IMPORT OF RECONDITIONED CARS

Need for a strategic approach

By RAHEEL YOUSAF
Apr 12 - 18, 2004

Progress lies not in enhancing what is but in advancing towards what will be......
Gibran Khalil Gibran

Much has been written in the recent past about the Automotive Industry of Pakistan. Though some of it has been based on facts, a lot is based on fiction and a few suggestions even bordering on naivety. Some have even gone to the extent of labeling all involved in the industry as cheats and profiteers calling for a quick decision in favor of allowing import of reconditioned cars without even giving the Automotive Industry leaders an opportunity to present their case. One wonders whether it is because of the fear that the Automotive Industry's demand for keeping a ban on import of reconditioned cars is based on merit.

The history of Automotive Industry in Pakistan dates back to the 50's when General Motors (GM) established a bus/truck assembly plant. But it is only in the recent past that this industry has become a lead story for the press and public alike.

Today the Automotive Industry of Pakistan mainly comprises of more than a dozen manufacturers of passenger cars, commercial vehicles, motorbikes and tractors, and over 800 down stream vendors supplying various indigenous component to these Manufacturers. The vehicle manufacturers alone employ around 10,000 workers with more than 100,000 people working in the vendor industry. During the FY 2002-2003 the Automotive Industry contributed over Rs. 30 billion to the government exchequer in the form of duties and taxes, with a contribution of Rs. 17 billion from the top four manufacturers alone. This industry is credited with foreign exchange savings of US $ 700 million in FY 2002-2003. The total investment in the Automotive Industry has surpassed the Rs. 50 billion mark and another Rs.30 billion investment is in the pipeline in the coming 3-5 years, promising to create another 350,000 jobs.

Most of the attention being paid to the Automotive Industry is due to the phenomenal growth achieved during last two years; the fact is that it has been a pretty rough ride for this industry during the last decade of the previous century.

From the late 80's to early 90's the demand for automobiles was on the rise, setting the stage for a decade of robust growth. But as is evident in the graph, the Yellow Cab Scheme launched in 1992-1993 had an adverse impact on the industry leading to a sharp decline in demand. In the subsequent years from 1993 to 2000 over 30 policy changes froze further investment and contributed to a stagnant market. It is largely due to the consistent and business friendly policies of the current government, improved liquidity in the market, reduction in interest rates and economic growth that demand has grown tremendously in the past two years.

Those advocating the import of reconditioned cars have been creating the impression that prices of automobiles in Pakistan are higher when compared with India. A cursory look at the facts proves that nothing could be farther from the truth.

PRICE COMPARISON OF PASSENGER CARS IN THE REGION AS ON FEB 2003
(in 000 Rs.) Except US $

MAKE/ MODEL

PAKISTAN RETAIL PRICE

MALAYSIA RETAIL PRICE

THAILAND RETAIL PRICE

INDIA RETAIL PRICE

 

Rs.

US $

Ringgit

US $

Equil. Pak Rs

Baht

US $

Equi Pak Rs

Ind Rs.

US $

Equil. Pak Rs

TOYOTA

1.6 A/T Corolla

1,169

20,260

100

26,314

1,543

843

19,770

1,222

     

1.6 M/T Corolla

1,079

18,700

93

24,531

1,439

803

18,832

1,164

     

1.3 M/T Corolla

849

14,714

                 

HONDA

1.6 A/T Civic

1,239

21,473

100

26,251

1,540

854

20,028

1,238

     

1.6 M/T Civic

1,149

19,913

75

19,852

1,164

759

17,800

1,100

     

1.3 M/T City

779

13,501

           

717

15,041

903

SUZUKI

Mehran 800 cc std.

299

5,182

           

255

5,348

321

Mehran 800 cc A/C.

349

6,049

           

275

5,766

346

Alto LX

419

7,262

           

303

6,360

382

Alto VX

469

8,128

           

360

7,568

454

HYUNDAI

Santro GS

419

7,262

           

334

7,012

421

Santro Plus GX

509

8,821

           

398

8,346

501

COMPARABLE CARS IN INDIAN MARKET

Mitsubishi Lancer

               

723

15,172

911

Mit Lancer -Diesel

               

934

19,596

1,177

GM Astra 1.6 M/T

               

829

17,388

1,044

Hyundai Sonata 1.6 l

               

1,310

27,469

1,650

NOTE:

Exchange rate parity is as follows

US $

.

57.7

.

3.82

.

.

42.64

.

.

53.88

.

Pak Rs.

.

.

.

.

15.36

.

..

1.45

.

.

1.12

This chart clearly refutes the claim of some vested interests that car prices in Pakistan are higher compared to other countries of the region, particularly, India. The fact is that car prices in Pakistan are lower for most of the comparable models, except few where they are slightly higher and that too due to higher duties and taxes paid by Pakistani manufacturers when compared with their Indian counterparts.

DUTIES & TAXES
COMPARATIVE INDIA & PAKISTAN

CKD

DUTY

INDIA

PAKISTAN

Customs Duty

*20%

35 %

Additional Customs Duty

*16%

 

Sales Tax

 

15%

Income Tax

   

Total

36%

50%

PARTS

Customs Duty

20%

25%

Additional Customs Duty

6%

 

Sales Tax

 

15%

Income Tax

 

6%

Total

36%

46%

CBU

Customs Duty

60%

20% - 150%

Additional Customs Duty

24%

 

Sales Tax

 

15%

Income Tax

 

6%

Calamity contingent duty

1%

1%

Cess

.125%

 

Capital value tax

 

Upto 7.5%

Total

100.125%

 

*as per Indian localization policy where car manufacturers are required to localize any one of the following 7 assemblies i.e. i) Engine Assembly ii) Body/Cab iii) Chassis iv) Gear Box v) Transmission System vi) Axle Front & Rear vii) Suspension.

It may be noted that import of CBU cars in India is also subject to customs duty of about 100% in addition to CED and sales tax. So the Indian car manufacturers are protected through tariff as well as non-tariff barriers. Imported vehicles also need to get tested by testing agencies set up in India to ensure that poor quality, fuel inefficient old vehicles do not enter the country. The vehicles have to conform to Indian EPA standards. These EPA standards are yet to be developed in Pakistan so the doors are open for sub-standard vehicles with higher fuel emissions. Only right hand drive vehicles with speedometer in Km/hr reading and signaling system for Keep Left traffic system are permitted in India. Further in case of used cars, the import duties in India are in excess of 150%. Other Non-Tariff barriers include conditions such as, cars shall not be more than three years old from the date of manufacture, importer has to submit a pre-shipment certificate to the effect that vehicle conforms to regulations specified in the Motor Vehicles Act 1988 of India. The importer also has to submit a pre-shipment certificate to the effect that the vehicle conforms to the Original Homologation certificate issued at the time of registration. These conditions make import of used cars practically impossible in India.

Another pertinent factor is the major difference in market size of both countries. The total market demand in Pakistan for the year ending June 2004 is expected to be a little over 110,000 vehicles, whereas the Indian market is touching 1,000,000 vehicles p.a. This clearly provides economies of scale to Indian manufacturers, vendors and raw material suppliers, giving them huge cost advantages. Inspite of this advantage to Indian manufacturers, Pakistani vehicles are price competitive.

The data and points presented above should remove any doubts, if there are any, about the demerits of allowing import of reconditioned cars. This step, if taken, will reflect a short-term approach aimed at quick fixing. We simply cannot afford adhoc decisions based on political expediencies alone. Any changes in the automobile policy will not only have an adverse effect on the auto industry in particular, but will sound alarm bells for prospective investors in Pakistan. Facilitating further expansion of production capacity and providing conducive atmosphere to attract more investment is the only solution to providing quality cars at competitive prices to consumers. The Finance Minister recently informed that the average per capita income in Pakistan has increased to beyond US $600. This has been possible due to prudent and consistent economic policies aimed at attracting increased investment to create job opportunities. We have yet to go a long way and more of the same is required. The government should adhere to its strategy of long-term policymaking and not pay any heed to those who are always looking to make a quick buck at the cost of national interests.