FRESH INCENTIVES FOR NEW ENTRANTS TO AUTO INDUSTRY

Investors may be allowed duty free import of 3-25 cars

AMANULLAH BASHAR
Oct 01 - 07, 2007

The Government has introduced fresh incentives for new entrants to Pakistan's auto industry. Knowledgeable sources told Pakistan & Gulf Economist that besides other incentives, the government has allowed duty and tax free import of 3 to 25 cars by the investors who would be making an investment $10millionn to $125million.

The facility would be subject to a maximum of one motorcar of up to 1600 cc within the number of vehicles allowed and shall be further subject to the verification of the amount of investment. Apart from the efforts to attract new investors, all the existing automobile manufacturing companies have chalked out capacity expansion plans, which might place auto industry as the most vibrant sector in Pakistan.

Meanwhile in order to plug the influx of used cars, which in a way might hit the interest of the local investors, the government had introduced some preventive measures in the budget 2007-08. An upfront levy of 2.5 per cent withholding tax (initially proposed at 5 per cent) was imposed on locally manufactured vehicles. Besides restricting the age of used cars imported into Pakistan at a maximum of three years instead of five years for overseas Pakistani. In addition a special one per cent excise duty has been applied on landed costs of the goods, including imported and locally manufactured goods. These measures on one hand will significantly reduce the number of used automobiles being imported into the country on which the industry had already spent Rs 13.251 billion in the previous fiscal year, whereas, on the other hand compels the local auto manufacturers to raise the ex- factory price of their various models for regular customers due to the 2.5 per cent livery and special one per cent surcharge on imported and locally manufactured goods.

The policies proposed in the budget will only invoke an unnecessary rise in the end-cost borne by customers, which is already under pressure from increased financial costs of consumer financing and will bear a negative repression on the domestic production. The Auto Industry Development Plan (AIDP) has proposed import duties on CKD, CBUs and spare-parts to be reduced gradually until 2012 as against 2011 proposed by the former Export Promotion Bureau (EPB). Moreover, the reduction will begin from 2008-09 instead of 2007-08. Likewise, on localized parts, CKD duty will remain unchanged at 50 percent until 2008-09 thereafter it would be reduced to 45 percent (instead of 35 percent) by 2011-12. However, no change has been made in duty structure of CBUs below 1500cc segment.

For cars above 1500cc segment, there is a gradual decline in duty. For both 1500cc, 1800cc and above 1800cc segments, duty will come down to 50 percent by 2011 from their existing structure of 65 percent and 75 percent, respectively. AIDP would bring in much needed stability to the industry which, for the last two decades, had witnessed several policy changes. Along with that reduction in CKD duties, though lower than proposed, is favourable news for local assemblers' margins, which will improve, assuming there is no reduction in price?

The auto policy envisages an investment of Rs. 0.3 billion in the next five years, to achieve a target of 0.5 million cars per annum. Most of this investment will be made by the vendors for capacity expansion to meet the target of 500,000 vehicles per annum by 2011-2012. This additional capacity will enable assemblers to meet ever increasing demand driven on the back of superior purchasing power as illustrated by a rising GDP per Capital, and highlighted by a particularly lucrative fiscal year for the automotive industry, with cars sales crossing the 165,000 mark, an increase of 7 percent against the sales of 156,000 in the previous fiscal.

The local manufacturers of parts and accessories are adding on facilities as well as creating new employment opportunities and generating demand for several types of services. Currently, about 192,000 people are employed in Pakistan's automotive sector and it is expected that the sectoral employment would touch the figure of 250,000 by 2010.

The last three years have been exceptionally good for the auto sector due to the SBP's easy monetary policy and historically low interest rates. Availability of cheap credit induced people to lease out cars, motorcycles, auto rickshaws, buses, trucks, etc. which in turn helped factories to churn out more units than before. According to an estimate, there are now more than 5 million motorized vehicles on the road. As per the survey, the size of this automated fleet is increasing at a rate of about 5 per cent per annum. The production of car and motorcycle has grown over 50 per cent and 100 per cent, respectively. The trucks, buses, tractors and the light commercial vehicles (LCV) sector are having their best years. The record production prompted the establishment of 'Original Equipment Manufacturers' (OEMs) to invest more.

The deletion policy, introduced in 1996, provided broader guidelines to local industry but it also called for making an effort to stand on its feet. The encouraging result was that the industry was not only able to supply parts to local OEMs like Toyota, Honda, Suzuki, Nissan, etc. but was also able to export. The methodology to offer tariff incentives for progressive local manufacturers of automobiles and other engineering goods helped the industry to achieve 56-70 per cent local contents in the case of cars, 63.5-85.5 per cent for tractors, 81-88 per cent for motorcycles, 42.7-55 per cent for LCV and 46.5-48.5 per cent in the case of buses and trucks.

The latest figures from the auto sector indicate that Rs17 billion worth of investments have been made in the cars / commercial vehicles segment, Rs5.50 billion for motorcycles, and Rs3.5 billion in tractors. Cars / commercial vehicles contributed Rs84.0 billion to the country's GDP, motorcycles put in Rs30 billion, whilst tractors contribute Rs15.08 billion. Revenues paid by the industry to the government were estimated to be Rs28 billion for commercial vehicles, Rs11 billion for motorcycles, and Rs4.50 billion for tractors. As stated earlier, the automobile sector benefited from the rising credit disbursement. Auto loans disbursement which stood at Rs18.7 billion in 2003, increased to Rs27.8 billion in 2004 and Rs65.9 billion in 2005. The rising demand provided great stimulus to the production. Currently, the penetration ratio stands at 8 cars per 1000 people in Pakistan, as compared to 12 in India, 10 in China, 21 in Indonesia, 23 in Iran, 25 in Sri Lanka, and 31 in the Philippines. An average, 28 out of 1000 Asians own a car. This means there is further room for expansion, not only in Pakistan but also across the region, an aspect that stands in favor of local manufacturers.

To have stronger auto production, a long-term, well-defined auto policy is required that would provide investors a predictable and transparent environment and would facilitate long-term investment, encourage growth and competition, enhance competitiveness and stimulate innovation. Currently Pakistan continues to be a low cost manufacturing destination as compared to several other countries and has the potential to become an export hub for auto parts and sub assemblies. With this platform, the country will be on its way to develop automotive clusters, one each at Lahore and Karachi, to achieve the desired 500,000 cars production target by 2011-12.