The import of old, used or reconditioned cars had been damaging the local investment climate and adding an uncontrollable angle to the growth projections

MOMEY GUL, Senior Correspondent
July 17 - 23, 2006

The entire auto sector gave a robust performance marked by increase in car sales by 22.2 per cent. However, the automobiles' supply failed to slake the blooming demand, besides the exorbitant prices drew much criticism on the manufacturers despite tremendous growth. For the past couple of years the finance ministry allegedly overruled a CBR proposal wherein it was offered that the exemption levels for CKD be brought down and CBU duty rates be slashed, to create an atmosphere of competition in the market.

Besides, time was fast approaching when the car prices would have started discouraging the buyers at the market and they would either have opted for smuggled cars or have given up buying, leaving the vendor industry in lurks. The competition was meant to force the carmakers to improve quality, reduce prices and stop fleecing the country and the customers through unfair practices in parts imports/remodeling.

Pakistan Association of Automotive Parts & Accessories Manufacturers (PAAPAM) pointed out that the import of old, used or reconditioned cars had been damaging the local investment climate and adding an uncontrollable angle to the growth projections.

Razzak Ahmed, Chairman of the association, talking to the PAGE said that it supported customer-oriented policies that shall result in elimination of premiums, besides enhancing market growth for motorcycles, cars, tractors and trucks/buses. For customs recommendations, he said that the government should reduce custom duty on pig iron hard coke from 5 per cent to 0 per cent besides fixing assessment value for cast iron scrap to $ 200 per ton.

Regarding fiscal policies, he said that they demanded a special interest/markup rates less than 5 per cent for Auto Parts Engineering Organization, which will support the current expansion plans underway in the sector.

State Bank of Pakistan's consumer financing policy for the automobiles must continue. However, he said that the lending should be based on a transparent system wherein the consumer understands what he is getting into. This policy must be implemented only for new vehicles. Consumer financing for motorcycles, two wheelers and rickshaws may also be fully introduced. There should be no withholding tax on imports by industrial importers whilst for commercial importers it may continue at the current rate.

"Strict implementation and imposition of GST at auto parts retail stage is pending for the last many years. This is giving an automatic disadvantage to local manufacturers of over 18 per cent. We strongly urge implementation. The implementation of the proposed tariff based system is contingent upon a transparent import regime".

Razzak Ahmed said that undeterred under invoicing and clearance of SKD/CKD under simple auto parts classifications (commercial tariff) has been giving undue disadvantage to the local manufacturers. "To inhibit under invoicing and mis-declaration, we strongly recommend following guidelines be imposed for import of CKD allowed under reference to the component part number duly listed in the manufacturers / assembler parts/vehicle catalogue," he said.

The Chairman PAAPAM pointed out that appraisement staff is trained and PAAPAM teams may be included in the clearance of such consignments regularly.

On raw material, he pointed out that all prime materials tariff be brought down to zero per cent and export of steel and non ferrous scrap from Pakistan should be halted besides all secondary material tariff be also brought at par to 5 per cent and all alloys & special steel to zero per cent.

Razzak stressed that new PCTs should be introduced for raw materials at 5 per cent if a generic specification is not available for any material not made locally.

Introduction of new HSC headings in last year's budget 7204.1020 (waste & scrap of auto parts) has added a new conduit for import of these banned commodities. PAAPAM regretting the CBR action urged for immediate deletion of this line from the tariff books as all vehicles and components manufactured worldwide had a certain life cycle and span.

Razzak pointed out that these used parts were supposed to be destroyed and not reused as visual examples of these accidents are available everywhere in Pakistan and one cannot miss to note that only Bedford trucks turn turtle, and old diesel cars are always broken down on the motorway.

Majority, if not all, of the vehicles now on Pakistani roads are made in Pakistan with adequate local parts production availability, "Unfortunately these parts finding their way into Pakistan will add risk to the already overcrowded roads. This surely is against the intentions of the present government that is trying to promote good and safe transport", the chairman added.

One does get a chance to read a lot about the automobile assemblers but usually does not come across the vendor industry, which produces auto parts and accessories manufacturers. In fact the vendor industry is the backbone of automobile industry. Its importance in Pakistan can be gauged from the fact that it has been successfully meeting the demand despite nearly three-fold increase in number of cars assembled over the years. This has become possible as of the close interaction between assemblers and vendor units. It is also a fact that quality and diversity of items produced locally has also improved substantially.

It is often said that the vendor industry has flourished and grown in Pakistan mainly following the deletion program followed by the government. However, it is a juggle of figures. There are two opinions: sector has flourished due to deletion program and the sector has established its credibility with the gradual improvement in quality and diversification of the product range. However, some of the analysts have a different point of view. They say, the sector may have flourished due to the deletion program but it is also a fact that this program was hardly followed by any assembler. They were able to get extension on any pretext.

The fact, which establishes the credibility of vendor units, is that they have been successfully meeting the requirement of the assemblers. They were meeting the demand when annual production of cars was 40,000 units. They also successfully managed to support production of more than 127,000 units during 2004-05. The assemblers produced a little less than 97,000 units during 2003-04. Achieving these levels of production was just not possible had the parts manufacturers not increased their production capacities.

To achieve the present production level these units have invested huge amount not only to meet the enhanced demand but also to improve the quality. In this regard no one can undermine the role of local assemblers. Local assemblers have been working very closely with the parts and accessories manufacturers to expand the capacity and to improve the quality standards.

With the reduction in tariff and permission to allow import of CBUs, at reduced duties, one has to look at the fate of the vendor industry. The propagators of present policy say, "If the country is adopting market-based policies there should not be any requirement of following the deletion program. Assemblers should be free to make the decision of buying locally produced parts or importing these." However, the supporters of protection policy say, "The prime concern should be to provide safeguards to the local industry. It becomes all the more important because often the prices of basic but imported raw materials are beyond the control of local industry." They cite the example of recent hike in steel prices. With the substantial rise in steel prices local vendors had no option but to increase the prices of components. The same is also true about others petroleum-based raw materials.

However, some of the sector analysts are of the view that the smuggling of components/parts in huge quantities is the main impediment affecting the profitability of the local vendor industry. These units could have achieved economies of scale and greater synergy had there been no such influx of parts. The local markets are flooded with smuggled parts and accessories. There would have been no incentive for smuggling had the prices of locally manufactured components and accessories were not high.

These analysts say that while reducing the tariff the government ignored the basic principle of cascading. According to this policy there should have been sufficient difference between the tariff applicable on finished components and the rates applicable on raw materials. The difference in rates should always be there to facilitate the local manufacturers.

The prime objective should be to ensure economic sustainability of these units and if certain protection is required it must be ensured. The economic viability of local units has to be maintained. The factors responsible for higher cost of production must be addressed because allowing import cannot help contain the cost of automobiles in the country.

Interestingly the government has not been able to overcome on money issue but seems to be ready to implement a policy, which can kill the growing industry.