AUTO INDUSTRY

Industry's survival demands thorough policy reconsideration and consistency

By TALLHA BIN HISSAM
Nov 29 - Dec 05, 2004

The Pakistan Automobile Industry, with its Rs.52 billion investment, is playing its due role in strengthening the economy.

The fiscal year 2003-04 proved to be a good year for the industry and its allied industries. Between them, the five local assemblers produced a total of approximately 130,000 units, compared to just over 75,500 units produced in the previous fiscal year. The current fiscal year certainly started out on a healthy note with a production figure of 114,000 units against an installed capacity of 108,000 units in June 2004. But ever since, the revision of duties was announced in the Federal Budget 2004-05, 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 increased import duties on sub-assemblies, components and parts used in manufacturing and assembly of vehicles. GoP's recent measures in the budget are bound to have an adverse affect on the industry.

Reduction in duties on imported automobiles has created a misbalance between duty on CBU and CKD. Gap has reduced from a minimum of 40% to 15%.

Industry experts fear that reduction in duties could result in a situation similar to the one created by the Taxi Scheme of the early nineties that allowed zero-rated import of taxis resulting in massive decline in sales of locally manufactured vehicles and complete cessation of investment. Before the announcement of the Taxi Scheme, the industry had reached production figures of 65,000 units/year. After the scheme, production reduced to 45,000 units/year and remained at around that level for more than 7 years. It was only due to consistent policies of the last 3 years that the industry was able to achieve tremendous growth and cross figures of 130,000 units /year in 2003-04

Once again the industry is faced with similar situation, as the GoP is again playing with duties. The recent budgetary measures will stop the investment by OEM's and vendors. There is no long-term auto policy for the auto sector.

This will have a direct negative affect on employment, revenue to GoP and transfer of technology. Almost all auto manufacturers in Pakistan are joint venture projects with foreign affiliates. Not only do the foreign partners provide foreign exchange equity, but are also responsible for transfer of technology. Many of them are responsible for Technical Assistance Agreements (TAA) with foreign component manufacturers. All of the above has been jeopardized by recent measures in the budget 2004-05. These measures render Pakistan a less lucrative investment opportunity compared to other countries in the region.

Being in the stages of development, foreign investment looked towards and relied upon for a boost in the economy. But the decision of the government will discourage the investors who have currently invested a lump sum amount in this industry. None of the investors would gamble on an investment that is not protected by guarantees and secure returns. The automobile industry has a current investment of Rs.52 billion, which is expected to rise beyond Rs.90 billion by 2006. Such an amount if withdrawn by the investors would damage the economic growth, as globally, the automobile industry is considered to be the mother of all industries and an engine of growth for the economy.

From the tables given below, it is evident that Pakistan has the lowest CBU duties for imports of new cars in the region as well as the highest CKD duties, thus providing the least incentive for local manufacturing.

TABLE 1
DUTY STRUCTURE IN PAKISTAN

Segment

CUSTOM DUTIES-CBU

 

Previous

New Budget 04-05

1801 cc

150%

100%

1601 - 1800 cc

125%

80 %

1301 - 1600 cc

100%

70%

1001 - 1300 cc

100%

50%

Up to 1000 cc

75%

50%

 


 

Table - 2
GAP BETWEEN CKD & CBU DUTIES IN SELECTED REGIONAL COUNTRIES

COUNTRY

CBU CUSTOM

CKD CUSTOM DUTIES
(MINIMUM)

GAP

Pakistan

50%

35%

15%

India

105%

20%

85%

Thailand

80%

20%

60%

GoP has also imposed 20% Customs Duty on CKD kits for buses under the Urban Transport Scheme in Federal Budget 2004-05. This will result in an appreciation of prices to around Rs.250,000 per unit. Transporters have stopped booking of buses after the imposition of duty.

GoP has also increased duties on auto components from 25% to 35%. This will not only encourage smuggling further, but will also increase the cost of locally produced vehicles leading to reduced gap between the price of locally manufactured vehicles and imported vehicles. Reduction in CBU duties is bound to result in an influx of low quality vehicles in Pakistan, without adequate local service and spare support facilities. This influx would also be encouraged by the absence of Quality Standards for import of vehicles in Pakistan. In other countries like India and Thailand, non-tariff barriers are imposed to check import of low quality vehicles. For example, in India, imported vehicles are tested by testing agencies to ensure that poor quality and fuel inefficient vehicles do not enter the country. The vehicles also have to conform to Indian EPA standards.

NO NTN REGISTRATION

In the Federal Budget 2004-05, CBR under SRO 453(I) 2004, has made it compulsory for auto manufacturers to sell vehicles only to holders of NTN certificates and to send records of these to CBR on monthly basis. While the Auto Industry is fully documented, contributing substantial revenues to the government, there are only around 5.5 lakh NTN certificate holders in the country. A majority of the population is not enlisted with the taxation authorities. This step has drastically reduced new car bookings by around 70-80%. This policy would deprive a major population segment from purchasing locally manufactured cars, including; Farmers, Growers, Housewives, Families of Pakistanis working abroad, Defense Department Personnel, Expatriate Pakistanis etc., leaving them with no option but to buy imported vehicles on which no such restriction has been imposed. Further this condition has put local auto manufacturers at a disadvantage.

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 bring onboard the local associations of automobile manufacturers and work out policies that are in the greater national interest.