AUTO DEVELOPMENT POLICY ANTICIPATES $5BN INVESTMENT IN FIVE YEARS

The policy has been prepared on the pattern of South Africa on the strong recommendation of Renault Group.

SHAMIM AHMED RIZVI, Bureau Chief, Islamabad
Mar 19 - 25, 2007

The Economic Coordination Committee (ECC) in its meeting last month approved the long term Auto Development Policy aiming to increase the production of cars and trucks from 200,000 in 2006 to 500,000 units in 2011 and motorcycles from 600,000 to 1 million units during this period, anticipating an additional investment of about five billion US dollars in the auto industry during the next five years.

Before ECC approval, Prime Minister Shaukat Aziz had reviewed and discussed the draft policy in a meeting attended by the federal Minister for Industries, Production and Special Initiatives, Jahangir Khan Tarin; Deputy Chairman Planning Commission Dr. M. Akram Sheikh, Chairman Engineering Development Board, senior officials and leading automobile manufacturers.

Mr. Tareen made a presentation about the salient features of the policy. He said the important pillars of the policy include a five-year tariff plan, human resources development plans, auto cluster development, technology acquisition support, incentive for higher value indigenization, penalty for not achieving the further indigenization and institutional mechanism including industry representatives for regular assessment and review of progress under the policy.

Speaking on the occasion, the Prime Minister said that the government attached great importance to the auto industry, as it is a key driver of economic growth and a creator of jobs and employment in the country. He said the government is keen that apart from meeting the growing local demand for autos, the industry should get into the export of auto parts which is a good business requiring specialization.

The government, he said, recognizes the auto industry as an important stakeholder and wants it to expand in keeping with the demand that is expected to grow significantly in view of the increase in the size of the middle class and the economy. The long-term auto policy will provide the investors predictable and transparent environment and will facilitate long-term investment, encourage growth and competition, enhance competitiveness and stimulate innovation, he said, adding that "the government is acting as an enabler of the private sector and will ensure consistency and continuity of policies to facilitate the auto industry's integration into the global supply chain". He also emphasized the need for indigenization of the auto industry, which, he said is not getting increasingly possible with the development of engineering industry in the country.

Minister for Industries, Production and Special Initiatives Janangir Khan Tareen underlined the importance of the auto industry as key to the economic development of the country. He said that auto industry because of its forward and backward linkages and economic multiplier effects will contribute to register a robust growth for a considerable period. The minister, however, took note of various challenges faced by auto assemblers and vendors and said that the program aims to address these. Mr. Tareen added that the government wants to encourage growth, promote domestic competition, enhance competitiveness and stimulate innovation through the program. He hoped that the policy framework of the government will double the contribution of auto industry to GDP to 5-6% in 2011-12 from present 2.8%, with turnover of Rs.600 billion and export to US $350 million and US $ 300 million for CBUs. Paying tributes to vendor sector, he described it as vibrant, major job provider and a potential necessary for the engineering skills, know-how and integration of technologies in other sectors.

He assured that the government will support the auto industry with skill development program, technology up-gradation, auto cluster and R&D. He referred to up-gradation of Engineering Development Board to Authority and said that the ministry was working on in its details and the exercise will be completed soon. This will give more independence and powers to the organization for serving the auto industry. However, he expressed regrets on non-introduction of new products by the industry in last few years. The benefits of the policies of President Musharraf and Prime Minister Shaukat Aziz have gone to the auto industry, he added.

Representatives of the car industry said the policy will encourage the private sector to invest more, leading to value addition and modernization of the industry. They said the long-term policy will boost the confidence of the private sector and will enable them to do future planning in a better way.

The long-term auto policy was originally drafted by the Engineering Development Board (EDB) after a series of meetings with stakeholders and then vetted by the Ministry of Industry before submitting to the Prime Minister for his approval.

Under the plan, manufacturers will be given a target of producing 0.5 million cars and one million motorcycles by the end of 2010-11 for which the government would provide all out support to the industry. The total car production till May 2006 is 143,921 against the total sale of 140,071, whereas the production of motorcycles, according to EDB officials, stood at 600,000.

This policy will meet the long-standing demand to discourage import of automobiles. With fixed tariff guaranteed for about 5 years, the local auto manufacturers have agreed to make fresh investment to double the production of motorbikes and increase the car production by about 150 percent by 2010. Auto manufactures will have to find market to export about 400,000 cars and vehicles annually. As a matter of fact the primary thrust of the policy is to encourage local manufacturers to increase investment and enhance their production not only to meet the demand of the local market, but to ensure that a sizeable chunk is available for export.

A source in the EDB told PAGE that the policy has been prepared on the pattern of South Africa on the strong recommendation of Renault Group of Paris (France), a renewed name in the world automobile industry, which offered to set up a truck manufacturing plant in Pakistan for export purposes. The proposal was made last year by Renault Group and consequently a delegation of experts was sent to study the auto policy of South Africa which had proved highly successful.

South Africa entered in the field of auto making in 1994. By now vehicle production is the second biggest industry in South Africa's manufacturing sector, and one of the fastest growing. Vehicle exports have grown around nine-fold since 1994, and now account for nearly 7% of the country's exports. Overall, the automotive industry including manufacturing, distributing and servicing of vehicles and components is the third largest sector in the economy, after mining and financial services, contributing in the region of 7% to gross domestic product. All of the major vehicle makers of the world are represented in South Africa, as well as eight of the world's top 10 auto component manufacturers and three of the four largest tyre manufacturers. South African auto exports are projected to rise strongly through 2006-08, following a record year for South African vehicle production and sales in 2005. Domestic new vehicle sales soared by a record 22% in 2004, followed by a new record of 27% in 2005, making the country one of the best performing automobile markets internationally. Between 1999 and 2005, production of cars and light commercial vehicles grew from 315,000 to almost half a million units, while exports more than doubled from approximately 60,000 to 140,000 units. All of the large manufacturers in the country have launched major export programs in recent years - the latest being General Motors.

Mr. Jeard Etourebet, a senior official of Renault Group, called on Imtiaz Rastgar, CEO EDB on October 19 in order to exchange views about starting assembly of cars and trucks in Pakistan. He said that his company was discussing the project with the Pakistani authorities since November 2005 and "now is the time to finalize things". He added that the facility would be mainly used for export purposes, therefore, they need incentives in the shape of tariff concession and duty drawbacks. When asked to give specific proposals he said that South African scheme would suit them. He assured that maximum local component would be used in assembly of their products.

Mr. Imtiaz Rastgar, CEO EDB informed that South African proposal given by him during his last visit was seriously taken up by the Engineering Development Board and a delegation was sent there to study the system in-depth. On return of the delegation recommendations were submitted to the authorities, which could be reactivated now. He also gave overview of export potential of the local auto sector and incentives given by the government. He specially mentioned two SROs of CBR having inbuilt incentives for exporters. However, he underlined the importance of sustainable long-range policy for development of the auto sector. He said that EDB was working on a duty drawback scheme for engineering sector, including auto, with the approval of the CBR.

Automation industry in Pakistan is in a state of transition, automobile industry is quite rightly termed as the mother of all industries. It incorporates almost every facet of engineering sector- be it electrical, technical or mechanical. For the past couple of years there has been a turning point in the Pakistani automobile sector on the whole. Where in 1999-2000 it suffered negative growth demand, in the years to follow it has developed to an extent that in 2004-05 consumer demand has surpassed the available production capacities.

At present Pakistan's automobile industry is mostly dominated by foreign assemblers. It dates back to 1953 when the US General Motors set up its first plant. But things really took off in the 1980s and 1990s when the Korean & Japanese giants moved in. Pak Suzuki was the first, and is still the market leader. Apart from Pak Suzuki the industry constitutes several other joint venture companies, some domestic firms and leading automobile manufacturers from Japan and South Korea namely Toyota, Nissan, Mazada, Honda, Yamaha and Kia.

According to the Economic Survey of Pakistan the automobile group has contributed to the overall growth by an impressive 30.1 percent. However, ample amount of potential still lies unutilized as there exists a huge supply-demand gap in the local consumer market. As stated by a Yamaha official local assemblers this year have over achieved their respective targets. They are rather enjoying the perks by not enhancing their capacity or production levels leading prices of cars to rise due to shortage of supply. However, automobile industries have doubled and some like Suzuki have tripled its production levels but the question at hand is how long will this demand persist. So far there has been an inflow of remittances and ample amount of leasing thereof demand persisted. To maintain the growth momentum export potential has to be tapped. This needed fresh investment for which auto makers demanded certain guarantees which have been now provided.

The new policy, it is estimated, would attract fresh investment of about $ 5 billion with expansion in the existing facilities as well as new entrants in the field. We are already exporting motorbikes at present level of our production of about 600,000 units, which is slightly surplus to our requirement. Large markets are available in Nepal, Bangladesh and even South Africa where motorbikes are not manufactured. For cars, vans and trucks we will have to fight for our share in a highly competitive environment.