AUTO POLICY: AUTO INDUSTRY REACTS WITH GUARDED RESPONSE

Lukewarm response hints that the policy was not received well by the auto industry for it has been demanding greater incentives immediately.

SYED M. ASLAM
Feb 12 - 18, 2007

The Economic Coordination Committee (ECC) of the Cabinet announced a five-year Auto Policy on the 1st of this month. The Economic Advisor to Finance Ministry, Dr. Ashfaq Hassan, hailed the long-term policy as pro-industry that would attract fresh investment into the sector. However, the guarded response bordering on silence seem to indicate that the car-led auto industry is just not too jubilant about it.

Before we proceed to the reasons for the lukewarm response that the policy seems to have elicited from the local car industry let us highlight the salient features of the policy - what it offers and what it aims to achieve?

The salient features:

•Tariff on the localized parts would be reduced by 5 per cent from 50 per cent at present to 45 per cent in 2011-12. It would remain unchanged till 2008-09 and would be lowered to 45 per cent in 2009-10, reduced to 47.5 per cent in 2009-10 and further reduced to 45 per cent in 2010-11 and would remain at that level in 2011-12.

•Import Tariff on non-localized parts of the completely knock-down (CKD) cars would be reduced by 5 per cent from 35 per cent at present to 30 per cent by 2011-12: It would be left unchanged this fiscal and 2007-08, 32.5 per cent in 2008-09 and 2009-10 and would finally be reduced to 30 per cent in 2010-11 where it would remain till 2011-12.

•Tariff on the import of cars in completely built up (CBU) units would remain unchanged at 50 per cent for up to 1500cc cars till 2011-12. Tariff on the import of 1501-1800cc cars in CBU form would remain unchanged at 65 per cent till 2008-09 which would be reduced by 5 per cent to 60 per cent in 2009-10 and stay at that level till 2011-12. Tariff on import of 1801cc and above cars in CBU condition would remain unchanged at 75 per cent till 2008-09 and would be reduced to 70 per cent in 2009-10 where it would remain till 2011-12.

•Duty on localized parts of light commercial vehicles (LCVs) in CKD form would be reduced from 50 per cent to 45 per cent by 2011-1. It would remain unchanged till 2008-09 and will be lowered to 47.5 per cent in 2009-10 and finally to 45 per cent in 20010-11 where it would stay till 2011-12.

•The import duty on the non-localized parts for LCV would remain unchanged at existing 20 per cent till 2011-12.

•The existing 60 per cent duty on LCV in CBU form would remain unchanged at 60 per cent.

The car-led local auto industry thus has been given a maximum 5 per cent relief in duty and tariff which would not be affective till next five years.

The guarded response from the auto industry hints that the policy has not been received well by it because it has been demanding greater incentives immediately. In addition, the influential industry seems to have failed to convince the government to ban the import of used cars that it says discourages the sales of locally assembly cars.

WHAT IT AIMS TO ACHIEVE?

Dr. Hassan has said that the policy would enhance total investment in the auto industry from Rs 98 billion in last fiscal (2005-06) to Rs 225 billion by 2011-12. It would push car production in the country to 500,000 units by 2011-12, depicting a two-and-half fold increase from around 200,000 units expected to be produced in the current fiscal ending June 30 this year.

He also said that the policy would help push the share of auto sector in the overall manufacturing sector to 25 per cent from the present 16 per cent. It would also double the share of the auto sector in the GDP from 2.8 per cent at present to 5.6 per cent by fiscal 2012. He also said that the policy would push auto industry's share in indirect taxes to Rs 190 billion by 2011-12 from around Rs 63 billion presently. And it would also push the employment from the present 192,000 to 250,000 people by 2011-12.

REACTION

There are indications that the local auto industry has not been too happy about the five-year auto policy. This is obvious from the prevalent eerie silence that they have chosen to adopt. One of their most persistent demand has not been given any thought by the government and it is about banning of used cars imports that have come to a trickle but still continues despite the decision of the government to restrict imports to cars not more than five year old.

Chairman All Pakistan Motor Dealers Association H. M. Shahzad feels that the policy justifies the stand he has always maintained that "imports of used cars not only give the people a choice to buy cars at affordable prices but also creates an environment of real competition to force local assemblers improve the quality of their products".

Talking to PAGE Shahzad said that despite tremendous pressure of the car assemblers the government's refusal to slap a ban on the import of used cars clearly indicates that it is serious about protecting the interests of the people, a major stakeholder who remained neglected for a long time.

The statement made by Dr. Ashfaque Hassan after the approval of the policy seems to strengthen that notion. Dr. Hassan had said, "the existing policy on the import of used cars would remain in place to protect the interests of consumers... it would continue in its present form and if premium becomes a public issue the government will take appropriate measures to protect the interests of the consumers".

It may be mentioned here that since the government announced to restrict used car imports that are five or less years old the imports have been drastically slowed down compared to over 55,000 units last fiscal (2005-06). Shahzad projects that less than 20,000 used cars would be imported this year.

However, with this import restriction the "on-money" factor has once again resurfaced on the sale of new cars. Today the infamous on-money runs anywhere from Rs 30,000 to Rs 190,000 depending on the brand and model of the vehicle. For instance, the on-money on Daihatsu Cuore CNG-ECO-CX stands around Rs 40,000 at present while that on more expensive Honda Civic with retail price of Rs 1,506,000 it is Rs 190,000.

FIRST SEVEN-MONTH PERFORMANCE

Meanwhile, production and sales of new locally made cars increased by 5 and 7 per cent, respectively, during the first seven months of the current fiscal (July 2006-January 2007) over the same period of the previous year. According to statistics released by Pakistan Automotive Manufacturers Association, they produced 86,992 units and sold 88,031 units during the first seven months of this fiscal.

Production and sales of LCVs depicted a much more healthy increase of 13 and 14 per cent to 19,199 units and 19,195 units, respectively.