Bearing the brunt of tariff based measures

Oct 01 - 07, 2007

Ever since the government has introduced tariff-based measures for the automobile assembly sector, the vendors industry is bearing the brunt. The capacity utilization is on the decline, some of the units have already closed and others are on the verge of collapse.

To begin with the OEMs find it easier to pay extra duty and import the components. On top of this declining capacity utilization of the OEMs is dampening the outlook of the parts and accessories manufacturers. The OEMs having expanded capacity in the hope of increasing production got the jolt when the government allowed import of the secondhand cars. The worst hit is the assemblers of buses and trucks. Thousands of imported cars, light commercial vehicles, buses and trucks are waiting for the customers.

There are also reports that more than ten thousand secondhand cars have been stuck in Japan because of change in the government policy. Previously, import of five years old models was allowed but now only three years old models could be imported.

Reportedly, more than five thousand secondhand buses and trucks have been imported and are now rusting standing in the open or at the showrooms. The result is hardly any production by the local assemblers. An attempt was also made to import new as well as secondhand tractors but the strategy backfired.

The reason tractor assemblers have emerged immune and least affected from tariff based measures is their ability to achieve more than 95% indigenization and extensive and intensive repair and service network. That is the reason all the attempts to import tractors have been frustrated.

The factor behind achieving higher indigenization is that model changes are not very frequent in case of tractors. As a result not only the assemblers have been able to develop dependable parts manufacturers but also optimize cost of production. It is on record that the government did not allow any increase in tractor prices but assemblers were able to survive.

As against this car assemblers have been bringing in new technologies and new models. This allowed them to deviate from the "Deletion Policy" introduced by the government. Ironically, OEMs used to agree on a program and then find excuse for not following it in letter and spirit. The biggest complaint was that local vendor industry was inefficient and uncompetitive. The OEMs always managed to convince the government to extend/alter the deletion plan.

According to one of the leading manufacturers of parts and accessories, "The OEMs are responsible for subdued performance of the local component manufacturers. The OEMs are least interested in developing the local vendor industry because of the global agreements. The reason for insisting on import is "transfer pricing". This helps the foreign investors to repatriate the profit. The OEMs are also reluctant in transferring technology. Wherever we are it has been achieved through trial and error".

This argument gains credibility particularly in case of production of motorcycle parts. Till a few Japanese motorcycles were assembled in Pakistan the price of a 70cc model was around Rs 70,000. However, with the entry of Chinese motorcycles the same model is available at half the price.

It is on record that most of assemblers of Chinese motorcycles use locally manufactured parts and similar model is available at less than Rs 30,000. It is estimated that around 35 motorcycle assemblers are operating in the country.

As regards being uncompetitive the point of view of vendor industry is credible. According to the leading vendors, "The government as well as the OEMs are responsible for the prevailing situation. The difference in duty on raw material and finished units does not allow the local manufacturers to compete with imported ones. On top of this government's inability to control smuggling of parts has kept the local replacement market flooded with smuggled parts. This has been going on for decades in connivance with the customs officials. These parts are cleared as secondhand but are new. Unless smuggling is stopped local manufacturers cannot achieve economies of scale and optimize cost of production".

According to another parts and accessories manufacturer, "The worst hit are the units producing steel components. Steel prices have gone up in the international markets but the OEMs are not willing to allow price adjustment. Is it fair that the OEMs announce price increase but do not give the same right to parts manufacturers? At present Pakistan Steel cannot meet the local demand and the landed cost of imported steel has gone up substantially but OEMs are being inconsiderate".

Local manufacturers of parts also refute OEMs stand that indigenous products are of inferior quality. They say, "The perception being created by some of the OEMs is incorrect. If any one wishes to compare the quality of locally produced components, he/she must look at the quality of CBUs imported from China and Korea and the same models assembled in Pakistan".

As regards price another point of view is, "Till recently about 50,000 units were assembled in Pakistan the natural outcome was higher cost. Now the country produces about 200,000 units and probability of achieving economies of scale is higher. If the government is able to stop smuggling it would improve the competitiveness of the local parts manufacturers".

According to an automobile sector expert, "Had the government adhered to the deletion program and didn't allow deviation during the last three decades the situation would have been different. If any one does not agree with this statement, he /she must look at the growth of Indian automobile industry. For decades it continued to produce a few and outdated models but now has elaborate light and heavy engineering industries to support the automobile manufacturers.