LOCAL AUTO INDUSTRY SEEKING GOP SUPPORT
Import of used cars due to the import liberalization policy currently applicable to the auto sector, is making its negative impact felt in the local industry. The liberalization, at the first instance, may seem positive as the delivery clog of cars seems to be addressed to, however the matter if analyzed long-term and on a macro level identifies some serious consequences for both the industry and the country.
BENISH YUSUF KASSIM
Aug 07 - 13, 2006
The overall demand for locally manufactured cars having dropped significantly due to this import influx, will discourage local players from further investment. This automatically adversely affects employment opportunities in the country. Currently the industry employs over 400,000 people. Also growth in allied industries will be negatively impacted. This means that the revenue to the GOP would suffer. The industry has been instrumental in transferring the technology to vendors and dealers. The development of this industry would result in substantial foreign exchange savings which would be drained, if as a short term solution to supply and demand gap, imports of cars continues.
The car manufacturers have not been able to fully meet the demand of the buyers which has seen an unprecedented rise during the last few years owing to the easy accessibility of auto credit amongst other factors. Industry sales figures show robust growth of 22 % at 757,235 units as compared to previous 618,834 units. It must however be understood by policy makers that although investments have been made by local players, notwithstanding the production capacity increase, it would take a minimum period of 2 years to meet the exponential demand of such a capital intensive industry.
At the same time, it must be kept in mind that expecting additional investment without a consistent, long-term and positive policy framework would be superficial. It has been repeatedly urged by the local manufacturers that a major part of this demand is through non-genuine buyers who act as investors, buying vehicles on ex-factory price and reselling them on premium much to the discredit of the local manufacturer's image.
The issue of premiums however is temporary and is neither new nor unique to Pakistan. Once the local industry is allowed to grow, by virtue of conducive policies that need to be brought in, taking lessons from other countries and their experience, the premium issue would be non-existent as supply would meet genuine demand. In the given circumstance particularly when the rise in demand is not substantiated with actual consumption, it is very unlikely that investment influx can be ascertained.
Another adverse impact of imports liberalization policy to the GOP is massive under invoicing and flight of capital. The car dealers have been the ultimate beneficiary of the liberal imports instead of end users, who have been suffering due to the absence of after-sale service and delivery parts availability of the cars in the offing. On the contrary, local manufactured cars are made on improved specs to suit local road conditions.
Taking India as a model; the Indian government reviews the automotive tariff structure periodically to encourage demand, promote the growth of the industry and prevent the country from becoming a dumping ground for international rejects. High rate of customs and other duties, up to 180%, imposed on import of used cars in India are aimed at stopping the import of reconditioned cars. The auto policy strongly discourages import of second-hand or reconditioned cars, making it virtually prohibitive.
Likewise the Thai vision for 2011 is 'Thailand is the automotive production base in Asia that adds value to the country with strong supplier base.' The Thai objective is to produce at least one million vehicles per year with total production value of more than 500 billion baths, being then in a position to export a major percentage. The vision is backed by a very supportive and long term auto policy which discourages import of cars through both tariff and non-tariff barriers. The automotive industry in Thailand encourages automotive assembly in Thailand. From the early 1960's when Ford first established a car assembly plant there, the major multinational automotive companies have expressed confidence in the country through substantial investment in the auto sector. Sixteen leading automotive brands have since been serviced by a diversified base of over 1600 small and medium parts manufacturing companies that continue to capitalize on the growth of billion dollar multinational automobile companies.
India and Thailand have kept the imports of cars to the minimum in order to safeguard the industry. The comparison of their data with Pakistan reveals shocking facts.
New Car Duties:
50% (upto 1500 cc)
65% (1500-1800 cc)
75%(1800 cc plus)
$2000-$10500 (upto 1800 cc)
75% (Above 1800cc)
new CBU rates
NOTE: In Pakistan, there is a further 2% duty reduction per month on the import of used cars so that a two years old used car of upto 1500 cc when imported would actually have only a 25% import duty!!
India today is an engineering hub and a major auto exporter. There are 416 vendors in India with a $2.65 billion investment ploughed in the country. Their sales exceed $5.1 billion; the exports are at $800 million which are the 15% of the out put. A total of 250,000 people are directly involved into the business.
HIGHLIGHTING INDIA'S AUTO POLICY:
*Import allowed of cars of a maximum three years old model
*There is no gift scheme
*Registration is sanctioned in the importer's name for a year long period.
*Duty on two year old vehicle is 108%
HIGHLIGHTING THAILAND'S AUTO POLICY:
*Makes compulsory registration in the name of the user for at least one year
*Import is allowed in case of a foreigner living in Thailand for more than one year
*Thai residents have to own the vehicle abroad for 1.5 years with a driving license.
*Duty on two year old vehicle is 125% to 145%.
On the other hand, New Zealand had a very liberal import policy initiated in 1991 whereby they reduced the import duties over the years to support the entry of used cars. This proved to be a failure, by 2004 used cars were 65% of the total cars bought in the country. March 1997 onwards Toyota, Ford, Mazda, Mitsubishi, Honda and Nissan closed down their plants which resulted in massive unemployment of the natives working in the sector.
IN VIEW OF THE ABOVE, THE NEED OF THE HOUR IS THAT THE GOVERNMENT:
*have a policy regarding auto parts development locally as has been done in Textiles. This would boost substantial exports for the country.
*support the local car manufacturers and auto part makers so that there is integrated development.
*support local manufacturers by subsidising their plants and equipment so that production of cars is increased and imports are minimised.
The auto sector being the backbone of the economy, needs to be carefully studied. The policy holders should decide based on long term national interest and take a mature remedial measure urgently, so as to determine whether Pakistan intends to be an industrial giant in Asia like India and Thailand or a dumping ground of used cars like New Zealand.