NEW AUTO POLICY MUST TREAT ALL STAKEHOLDERS EVENLY
The government must come up with an auto policy which should not create market distortion by extending undue favor to any one or group of assemblers as well as help curtail delivery time and on-money amount, besides protecting vendor industry and above all enabling the local assemblers to export CBUs.
SHABBIR H. KAZMI, Special Correspondent
Nov 13 - 19, 2006
Automobile industry in Pakistan has reached a point where many brand holders, which initially ignored the country, are keen in selling their products. Less than half a dozen assemblers who have worked for decades following progressive manufacturing and thousands of parts manufacturers having withstood their stringent quality standards are facing new dilemma. It may be noted that existing assemblers and parts manufacturers are not asking for additional incentives but are only demanding the government to avoid unhealthy competition. One just could not resist from saying that financial institutions offering auto financing have also been playing an important role in the growth of automobile industry in Pakistan.
To begin with, it is necessary to take into account growth in annual sales during last five years, going up from 50,000 units to about 200,000 units. While assemblers have added new capacities by investing millions of rupees, parts manufacturers have been doing an equally remarkable job, never letting down the assemblers. The fact is quality of locally produced parts has improved, in many cases it is as good as that of made in Japan or any other technologically advanced country. Parts manufacturers take pride in saying that assemblers of Japanese brands have been very stringent about standards and are hardly willing to compromise on quality. Initially it was tiring, some times frustrating but cold shoulder offered by assemblers taught them the lesson to work even harder.
Suzuki was the first Japanese brand to enter Pakistan as assembler and now the country enjoys presence of half a dozen Japanese automotive manufacturers. These include Suzuki, Toyota, Nissan and Daihatsu as car assemblers and Hino, Isuzu and Mazda as assemblers of buses and trucks and light commercial vehicles. These assemblers have been collectively working to increase the pie size and by creating niche market. The deregulation, liberalization and privatization policy being followed by the government has helped in increasing production and improving productivity as well as quality.
The restriction on import of secondhand cars and higher duties applicable on completely built units (CBUs) had made locally assembled vehicles a better bargain. Thanks to rising crude oil prices and production of CNG-fitted cars, consumer preference shifted away from higher engine capacity cars to lower capacity cars. In the wake of easy auto financing facility cars up to 1,000cc remain most popular, mainly due to low monthly lease installment and low fuel consumption. However, easy financing has also encouraged people to acquire higher engine capacity cars.
INVESTMENT PLANS IN AUTO SECTOR(Billion Rs.)
Indus Motor Co
New Assemblers & Vendors
($ 307 M)
HINO PAK (Trucks & Buses)
($ 25 M)
( Approx $ 332 M)
Despite growing competition Suzuki continues to enjoy the largest market share due to wider product range, lower engine capacities, light commercial vehicles and 4-wheel drives. Maintaining the largest market share has not been an easy task, as it has to constantly improve quality standard ñ from minimum accepted level to international standards. Some of the critics may say that the quality of locally assembled units is not at par with foreign assembled units.
Toyota and Daihatsu continue to enjoy strong demand from respective niche markets. The preference could be best described in words like affordability, economy, dependability, elegance and quality plus after-sales-service. Some analysts say, "It is true that Toyota brand has emerged as symbol of dependability it may not be true that other assemblers have been lagging behind. However, timely delivery and on-money factor remains a serious issue in Pakistan.
Nissan and Honda despite being globally recognized brands have not been able to exploit franchise value. The two Korean brands are still struggling to make the mark. Locally assembled Chinese and Korean light commercial vehicles have not been able to erode Suzuki's market share in a significant manner.
It is believed that European brands are getting ready to enter Pakistan. These include the famous Black Cab of UK, BMW, Renault and Mercedes Benz. Without any prejudice they will take some time to get their brand names established and hardly pose any material threat to the assemblers of Japanese brands ñ simply because they cater to entirely different niche markets.
CONTRIBUTION: REVENUE SPINNER IN INDIRECT TAXES
SHARE IN GROSS (%)
2. Auto Sector
Delay in the approval of Auto Policy by Economic Coordination Committee (ECC) is causing uneasiness among the assemblers as well as parts' manufacturers. The policy - expected to be finalized following the ECC's last meeting- should have shed more light on sector outlook as far as foreign investment is concerned. A lot has been written and talked about the entry of European players. It is anticipated that the ECC policy will draw foreign investment of this nature by allowing foreign manufacturers to establish assembly plants and import 100% CKD (completely knocked down) kits at 35% duty. This is likely to place existing auto assemblers at a competitive disadvantage.
Currently major auto assemblers including Indus Motors, Honda Atlas, Pak Suzuki and Dewan Farooque are source parts according to a tariff based system, whereby the components used in assembly that are already indigenized are subject to a tariff of 50% and those parts that have not yet been indigenized are subject to a tariff of 35%.
Nevertheless it is worth noting that the basis of foreign interest and eventually investment remains a robust demand in a buoyant market. There are approximately 10 cars per 1000 persons in Pakistan. The situation is similar in neighbouring India and China, and both countries have of late been an increasingly popular destination for investment from global automotive giants. The potential for growth is significant by any standard; for every 1000 persons there are approximately 546 cars in Japan, 641 in Malaysia, and 765 in the USA.
Existing assemblers have in recent years seen strong growth and have all been engaged in enhancing capacity ñ total passenger car sales grew 38.6% YoY in FY06 to 226,464 units. Higher sales have been fully supported by the explosion of consumer finance and strong per capita income growth. This state of affairs is expected to prevail at least in the short to medium term. Assemblers have so far been successful in maintaining market share in the face of CBU (completely built up) imports and it is unlikely that any negative impact from new competition will be felt within the next two to three years.
It is necessary to understand that entry of European brands is not being resisted because critics like the Japanese brands are totally satisfied with their assemblers. The entry is resisted because it would make the field uneven. On top of this permission to allow import of CBUs and the import of CKD kits at reduced tariff is likely to hit the vendor industry worst. Vendor industry has reportedly invested billions of rupees as evident from the fact that it had been meeting the demand when assemblers were producing 50,000 units and now they are successfully supporting production of 200,000 units.
During the last couple of years the country has spent millions of dollars on import of secondhand cars. The government allowed import of secondhand cars because of long delivery period and substantial on-money factor. The country may have imported thousands of cars but neither the delivery time nor on-money has come down in any significant manner. On top of this one can see hundreds of imported cars standing at the showrooms waiting for the customers. One really does not know whether these cars would be sold or not.
As regards Black Cabs, there are two opinions 1) the initial number of cabs being imported is too small to affect the local assemblers and 2) it would be unfair with the local assemblers. People have seen a similar situation when 'Yellow Cabs' scheme was introduced in the country. A number of brands entered the market but very shortly the vehicles went off the road because either the parts were not available or it became uneconomical to maintain these vehicles.
Import of CBS and CKD kits for the European models are bound to put additional pressure on the country's depleting foreign exchange reserves. The local production of parts and accessories is adding manufacturing facilities as well as creating new employment opportunities and generating additional revenue for the government. Some of the analysts say that whether CBUs or kits are imported these would generate revenue for the government. However, they tend to forget that enhancing indigenous production of parts and accessories is a better option because it creates local production capacity and new employment opportunities.
MAJOR JOINT VENTURES IN AUTO INDUSTRY
Indus Motor Company
Diahatsu Coure Cars
Honda Atlas Cars
Dewan Farooq Motors Ltd
Kia and Hyundai, Korea
Kia and Hyundai Cars
Source: Auto Sector Profile, Atlas Investment Bank
Therefore, the government must come up with an Auto Policy which should not create market distortion by extending undue favor to any one or group of assemblers as well as help curtail delivery time and on-money amount, besides protecting vendor industry and above all enabling the local assemblers to export CBUs. Till recently the government has not been making buy-back mandatory for the overseas investors. Now it is time to link new permission with buy-back arrangement. Absence of such an agreement has kept quality of locally produced models to their indigenous models. Buy-back agreement could yield two advantages - improving quality standards and economies of scale.