By AMANULLAH BASHAR
July 19 - 25, 2004
The automobile industry, which led the rally of growth to an unprecedented height of over 90 percent during the recently concluded financial year 2003-04 has shown new directions for sustainable economic growth in Pakistan.
The commendable role played by the banking sector, which came out with innovative auto-financing products, no doubt was equally appreciable for cultivating a rich crop of buyers by floating innovative auto financing products at attractive and reasonably low interest rates. The financial managers also deserve a word of appreciation for their commendable job for giving a sturdy look to Pak Rupee and a stable exchange rate, which played a pivotal role to ignite a spark to comparatively a subdued, and stagnant consumer market persisting only a few years back in Pakistan.
Suhail P. Ahmed, who figures as a key man in Pakistan's auto engineering sector for the last two decades, working passionately to make the automotive industry as an active player rubbing shoulders with the grownup economies in the region. He recommends that creation of an enabling environment especially in the financial sector was highly imperative to keep moving the wheels of the automobile sector on the faster track.
In fact, it is the growth of the engineering sector, which subsequently nurture to the growth of the auto sector as the single largest contributor for the global economic growth. While substantiating his statement he referred to the 68 percent global economic growth grabbed by the engineering sector while 13 percent share goes to the credit of the world auto sector, as against 6 percent share of the textile sector in the global perspective.
While looking at the market potential one finds that there are 7 cars per 1000 people in Pakistan, 12 cars per 1000 in India as against the world average of 120 per thousand people. In the backdrop of the above situation, one can say without any fear of contradiction that a huge untapped market available within the country was suffice to pave the way for the auto sector to be a leading player in the future economic scenario of the country. Despite availability of a huge consumer market, which speaks about the future growth of the auto sector in Pakistan, the only gray area, which needs serious attention of the economic managers of this country, is the eroded buying power of the people. How to improve the financial health of the people is a million dollar question, which needs to be answered by those who are at the helm of affairs. You may call it broadly or strictly speaking, the answer lies in fair distribution of available national resources through good governance on the part of the government as well as by the well off segment of the society.
Suhail, currently associated as the Chief Executive of Habib Groups' Thal Engineering and Agri Autos, feels that despite signs for global increase in the financial charges, it is highly important and in the interest of the economy that the trend of affordable interest rates prevailing in the country which, helped augmenting a strong consumer market should be allowed to prevail in the larger economic interest of the country.
Contrary to the concerns shown by certain quarters in the automobile sector that the budgetary measures for reduction in duty on the import of cars may cast an evil affect on the growth of the automobile industry in Pakistan, Suhail feels otherwise. Instead of making an adverse affect on auto sector, this may help ease the situation especially on the delayed delivery, a factor contributing for price hike and providing opportunity to the middleman to take undue premium in the open market.
Auto assemblers or manufacturing producing cars of different makes in Pakistan collectively produced 98,000 units, which, are almost double the industry, had produced a year back. The reduction in duty may not have any fall out on the market because even after reduction in duty the landed cost of the import cars will be identical to the local prices. Hence majority of the people will stick to the locally produced cars after an improved delivery situation. As far as the quality of the locally produced cars was concerned it is as good as the imported ones. This may not be taken as an exaggeration because the spare parts and other accessories produced by the local vendor industry are in demand even in the United States, United Kingdom and the Germany as these highly developed and the choosy markets imported auto parts worth $25 million during 2003-04, which deemed fit to the satisfaction of the fastidious.
TAXES AND DUTY
Under the new scheme of things, the government has fixed consolidated customs duty, Sales Tax, Withholding Tax and Capital Value Tax (CVT) on the import of new cars (CBU) in terms of dollars.
The Customs General Order (CGO), issued by the CBR recently, will facilitated the clearance process and prevent any manipulation in the prices of imported vehicles including new cars, jeeps, buses, coaches and trucks. The potential importers will be required to pay the customs duty, sales tax, withholding tax and CVT in terms of dollars in the following manners: As against the existing duty of 50 percent ad valorem, the total impact on import of vehicles up to 800cc the consolidated amount of taxes would be $4000, up to 1000cc the taxable amount would $500, 1300cc $10,000, 1600cc $18000, 1800cc $22,000.
The import duty on different makes of the cars varies under the new scheme: Duty to be paid on import of Honda Accord 2000cc would amount to $33,000, Toyota Mark-II, 2000cc $34,000, Mercedes Benz C200 2500cc $66,000, Mercedes Benz E240 2500cc $80,000, Mercedes Benz S320 3200cc $130,000, Toyota Hilux Surf 2779cc $38000, Toyota Land Cruiser Prado Jeep, 2779cc $30,000, Toyota Land Cruiser Prado 3000cc $49,000, Mitsubishi Pajero 2834cc $58,000, Mitsubishi Pajero 3000cc $55,000, Toyota Land Cruiser Jeep 4163cc $70,000, Toyota Land Cruiser Jeep 4200cc $70,000, BMW X5 Jeep $74,000, New Toyota Hillux Pickup 2982cc $22,000, Diesel bus 70 capacity without A/C Chinese origin $16,000, Mercedes Benz coaches 15 seater $8,000, Mercedes Benz Coaches 12 seater $8,000, Mercedes Benz Coaches 10 seater $7,000, Toyota Hiace Commuter 15 seater $8,500, Changen Brand Mini Pickup 797cc $2,000, Faw brand Chinese truck 3000cc $10,000.
Depreciation has been allowed on used and second hand cars in the form of reduction in the fixed amount of customs duty and taxes in dollar terms at the rate of one percent for each complete month or 10 percent per annum calculated from the date of the first registration abroad up to the date of the entry into Pakistan. This is subjected to maximum 50 percent depreciation on vehicles more than five years old.
In case of import of reconditioned or refurbished vehicles, amount of tax worked out after allowing depreciation will be inflated by 10 percent.
Despite the fact that the payment of duty in terms of dollar or rupee does not make any difference especially when the conversion facility is available, the dealers association as well as the importers have strongly opposed to pay duty in consolidated form in dollar terms, because they feel that the amount of duty liable on import of different makes of vehicles which has been worked out by the customs authorities does not compatible to the concessionary measures regarding downward revision of the duty and taxes on import of new vehicles. The dealers and the importers have urged the authorities to get an update from our foreign missions regarding factory prices of different vehicles especially from China and Korea. The authorities however have agreed to review the consolidated duty on import of cars in consultation with all the stakeholders in the arena. The decision to allow import new cars was taken in view of growing demand which has created a gap between demand and production causing delays in delivery, sticking up huge amount deposited by the consumers at the time of booking, increasing premium and other problems irritating to the buyers.
DEMAND & SUPPLY
Despite an impressive increase in production i.e. 53 percent in segments of car and light commercial vehicle production last year and against over 46 percent growth in the current fiscal taking to cumulative growth of 102 percent in two years, the industry was unable to meet the demand which was also taking a quantum jump much higher than the growth in production. The growing demand was of course a good omen for the growth of any business on the stable and sound footings. The growing market appetite was essentially good for economic stability, as the stagnation dampens the spirit of growth in any segment of the economy. It is the increasing demand that has reactivated the Raja Group, which had come out with a plan to produce FIAT cars in Pakistan but was lying idle for quite sometimes.
The demand dominating over the production capacity of the automotive industry has started casting a magic spell on the investors as well. There are visible signs of investment in the down stream industries, which are also generating tremendous economic activities. See the remarkable growth in consumption of steel, which is essentially a basic raw material for the engineering sector in general, and automobile sector in particular. It only because of rapid growth in steel consumption, not only the Pakistan Steel has started taking concrete steps for capacity building of the National Steel Complex from existing 1.1 million to a prestigious level of 3 million tons a year. Besides expansion in Pakistan Steel, a Saudi group has also signed an agreement to set up a steel plant with a capacity of one million ton within the close vicinity to the Pakistan Steel. Obviously the capacity expansion will significantly address the issue of unemployment in our country.
As far as the contribution of the automobile industry was concerned for creation of job opportunities in Pakistan, the total strength of the workforce directly engaged with the industry was estimated to over 25,000 besides its impressive contribution worth over Rs31 billion to the government exchequer in the form of duty and taxes.
Generally speaking, we usually talk about neighboring economies including Korea, Malaysia, Thailand and particularly India for their social, political and economic achievements. People have develop a psyche to compare the price level of identical products produced in India and Pakistan especially in the automobile and the pharmaceutical industry without taking into account the huge difference between the scale of production of the two countries. The larger the scale of production, the lower the cost of production has always been the name of the game. If we have to match the price level, we would be required to work hard to enlarge the volume of production to come at the economy of the scale. A comparatively look reveals that while India is about to hit the mark of one million in automotive production, we have yet to cross the level of one lakh units. As compared to the exports of auto parts close to one billion dollars, we are struggling around 25 million dollar. One should not get upset with these figures. Though we are late yet we on the right track. Light at the end of the tunnel is visible. Our industry has the potential to deliver. As the finance minister Shaukat Aziz has initiated business friendly policies. The last budget he presented on June 12, 2004 was widely appreciated by the trade and industry all over the country. Currently, our worthy finance minister is contesting the by-elections to take the reigns of the country as the Prime Minister of Pakistan. Hopefully, his vision and policies, which are considered as friendly, will be implemented more effectively.
So far, Pakistan is known as a single crop economy i.e. cotton and textile. Certainly, the pace of growth shown by the textile sector was commendable, yet the national interests calls for diversification in the economy to have a safer future plan. The auto sector is emerging fast on the economic scene of Pakistan and it was treated as a strategic industry, it has the potential to address various social and economic issues i.e. Poverty Alleviation and economic independence, which should be the major concerns of our economic manager.