Snatching defeat from the jaws of victory

July 26 - Aug 01, 2004

The fiscal year 2002-03 proved to be a good year for the Pakistani automobile industry and its allied industries. Between them, the five local assemblers produced a total of approximately 75,500 units, compared to just over 47,000 units produced in the previous fiscal year. The current fiscal year certainly started out on a healthy note with a projected production figure of 114,000 units against an installed capacity of 108,000 units. But ever since the revision of duties announcement in the Federal Budget 2004-05 by Shaukat Aziz, Federal Minister for Finance and Economic Affairs, the winds of uncertainty have started to blow across the industry.

The budget has declared a downward revision of Customs Duty on imported CBUs along with increasing import duties on sub-assemblies, components and parts used in manufacturing and assembly of vehicles.

These measures come as a major threat to the auto sector as they would increase the cost of the locally produced vehicles and at the same time allow imported vehicles to enter the market at lower costs. The drastic effects of this inconsistency in government polices is expected to erode the protection to domestic industry to ineffective levels.

Investment in the auto industry is estimated at Pak Rs. 52 billion, of which Indus Motors share is Rs. 2.4 billion; Pak Suzuki's share is Rs. 3 billion; Honda Atlas share is Rs. 1.053 billion; and Dewan Farooque Motors share is Rs. 1.8 billion. Other than the share of these major car manufacturers, investment in vendor industry stands at Rs. 35 billion; in tractor manufacturing at Rs. 3.5 billion; motorcycle manufacturing at Rs. 3 billion and other commercial vehicle manufacturing at Rs. 2 billion. Had the environment remained conducive, investment in the industry was expected to reach approximately Rs. 93 billion by 2006.

However, the inconsistency in policies is evidently penalizing towards the factors that have contributed to Pakistan's economic revival. The policy is expected to lead to roll back in localization programs as it carries no incentive for OEMs and vendors.

During the second half of the 90's, similar inconsistencies and frequent policy changes affected the market negatively and production figures remained stagnant at under 50,000 units annually. It was a result of consistent government auto policies during the last three years that spurred market growth. Indus Motors, with an installed capacity of 26,000 units, had a production that increased from 13,200 in 2000-01 to approximately 20,500 in 2002-03 and was projected to reach 32,000 units by end of 2004. Pak Suzuki, with an installed capacity of 50,000 units, went from a little over 19,000 in 2000-01 to over 38,650 in 2002-03 and was projected to reach 50,000 units by end of 2004. Honda Atlas, with an installed capacity of 6,000 units, increased from 5,800 in 2000-01 to approximately 8,400 in 2002-03 and was projected at 12,000 units by end of 2004. Dewan Farooque Motors was also expected to reach its full capacity of 20,000 units in the current fiscal year.

Needless to say, these measures on part of the GoP are like snatching defeat from the jaws of victory. The proposals made will put all investment and expansion proposals and plans on hold and will grossly un-nerve investors.

It is estimated that currently as many as around one million people earn their livelihood, either directly or indirectly, from the domestic auto industry and all its allied industries. It was estimated that the industry would create a further 350,000 job opportunities, a big boon to a country where unemployment figures are presently at 7.8 per cent. Under the current scenario, these would be shelved as planned expansion by local OEMs comes to a standstill.

The industry will be facing an acute collapse in the demand for locally manufactured cars as large-scale imports will be resorted to. Needless to say, this measure would reduce a growing industrial base of the auto sector to naught, and convert the Pakistani auto market into an international dumping area, where all countries discard vehicles that are not fit for their roads and traffic regulations.

While the locally manufactured cars reach the market after thorough inspection and clearance from quality control and management systems established on international standards at all manufacturing plants, imported CBUs would carry no such certification of quality or warranty, proving a hazard to the domestic consumers, as well as to the environment.

The duties on some of locally manufactured categories have been lowered by 50%. The proposed tariffs on import of new cars will give Pakistan the distinction of being a country with the lowest tariffs on cars in the entire South East Asia. To consider as a case in point, duties & taxes on CBUs alone in India stand at 146.13%.

Though the budget clearly strikes at the root of the Auto Industry's thrive, it has not spelt out any rules to govern import of used cars. Under current rules there is a maximum of 50% depreciation allowance given on two-year-old vehicles. Application of this rule in conjunction with the newly proposed tariff will render the protection level to the local industry to a negative one. To consider as an example, duty on vehicles up to 1300 cc has been reduced to 50% whereas duty on CKD of 1300 cc is 35%. On application of 50% depreciation allowance duty on finished product that comes under transfer of residence and personal baggage, becomes 25% while input materials remain at 35%.

Another drawback of the newly imposed measures is the restriction on local manufacturers to sell vehicles only to NTN (National Tax Number) holders. In addition, it also demands that records of every customer to whom vehicles are sold, be provided to the CBR. While the Auto Industry is fully documented, contributing substantial revenues to the government, there are only around 5.5 lac NTN number holders in the country. A majority of the population is not enlisted with the taxation authorities, including those belonging to the agricultural sector as well as overseas Pakistanis who send foreign exchange remittances to their families residing in Pakistan. This policy would deprive a major population segment from purchasing locally manufactured cars; leaving them with no option but to buy imported vehicles on which no such restriction has been imposed.

The measures taken so far reveal that the government has taken its decisions keeping in view the consumers' interest, instead of the national one. It is proven that the local auto sector has not been taken on board, in the least for consultation even before finalizing the policies that govern the root of their very existence.

Protection to the local industry has been rendered ineffective and if the rules governing import of used cars remain vague the domestic industry will have no choice but to shut down assembly and localization operations. While there is still time, the government should onboard the local associations of automobile manufacturers and work out policies that are in the greater national interest.