Auto industry in Pakistan

High rate of duty on two wheelers meant to discourage imports and give more benefit to local industry

By Syed M. Aslam
July 12-18, 1999

No other industry enjoys more protection in Pakistan than the auto industry, particularly the two-wheelers. For almost two decades the import of two-wheelers is subjected to a high, 105 per cent duty to discourage imports.

In the early 1970s imports of motorcycles in Completely Built-Up (CBU), Completely Knock-Down (CKD) and Semi Knock-Down units were subjected to 10 per cent duty. Eight years later many of the local distributors of Japanese motorcycles established their plants to assemble the two-wheelers locally in collaboration with their foreign principals and the duty was increased to an unaffordable rate of 105 per cent to protect the nascent industry.

Today the bulk of the national market is dominated by three major manufacturers— Honda, which enjoys the biggest share of the market, followed by Yamaha and Suzuki. Others producers like Vespa and new entrants such as Hero and Sohrab enjoy much smaller share.

While the high duty was imposed to help the nascent industry initially for ten years, it continued till July this year. The three major Japanese manufacturers have not only been able to take a sizable share of the market but also to achieve a reasonable deletion target of up to 70 per cent. However, the extensive protection for over two decades has created a virtual absence of healthy competition resulting in drastic increase in prices in particular and quality in general.

Today, prices of the two-wheelers have reached a level where the majority of middle income group, the main market of the two-wheelers, can hardly afford to buy a new motorcycle whose prices start from over Rs 60,000. The prices of locally assembled Chinese brands are comparatively less but still run in excess of Rs 44,000.

For the first time the government announced to reduce the duty on the import of motorcycles; in CKD, SKD or CBU form, to 10 per cent when finance minister Ishaq Dar presented the Budget 1999-2000 in the Parliament on June 12. However, a notification issued by the ministry of finance dated June 14 but received on June 23 said that the imports of motorcycles will be subjected to a regulatory duty of 95 per cent. The registered local assemblers, which include all manufacturers, will be exempted from regulatory duty on the import of CKDs which will be subjected to import duty of 10 per cent, sales tax of 15 per cent, income tax of 5 per cent. No other import, including the automobiles, is subjected to a higher regulatory duty than the two-wheelers.

Pakistan, with a population of 131 million, is the seventh most populated country in the world but despite tremendous market for two-wheeler its share in the global production of over 19 million remains negligible. It produced a record 112,000 motorcycles in 1992-93 which fell down to 90,000 in 1997-98. During the first nine months of 1998-99, (July ‘98 to March ‘99), a total of 55,000 two wheelers were produced as compared to over 68,000 in the comparative period the previous year.

The declining sales have also worried the major producers who feel that the high import tariff is hurting the industry. Talking to PAGE the chief executive of Suzuki Motorcycles, Danishmand, said that instead of relying heavily on customs duty to earn revenue the government should direct its attention on sales tax. "By cutting the customs duty on CKD kits the prices of motorcycles would decrease to an affordable level to improve the sales volume to earn a better revenue from the sales tax, at retail stage," he added. Danishmand said that the high prices were hurting the sales and agreed that the total impact of import tariff on the completely built two wheelers should be reduced.

He said that the sale of locally manufactured motorcycles is feared not to pick up till September, primarily due to the conflict in Kargil and absence of any new crops in the country, particularly in agriculture belts in Punjab near the border areas.

He was also much critical of the failure of the local manufacturers to provide a better price and product choice to the motorcycle buyers in Pakistan. Instead of coming up with newer models the local manufacturers keep on selling same old ones by making such negligible cosmetic changes as changes in fuel tank and design changes on its side stickers year after year, he added.

The president of Motorcycles, Scooters, Auto rickshaw Importers and Dealers Group, Muhammad Sabir Shaikh, demanded the reduction in regulatory duty to 40 per cent for the benefit of the middle class to facilitate competitive priced imports.

He said that local manufacturers produce only a handful of models with engine capacity of which is 70 cc, 100 cc, 125 cc and 150 cc. For the benefit of the people the government can reduce the import tariff on the motorcycles which are not produced locally— bikes up to 50 cc and over 200 cc. The reduced tariff will help encourage import of two-wheelers not produced locally to keep providing protection to the manufacturers on one hand and a much better price and product choice to the people on the other.