The assemblers are dependent on them and production of vehicles cannot be increased without their active participation

SHABBIR H. KAZMI, Special Correspondent
July 17 - 23, 2006

Ever since the World Trade Organization (WTO) has been established there is pressure on developing countries to comply with its various Articles. For decades the automobile industry in Pakistan enjoyed protection, both in terms of higher import duty on CBUs and restriction on import of secondhand cars. However, efforts were made to facilitate manufacturing of components locally under the deletion program.

There could be different views about the deletion program but certainly the strategy has yielded positive results. One group says that the protection provided by the government led to inefficiencies, delayed delivery and higher prices. The other group says that though there was a program, it was hardly followed and extensions allowed the assemblers to pay little attention to units manufacturing components locally. However, it is record that local manufacturers of parts and accessories have been fully supporting the assemblers. They met the demand when assemblers were producing less than 50,000 units. They have also met the demand when nearly 200,000 cars are being assembled in the country.

According to a cynic automobile industry does not comprise assemblers only. The real industry consists of hundreds and thousands of units manufacturing components and accessories. While the assemblers often succeed in exerting pressure on the government voice of parts manufacturers often remains unheard. While the first group enjoys access to power corridors, the legitimate demands of the second group are often not considered as they lack clout because the players are small and fragmented.

The Auto Policy consists of various sections dealing with 1) import of CBUs (new as well as secondhand), 2) import of components and 3) entry of new players. However, all of these are intermingled and interdependent having direct impact on the manufacturers of parts and accessories. Therefore, it is necessary to understand the implications and also take necessary measures to minimize the adverse impact on the local manufacturers of parts and components.

With the permission to allow secondhand cars the country has already spent foreign exchange worth approximately US$ 1.5. A burden of parts, for the replacement market will be on top of this. It may also lead to smuggling of the parts depriving the country of possible revenue. Since most of the CBUs imported are not fitted with CNG kits it would also lead to higher POL import bill in the initial stages and subsequently necessitating import of CNG kits. According to some technicians CNG kits cannot be installed in most of the cars imported recently.

The government has decided to replace Tariff Based System (TBS) with the decades old Deletion program. According to some sector experts the overwhelming consensus is that TBS will have a negative impact on the component manufacturers, as the policy is tilted towards the new assemblers getting ready to enter Pakistan market. They say that the policy would encourage the already operating assemblers to switchover to imported CKD kits/parts. It is only because of the tariff anomalies, whereby the imported parts would be cheaper compared to locally produced parts. One may say that on the face value the policy assures full protection to the local manufacturers. However, analysts are of the view that realty is often different from the objectives expressed in a policy.

The third component of the policy is aimed at facilitating entry of new players in Pakistan. Before commenting on this it is important to look at the existing players. Most of the global leading brands are being assembled in Pakistan and entry of another two/three could not make any difference. The issue does not pertain to brands but delivery time and prices. Providing a wider range just cannot bring down the price or delivery time. Pakistanis have developed preference for certain brands over the years and this may not change even if some other brands are available. Various models of these brands are liked because of availability of spare parts and after sales services. The new entrants will take years to come close to the existing infrastructure.

One tends to arrive at a conclusion that the Auto Policy have some hidden motives and increasing supply or bringing down prices is only a ritual. Some of the analysts say that if the permission to allow import of CBUs, to begin with, must be supported by concrete plan for investment - creating new production facility rather than acquiring the existing facility on rental. Besides, the new entrants must be asked to finalize agreement with the local manufacturers of components and accessories.

By diverging from a prudent policy the government may succeed in luring a few high-end brands or opening the floodgate for imported cars. However, the smooth sail of assemblers is dependent on a robust chain of manufacturers of components and accessories. Most of these fall under the category of small and medium entrepreneurs. Most of them have invested their life savings and are also involved in day to day activities. They provide jobs to thousands of people and constitute the backbone of Pakistan's engineering sector.

According to the market sources the government is still negotiating with the existing assemblers, component manufacturers and the new entrants to strike a deal which can help improve supply, bringing down prices and above all ensuring diversified product range for the potential buyers. There should not be any attempt to achieve the objectives by following any shortcuts. If the government wants to follow market-based policies it should also protect the interests of all the stakeholders.