Globally, the automobile industry is considered to be
the mother of all industries and an engine of growth for the economy. It
is an indisputable fact that countries that have achieved major
industrial growth in the last century have focused on the auto industry,
e.g. USA, Japan and, in more recent times, India, Korea, Thailand,
Taiwan, Malaysia, etc.
Let us study the example of our neighboring country.
The Indian Auto policy is a clear manifestation of the importance the
Indian government accords to the Auto Industry in the context of its
contribution to overall growth. The policy provides measurable goals and
its stated Vision for the industry is "to establish a globally
competitive automotive industry in India and to double its contribution
to the economy by 2010."
INDIAN AUTO INDUSTRY BACKGROUND
The facts and figures relating to the Indian Auto
Industry speak volumes about the importance of its role in the Indian
* The size of
the market has increased dramatically, from approximately 600,000
vehicles in 2002 to more than a million vehicles in 2004.
* It numbers
more than 20 manufacturers among its ranks, including such names as
Toyota, General Motors, Hyundai, Mahindra, Suzuki, Daewoo Motors, Maruti
Udyog, Swaraj Mazda, Volvo, Ford, Hindustan Motors, Indian Auto and
* Number of
automotive parts vendors total more than 500 major companies.
of over US $ 5000 million.
amounting to over US $ 10 billion.
direct employment to approximately 450,000 people, and indirect
employment to millions.
Source: Automotive Component Manufacturers
Association of India (ACMA)
All the above has been made possible due to the
policy of facilitation and support adopted by the Indian government.
MAIN POINTS OF THE INDIAN AUTO POLICY:
Some excerpts of the Indian Auto policy might be of
interest in this analysis.
INDIAN POLICY OBJECTIVES
i. Exalt the
sector as a lever of industrial growth and employment and to achieve a
high degree of value addition in the country.
ii. Ensure a
balanced transition to open trade at a minimal risk to the Indian
economy and local industry.
The instruments to achieve the Policy objectives will
be the initiatives relating to investment, tariffs, duties and imports.
INDIAN IMPORT TARIFF
government will review the automotive tariff structure periodically to
encourage demand, promote the growth of the industry and prevent India
from becoming a dumping ground for international rejects.
ii. In respect
of items with bound rates, viz. buses, trucks, tractors, CBUs and auto
components, the government will give adequate accommodation to the
indigenous industry to attain global standards.
consonance with Auto Policy objectives, in respect of unbound items,
i.e., motorcars, MUVs, motorcycles, mopeds, scooters and auto rickshaws,
the import tariff shall be so designed as to give maximum fillip to
manufacturing in the country without extending undue protection to the
vehicles imported into the country would have to meet CMVR,
environmental requirements as per Public Notice issued by DGFT laying
down specific standards and other criteria for such imports.
INCENTIVE FOR RESEARCH AND DEVELOPMENT IN INDIA
i. The current
policy allows Weighted Tax Deduction under I.T. Act, 1961 for sponsored
research and in-house R&D expenditure. This will be improved further
for research and development activities of vehicle and component
manufacturers from the current level of 125%.
manufacturers will also be considered for a rebate on the applicable
excise duty for every 1% of the gross turnover of the company expended
during the year on Research and Development carried either in-house
under a distinct dedicated entity, faculty or division within the
company assessed as competent and qualified for the purpose or in any
other R&D institution in the country
Source: Ministry of Heavy Industries and Public
Enterprises, Government of India
Moreover, the Indian government is undertaking the
above measures in consultation with all stakeholders, i.e.
manufacturers, vendors, financial institutions, trade bodies etc.
Let us now compare the above with the situation in
COMPARISON WITH PAKISTAN
* The size of
the market has increased from approximately 60,000 vehicles in 2002 to
more than 100,000 vehicles in 2004, indicating a strong upward trend,
but still a very small market compared with India.
* The total
number of manufacturers is only 8 companies, comparatively much smaller
* The number
of vendor companies around 200.
in the industry is over Rs. 20 billion.
to around 120,000 people.
Sadly, despite the huge potential, a clear strategy
for the auto sector in Pakistan is still a dream; in fact, we have yet
to develop a comprehensive Auto policy. Every now and then there are
vested interests and lobbies that try to settle government's long term
plans (e.g. second hand car lobby, car importers etc.)
So far, the focus is only on deletion levels, which
happen to be amongst the highest in the world, in a country that has a
limited engineering and vendor industry. There are high tariffs on CKD
and raw materials, which when combined with minimum incentives for
investment in a high risk and geo-politically unstable regional
environment, tend to restrict the growth of the Auto sector in Pakistan.
The government also puts unnecessary pressure on
Pakistani automakers to reduce prices when the government is itself the
biggest gainer. On an average, the total government duties and taxes
levied on a car with a base price of about Rs 900,000 come to around
Rs.250, 000. Obviously, unlike the car manufacturers, the government has
zero equity, zero risk and zero management problems.
And, to top it all, the government has recently taken
certain decisions that totally negate a long-term approach. In fact
these decisions are harming the gains and growth made by the auto
sector. For example, on Feb 11, 2004, the cabinet decided in principle
to allow the import of used cars and towards this end it set up a task
force to present recommendations. Fortunately, sanity prevailed and the
decision was deferred till November 2004, though the very idea itself
should have been dropped altogether.
This is how the market reacted to this decision in
the subsequent days:
KSE Review: Cabinet decision on used car imports puts
the brakes on KSE — Daily Times, "International reaction to the
nuclear proliferation issue and the cabinet decision to allow the import
of reconditioned cars restricted the movement of the Karachi stock
market and the index failed to breach the 5,000 points level during the
week, analysts said. The market further went down on Thursday, on the
news of cabinet decision to allow the import of reconditioned cars and
strong remarks of President Bush about Dr Abdul Qadeer Khan. The KSE-100
index dropped 69.63 points to close at 4,874.22 points."
While the Engineering Development Board has developed
an Engineering Vision for the industry in general, it has yet to develop
a focused long-term Auto policy. Also, there is an acute need to put in
place specific measures to implement the Engineering Vision that was
developed a year ago.
In view of the exemplary growth of the Indian auto
industry, we need to take a lead from that country's auto policy to
provide "adequate accommodation to indigenous industry to attain
Initiatives that Government of Pakistan can consider:
should take into account the need to encourage investment for capacity
expansion in order to meet rising demand. Policy should also make the
auto sector WTO compatible instead of just seeking extensions.
* The policy
should make Pakistan a global supplier of auto components and should
also include incentives to facilitate R & D and setting up of
engineering educational institutions to provide trained manpower
tariffs should also be fixed in a manner so as to promote manufacturing
of cars and auto parts in Pakistan, as opposed to mere assembly,
providing a gradual reduction of protection to domestic industry. While
ensuring a balanced transition towards open trade, the automotive tariff
structure should be reviewed periodically to prevent Pakistan from
becoming a 'dumping ground' for second hand cars, used parts and