by 23 per cent and 17 per cent to 1,134
units and 9,033 units respectively during the comparative years.
The first month of the current fiscal — July 2002
— depicted an even better performance by the auto industry. Car
production and sales increased by 42 per cent and 21 per cent
respectively over the corresponding month last year. A total of 3,991
cars were produced in July this year compared to 2,794 units last July
while car sales soared from 3,044 units to 3,691 units during the same
The improved performance, however, hardly offers any
room for complacency on the part of the auto industry for the simple
fact that the production is not enough to keep up with the rising demand
fuelled by leasing companies and banks. More so the production remains
still much low not enough to create economies of scale, improved
turnovers and better utilization of the collective production capacity
to help bring prices to an affordable level.
Prices play an important role in auto sales anywhere
in the world including the developed countries and they remain the top
deciding factor in a developing economy like Pakistan. That explains the
reason for the big used-car market in the country which surpasses that
of the new car by one-to-five. The low per capita income, the increasing
cost of living, the shrinking purchasing power and the high auto prices
are shying away a vast majority of potential buyers in the middle income
segment of the society who dream of owning a personal vehicle. Though
the leasing companies and banks have played a vital role to help boost
car sales, according to an estimate over 40 per cent of all new car
sales are financed, the overall auto production and sales volumes still
remain low in a population of 140 million.
The record car sales figure of 42,342 in 2001-02
means that only one in 3,333 persons in the country bought a new car
last year. The car production and sales volume remain much too low to
help create the much needed economies of scale, turnovers and investment
in vending industry, particularly the precision-engineered parts which
require heavy investments and guarantee of adequate returns over a
specified period of time. The low production and sales volume
discourages the induction of latest technology to keep depending heavily
on imported CKDs, precision parts and accessories to inflate the
production costs and prices of the locally assembled cars. This is a
vicious cycle indeed.
Besides the price, the inefficient regulation is also
depriving the industry of an immense goodwill necessary for developing
voluntary loyalty, which the auto producers would be needing in not so
distant a future when it would no more be possible to stop the flow of
foreign counterparts in the local market. In the recent months the
government has taken a number of measures to better regulate the sector
to protect the interests of the car buyers. However, as we see, most of
these measures are more symbolic and token than practical and thus so
far has not seem to have a positive impact on the overall performance of
the auto industry. For instance, the government reduced the duty on car
imports on all range of cars by token 25 per cent in Budget 2002-03.
Despite the reduction the duty still remain much discouraging to allow
import of cars into the country to maintain the status quo to keep
protecting the industry.
In addition, the government has also tried to abolish
the unscrupulous practice whereby authorized dealers were selling the
new cars at a premium over the fixed price to customers who wanted
immediate delivery on cash. The rampant black-marketing kept the people
who booked the cars had to wait for the promised delivery, for months.
The government has ordered the dealers to ensure the delivery within 60
days of the booking and has also issued order to book one car per person
that can not transferred to another person for a specified period. In
addition, it also imposes a penalty on the dealers if they fail to
deliver the vehicle by the agreed date.
Informed sources, however, expressed concerns that
the measures, which look good in theory, would not be able to protect
the interests of the buyers in practise due to inherent problem
associated with the producers themselves — the over booking. "The
assemblers have find it convenient over the years to book vehicles way
above their production capacities and availability of CKDs. The overbook
vehicles to improve their cash flow without the least care whether or
not they will able to deliver the vehicles on time. One of the major
assembler booked some 5,000 high-priced vehicles in March and April when
it has no more 800 CKDs in its stock. Number of people who booked
vehicles with the assembler in early March and promised delivery with 3
months have yet to receive their cars. The fact is that the assembler
just can not deliver the 5,000 vehicles on time and the measure to
reduce the delivery date from three months to 2 months by the government
recently would hardly make any difference."
"SENDING A SIGNAL"
While presenting the Budget 2002-03 in June, Finance
Minister Shaukat Aziz said that the 'duties on import of vehicles are
extremely high and thus there is no import ...The sense of lack of
competition tempts the local manufacturers to be costly and less quality
conscious thus jeopardizing the legitimate interests of consumer."
He also announced to reduce the duty on imported
vehicles by 20-50 per cent depending on the engine power. Duty on cars
upto 1000 cc was reduced by 25 per cent to 75 per cent, duty on
1001-1500 cc cars was reduced by 20 per cent to 100 per cent, and duty
on 1501-1800 cc cars was reduced by 25 per cent to 125 per cent. The
biggest reduction was made in 1800 cc and above cars the import duty on
which was slashed by 50 per cent from 250 to 200 per cent.
The reduction was token and was meant only to send a
'signal' to the local auto assemblers as the overall impact of duties
and taxes at the import stage still remains much too high to encourage
imports to help improve quality and prices 'to protect the legitimate
interests of the consumer'. Not only the duties on cars still remain
high but the imports are also subjected to 15 per cent sales tax and 6
per cent income tax, like all other imports, as well CVT (Central
Vehicle Tax) depending on types of vehicles. While cars up to 800 cc are
exempted from the CVT, 800-1000 cc cars are subjected to a CVT of 3.75
per cent, 1000-1500 cc 5 per cent, 1500-1600 cc cars 6.25 per cent, and
1600-1800 cc cars 7.5 per cent. Increased rate of CVT is imposed on the
import of cars of 1801 cc and above.
Thus duties and taxes push the prices of imported
cars to discourage imports to maintain the status quo. However, the
industry and those related with it attribute the high car prices on the
government as well as the producers — the former to enhance its
revenue by subjecting the industry with highly uneconomical taxes and
the later to resorting to high built-in profit. In addition, they also
attribute the rising costs of production, particularly the incessant
rise in such basic utilities as electricity, gas and water.
RISING COST OF PRODUCTION
Mumtaz Shamim is the chief executive of Mumtaz
Engineering which provides a range of parts to car and motorcycle
producers. Mumtaz who manufactures a range of sheet metal, plastic and
machine parts as well as dyes say that the local auto vending industry
is heavily dependent on imported raw materials which are subjected to
"With the inclusion of the sales tax the total
impact of duty at the retail stage adds up to an uneconomical 25-30 per
cent. In addition the price of such major inputs as electricity, gas and
water are on a constant rise to push the production costs to exorbitant
level. For instance, from the 15th of the last month, the industrial
rates of water was increased by 50 per cent- from Rs 600 to Rs 900 and
from Rs 1,000 to Rs 1,500 per tanker depending on its size.
"The local vending industry, which primarily
comprises of small and medium size entrepreneurs, has no access to loans
as the banks still don't recognize it as an industry. The loans are just
not available to the deserving entrepreneurs and a few who are lucky to
get it have to pay high interest on it. How can a vendor expect to make
a profit at the high mark-up rate of minimum 13 per cent?
"Like many other industries auto vending
industry is also a high power consumer. While there has been an
incessant increase in the power rates which today have touched an
extremely high uneconomic level the power supply pattern has become
extremely erratic taking a heavy toll on the productivity. Like all
other industries, the auto vendors are not allowed to install their own
generators — a NOC is required to switch from petroleum generators to
gas generators while a similar permission is required by the Karachi
Electric Supply Corporation (KESC). The procedure for both does not only
involve a load of paperwork but also greasing of many palms at every
level. In addition, the KESC also charges a fee for using a generator.
The inconvenience and the costs involved discourage the use of
generators to help better the productivity."
Mumtaz also lamented the heavy dependence of the
vending industry on imported tools. "Quality tools and machines for
the vending industry do not come cheap and the prices are further
inflated by the import duty. There is no industry in Pakistan which
manufactures the required tools necessitating the need for the
manufacture of these tools in the country. We have failed to invest in
tools manufacturing in the past and it is imperative that we should
invest in it now."
He stressed the need to slash the import duty on raw
materials, machinery and tools used in the manufacture of auto parts and
accessories, including duty free import of those not manufactured in the
country, to create economies of scale and improve the quality of the
products. He also stressed on the need to cut the industrial rates of
power, gas and water to help the industry produce affordable parts
without which auto prices would keep remain high. "We don't need
protection, we need genuine incentives without which the local auto
industry would not be able to compete with the impeding imports a couple
of years from now."
PROTECTION OR INCENTIVES
For the time being the local auto industry enjoys the
protection against imports as imports are discouraged by heavy import
duty. While the protection has benefited both the government and the
producers — the former in substantial revenue and latter in
profitability — it has come at the cost of buyers whose concerns just
don't seem to matter with the policy makers. The protection has deprived
the market one of its basic essential — the presence of genuine
competition — and token measures announced by the finance minister in
his Budget 2002-03 speech would not help improve the situation. The
protection has allowed the industry to remain complacent with the
involuntary royalty in the absence of a choice and the situation is
feared not to favour the industry if and when the market opens up for
imports after the extension accorded to it by the WTO.
would once again like to quote Finance Minister Shaukat Aziz who replied
to a question put by it at the press briefing at the State Bank in
Karachi saying that "the reduction in duty on car imports is a
signal to the local auto assemblers to improve efficiency and
productivity. It will help encourage the local industry to become price
competitive and quality conscious. They have got the message." It
would also like to add that the measures taken by the government
recently to ensure timely delivery of the cars to the people is indeed
in the larger benefit of the industry itself to restore its public
confidence, a precious commodity which it will be needing in the years
not too far away.
However, measures would also be taken to address the
problems related to the rising production costs and quality. Much has
been done but much still remains to be done to ensure the development of
the local auto industry on professionally sound lines to meet the
challenge head-on when consumers will have a real choice about the price
and model of a vehicle.
The industry just cannot complain about consistant
profitability over the years. While the annual reports of the auto
makers are awaited half-monthly results of the major auto producers for
the period ended December 31, 2001 show increased profitability all
around and the trend continued during the first quarter this year.
The government's prodding has pushed car producers to
increase their production as obvious from the performance in the first
month of the current fiscal. The substantial increase shows the
potential for the creation of economies which according to observers
could have been even better if the producers passed on the benefit of
the rupee appreciation to the potential buyers.
Leasing companies and financial institutions have
played a pivotal role to push the auto sales during last couple of years
and are expected to play this role in the years to come. However, the
mark-up rates on auto financing still remains much too high shying away
many potential buyers as compound interest in the majority of leasing
options add up to over 40 per cent depending on the payment period.
In addition, the rising cost of petrol and high
incidence of auto thefts in all the urban centers across the country,
particularly Karachi, are also discouraging auto sales. Since 1997 over
25,000 cars have been either stolen or snatched in Karachi, over 45 per
cent of which still remain un-traced.
The survival of the local auto industry — which
employs over 125,000 persons directly or indirectly and contributes a
substantial of revenue Rs 7 billion annually, excluding Rs 3 billion
revenue by the auto vending industry, and saves around $ 5 million in
import substitution — means a lot for the national economy. Better
regulations and protecting the interests of the consumer, however, will
also play a vital role to instill the much needed customer loyalty which
will pay dividend in the years to come.
Thanks to the increasing internal competition
resulting in the introduction of new models in recent months, and with
many more such plans in the offing, the Pakistani automobile industry is
in transition. Car buyers today enjoy a better choice brands and models
as well leasing options. The time is ripe for the local auto industry to
solidify its base on merit alone both in terms of quality and price.
SALES OF VEHICLES
FROM 1995-96 TO 2001-02
Automative Manufacturers Association