AUTOMOBILE INDUSTRY: FOCUS SHOULD BE LAID ON LOCALIZATION

The objectives of the policy should be to enhance motorization though locally manufactured vehicles and policy thrust should be long term, clear, consistent and WTO-complaint.

AMANULLAH BASHAR
Nov 13 - 19, 2006

The local automobile industry in general and the allied industry in particular have their own reservations regarding the newly introduced Tariff-Based System (TBS) which seems quite indifferent to protecting the local industry. The system seems to have a leaning for immediate gains instead of ensuring the local industry's growth, which should have been the ultimate goal of the policy makers.

Despite achieving stellar growth contributing handsomely to overall economic growth, the spirit to elevate this vibrant sector as the pillar of the economy after textiles is quite missing from our policies.

Contrary to that the automobile industry in our neighboring India is on its way of meeting global standards. The Indian leadership has described the automobile industry as a 'sunrise sector' of that country.

The success of the Indian automobile and auto components industry is a proud symbol of the success of Indian enterprises in this new era of globalization. However, India has achieved the present status by giving priority to local vendor industry, which is providing the much-needed strength to the automobile manufacturers to become the economic pillar in the real sense.

Actually, the TBS looks at the industry with a view to supervise and comply with the WTO requirements and it may not help localization, consequently affecting the growth of vendor industry in Pakistan. The auto industry insiders argue that under the TBS localization decisions are based on cost merit and available technology. There is no option for a model free clause to support the OEMs introducing new models, available in this system. No yearly localization targets are mandatory and OEMs will select the parts for localization based on cost and technology. Therefore, OEMs' localization will become more economical as the selection of parts will be based on cost viability.

However, in the TBS, there is preferential treatment for new entrants which is counter productive for the overall development of the auto industry, feels the industry. For existing manufacturers, locally produced parts are at 50% custom duty and un-indigenized parts are at 35%, whereas the government has granted permission to new auto manufacturers to import 100% CKD at a custom duty of 35%. Hence, the new entrants into the industry have an unfair advantage of 15% as they are allowed to import even indigenized parts at 35% custom duty.

In the absence of any incentive for localization, new entrants will continue with a strategy of least localization for three years and may subsequently phase out the model (typically, the life of a model is five years) thus discouraging new investment. In the current scenario, local vendors who have made significant investments in the past will be most affected.

Pakistan, being a signatory to various international trade agreements, adopted the Tariff Based System on a similar pattern which India, Thailand and most other under-developed countries have designed and adopted. TBS can also be termed as auto industry's deletion program under which higher customs duty at 50% would be applied on components that are manufactured locally (A-max parts) while duty at 35% would be applied to parts that are not manufactured locally to encourage localization. This system has taken over from Auto Deletion Program, which regulated the auto industry in the past.

The rate of custom duty as per custom tariff on CKD (now defined as components for industrial assembly in any kit form) and CBU is the same which is up to 1500cc 50%, 1501-1600cc 65% and above 1600cc 75%.

Imports in CKD condition is allowed @ 35% Custom duty to assemblers / manufactures either having adequate in-house assembly / manufacturing facilities or has these facilities available through contract of manufacturing and registered with the Engineering Development Board (EDB). This mechanism is defined in SRO 656(I)/2006 dated 22nd June 2006.

Parts / components already indigenized and placed at a higher custom tariff of 50% (normal duty 35% and additional custom duty 15%) have been notified through SRO 693(I)/2006 dated 1st July 2006. Furthermore, the current auto manufacturers making up the major portion on the auto industry of the country will also suffer.

Chairman Pakistan Association of Automotive Parts & Accessories Manufacturers (PAAPAM), Malik Muhammad Aslam, has recently expressed his reservations on TBS by saying that the new system has failed to protect the local vending industry because it has partially been implemented and, therefore, the use of local parts in the assembly of local cars has been discontinued.

GROUP-WISE GROWTH PERFORMANCE
(Percent)

GROUP

2003-04

2004-05

2005-06*

Automobile

50.26

32.8

29.76

Tyres & Tubes

0.26

6.7

12.20

Light Engineering Goods

7.18

14.9

6.46

*July-March
Source: Economic Adviser Wing, Finance Division

Currently, the situation is vague regarding government's future plans about existing and prospective manufacturers entering the auto-manufacturing sector of Pakistan. It is believed that only if the new Tariff Based System was implemented in its true spirit, then this state of uncertainty would have not arisen among the current manufacturers and potential investors. The recent decision at the ECC meetings brings some hope as a further reduction in duties for CBUs were temporarily rejected.

The auto industry is playing a key role in the GDP growth especially in the large scale-manufacturing sector. The industry deserves support of the government via a stable long-term policy to maintain the momentum of growth. The objectives of the policy should be to enhance motorization though locally manufactured vehicles and policy thrust should be long term, clear, consistent and WTO-complaint, at least for the next five years which ensures continuity of investment, production enhancement, and generation of employment opportunities.

Pakistan is still in the early stages of motorization. Only 8 persons out of 1000 have cars in Pakistan as compared to India and Iran where the ratio is 12 persons/1000 and 23 persons/1000, respectively. However, if economic growth continues, per capita incomes increase and if auto-financing rates remain affordable, there is good potential for Pakistan to go up the motorization curve. If the government renders the right support in terms of a long term stable auto policy, the auto industry has all the potential required to meet this demand and even think of making Pakistan an automobile exporting country in the next 5 to 10 years.

Import tariff or duty or other levies are financial charges imposed on an individual or a legal entity by a country on imported goods. Protection through tariff is considered one of the tools for safeguarding interest of domestic industries. The other objectives of imposing tariff are: to reduce the level of imports by making them more expensive in relation to domestic substitutes, to counter the practice of dumping by raising the import price of the dumped good to market level, to retaliate trade barriers imposed by another country, and to protect a new industry until it is sufficiently well established to compete in the international market.

A tax structure regarding any particular industry of a country depends on its priorities and long term vision for its industrial development; some times governments have to make short term sacrifices for long term gains.

OVERVIEW OF TECHNICAL COLLABORATION IN AUTOMOBILE INDUSTRY

CATEGORY

NUMBER OF MANUFACTURERS/
ASSEMBLERS

TECHNICAL COLLABORATIONS STATUS

Cars

6

Japan=4
Republic of Korea=2
Italy=1

LCVs

3

Japan=2
Republic of Korea=1

Jeeps

1

Japan = 1

Trucks and buses

4

Japan=3
Sweden=1

Tractors

3

United Kingdom=1
Italy=1
Romania=1

2-/3-wheelers

8

Japan=3
Italy=1
China=3
Pakistan (local brand)=2

Total

25

27

Source: Pakistan Automotive Manufacturers Association.