WALKING THE DISTANCE
The remarkable growth in the auto industry is driven by both rising demand and increased supply
June 26 - July 02, 2006
The desperate pleas and cries raised by the local auto manufacturers to put a halt to the liberal import policies apparently seem to have been ignored by the authors of the current budget 2006-07.
The government has allowed new entrants into the auto sector in order to bridge a demand supply gap. In the new budget, importers are allowed to import cars not older than 5 years under the transfer of residence scheme. This move has opened a Pandora's Box for the local auto makers as all the progress made in terms of capacity enhancement to raise the production level and upgrade its product seem to literally go to waste.
The auto sector witnessed a deceleration in growth as growth in the auto sector fell by 32.3% in the first quarter of the financial year 2006, from 40.2% in the first quarter of the financial year 2005. Imported cars seen now at every nook and cranny, according to industry analysts, may touch 100,000 units mark by 2007. This amount is actually 40% of the total market share, which is being taken away from the local automobile manufacturers.
A dangerous trends if left unconstrained. The local players allege that the facility allowed to oversees Pakistanis is being abused by second hand car dealers and alternatively feel threatened by this as the assemblers claim that their daily bookings of cars of certain categories has drastically been affected.
Figures show that on an average, between 3,000-4,000 cars are arriving at the ports under various schemes in a month. This is adversely affecting the local vendor industries that have invested Rs. 125 billion in the past 5 years and have plans to invest an additional Rs. 20 billion.
Before the current budget, importers were allowed to import at 100% CKD kits and components at statutory customs duty for three years, this concession; however, wasn't applicable to the components manufactured locally.
However, the remarkable growth in the auto industry is driven by both rising demand and increased supply. The continuing demand is led by the availability of credit and strength of the domestic economy. What is needed to be realised is that Pakistan is in its Pre-Motorisation stage and in order to reach motorisation levels equivalent to those of other countries in the region we need to cross the 500,000 units per threshold. This is only possible if a long term policy supporting the local assemblers is in effect. During 1994-2000, there were over 30 changes in the auto policy and after 2000 did we see a strong and rapid growth in the auto sector due to economic expansion and consistent policies.
The vision for the auto sector is to establish a globally competitive automobile industry in Pakistan, making it a hub like Japan by the year 2012 by increasing the motorisation level, enhancing production and increasing capacity which would allow export of automobiles and auto parts due to economies of scale while significantly enhancing the industry's contribution to the economy. However, none of this will be a possibility if used cars continue to cascade upon the local market. What the buyers of these used vehicles do not realize is that vehicles imported are not suitable for Pakistani road conditions, fuel speculations, adequate parts, service backup facilities are not available, no after sales, no warranties, high maintenance and spares cost.
Additionally, cars are imported by used car dealers and investors instead of Overseas Pakistanis, there is massive under-invoicing & flight of capital, resulting in a loss of Government Revenue, no contribution to GDP or any economic growth and dealers of used cars are not Sales Tax Registered.
We need a tariff based system which is not only in the national interests but is also WTO compliant. This system should be transparent, should not rely on human interference or interpretation, easy to understand and implement. We need to continue utilization of existing technology and promote further technology transfer while enhancing human capital by creating new and high productivity job, encouraging new investment and helping to stop the smuggling and under invoicing of vehicles and parts while most importantly, restricting the import of used cars and used auto parts.
So far the automobile industry has shown robust growth in production and sales on the back of huge investment coming in this sector. The market appetite is reflected in the cumulative sales during the first eleven months of the current fiscal depicted a stable growth trend over the same period last year with car, trucks, LCVs (Light Commercial Vehicles) and tractor sales soaring by 23%, 32%, 33% and 11% respectively.
The growing demand despite increasing interest rates for car financing indicates that this mother industry can provide a strong engineering base, which is the real indicator for sustainable economic growth for an economy.
It is feared that the used cars flooding the local market may deprive the local economy of the forthcoming benefits, which are in the store so far!