AUTO POLICY NEEDS REVISION

AN INTERVIEW WITH JAWAID SHAIKH, VC PAAPAM

SADAF AURANGZAIB
Jan 14 - 20, 2008

Any nation's growth can be badly influenced due to nonchalant behavior of the policy makers. One such gray area is the auto mobile sector where our policy makers need to work upon ideas generated through the consented efforts both by private sector and the government authorities. The vendor industry can only be flourished if we give them a level playing field where the manufacturers, quality controllers and the vendors work hand in hand.

Automobile sector is one of the fastest growing sectors in Pakistan. Through out 90's annual automobile production remained constant around 45,000 but due to consistent policies and positive macro economic conditions the industry boomed to over 120,000 units per annum in just four years. It contributes towards the nation's economy in the form of Technology Transfer, Employment, Investment and much more.

According to a local newspaper report, "the automobiles industry witnessed a growth of only 5.0 percent during the first quarter of 2008, compared with 11.1 percent achieved in the same period of 2007. The quarter 1 of 2008 growth is the lowest first quarter growth since 2002. The growth in the automobile industry is generally influenced by the growth in production of cars and jeeps with 64.1 percent weight in the sector. Automobile jeeps and cars growth in automobile sector in quarter 1 and the substantial imports of cars indicate that domestic demand pressures remain strong. The domestic automobile sector needs to improve efficiency by investing heavily in order to meet the growing domestic as well as external demand. The government in an effort to protect local automobile industry from competition reduced the proposed 2007-08 budget withholding tax of 5 percent to 2.5 percent and allowed import of only less than three years old vehicles."

PAGE talked about the recent scenario of the auto industry with the Pakistan Association of Automotive Parts Accessories Manufacturer's Vice Chairman, Mr. Jawaid Sheikh, who also owns Noor Engineering Services (NES) that basically caters to the auto assemblers and manufacturers in Pakistan.

Pakistan Association of Automotive Parts Accessories Manufacturers (PAAPAM) was formed in 1988 to represent and to provide technical and management cooperation to its members. PAAPAM, with it's almost a decade old history, has attained a level of an indispensable and extremely effective link between the policy-making echelons at government and the whole entity of its member firms. The Association achieved recognition form the Government of the Pakistan in 1999 and today is represented in many Government and semi government as well as Private Institutions by its members. PAAPAM is the member of the Federal of Pakistan Chamber of Commerce & Industry (FPCCI).

With a registered membership base of over top line tier one 278 members and general manufacturers base of over 1200 companies, PAAPAM has under its wings manufacturing companies making parts for Pakistan's Cars, Motorcycle, Tractors, Trucks and Buses assemblers. Investments in place now exceed US$ 1.5 billion.

Here are Mr. Jawaid's answers to my queries,

PAGE: Tell me a bit about yourself, your association with PAAPAM? How effective do you see this organization has been in addressing the issues concerning the vendor industry?

JS: My association with PAAPAM goes back to the early 1990's when the association was revived by Mr. Sohail P. Ahmad and Mr. Feroz Khan. I was an M/C member then and became PAAPAM's Vice Chairman in 1997 and Chairman in 1999. Since I stepped down as Chairman, I continued to be involved in PAAPAM's activities and have now been elected as Vice Chairman.

PAAPAM played a major role in formatting policies in the Engineering Development Board (EDB) headed by Dr. Akram Shaikh, which resulted in an exponential growth. However, with the departure of Dr. Akram Shaikh as the head of EDB, PAAPAM's wings were clipped. PAAPAM firmly believes that the current NEGATIVE growth in the automotive industry is due to the wrong Government policies which are in place today.

PAGE: The automotive industry has achieved a lot during the last few years, how do you see these achievements in terms of investments, vendors and dealers base, technology transfer and human resource development?

JS: Industries achievements have been due to the positive policies of the Government, especially EDB headed by Dr. Akram Shaikh. During the period 1995 to approximately 2002, policies were formulated jointly by the private sector and the Government. This produced very positive results with localization, which increased from a meager 22 odd percent to nearly 60% for cars over 1200 cc. Increase in localization translated in reduction in the price of cars with subsequent increase in sales. Naturally favorable economic conditions played a major part in increasing vehicle sales. Many of us think that the price of locally manufactured vehicles is very high, but let me give you the facts. The current version of Suzuki Mehran was introduced at Rs.55,000/- in 1983 when Japanese Yen / Pak Rs. parity was 20:1, the parity now is worse than 2:1 ñ this by simple calculations means that the price of Suzuki Mehran should be Rs.550,000/-, but it is a little over Rs.315,000/-. The main reason for this is localization. Both Investment by industry and employment have doubled in the last approximately 5 years.

PAGE: How do you see the competition between the Japanese cars/imported cars vis a vis locally manufactured cars? There is a shift of preference from locally assembled cars to imported cars, how wide do you think this gap is and what steps our industry should take to rejuvenate the local industry?

JS: Initially when import was allowed there was a rush to purchase imported used cars, but gradually the consumer realized that imported vehicles had problems. Now the number of imported vehicles is reducing and the myth of locally manufactured vehicles being of poor quality seems to be fading. It is quite clear that Pakistani consumer prefers locally manufactured vehicles. But it seems very strange to me that used imported cars attract 25% duty whereas parts for locally assembled cars attract 35% duty, this naturally places local industry at a disadvantage.

PAGE: How do you see the government role towards this industry? How productive it has been and what is your view on the import duty provisions?

JS: From 1995 to approximately 2002, policies in the automotive sector were made jointly by private sector and government. This produced the exponential growth. But, with the departure of Dr. Akram Shaikh as Chief Executive, EDB, the concept of public / private partnership vanished. The result has been devastating for this industry; instead of growth at over 35% per annum we are looking at negative growth. Investment plans by OEM's, so painstakingly approved have been shelved. Auto-part Manufacturers (APM) have made huge investments and are now very concerned at the negative growth.

PAGE: How productive do you think the proposed Tariff Based System (TBS) would be in invigorating vendors industry altogether?

JS: TBS has not been introduced, what has been introduced is Tariffication. What we have today gives unfair advantage to OEMís at the expense of APM's. If tariffication is allowed to continue it will most certainly lead to the death of automotive industry in Pakistan, sooner than later.

TARIFF BASED SYSTEM (TBS) FOR AUTOMOTIVE SECTOR

As of July 1st 2006, the deletion programs for the Automotive Sector have been replaced by the Tariff Based System (TBS).

SRO 655(I) / 2006 dated June 22, 2006 (For Vendors)

SRO 656 (I) / 2006 dated June 22, 2006 (For OEMs)

SRO 693 (I) / 2006 dated July 1, 2006 (For OEMS)

SRO 655(1)/2006

CUSTOM DUTY

Raw Material

0%

Sub-Components

5%

Components

10%

Sub-assemblers

15%

THE TBS HAS BEEN DEVELOPED WITH THE FOLLOWING OVERRIDING OBJECTIVES:

Promote job creation

Protect the existing & planned investment by the OEMs & Vendors

Promote new investment

Encourage value addition

Promote new technologies

Expand the consumer base to create economies of scale

THE BASIC FRAMEWORK OF TARIFF BASED SYSTEM IS AS UNDER:

Imports in CKD condition would be allowed only to assemblers having adequate assembly facilities and registered as such with the Sales Tax Department.

Localized Parts imported in CKD kit for industrial assembly attract higher duty.

Parts not indigenized would be allowed at CKD rate of Custom Duty.

PAGE: What impediments do you think our auto motive industry is facing at the moment and when will auto manufacturers transfer major technology to Pakistan?

JS: The government's policies currently in vogue is really the only major impediment. No progress in this industry can be made without industry friendly policies.

PAGE: Lastly, is there any message to general reader or any other thing that you would like to tell about the future of auto motive industry?

JS: The Automotive industry is known as the Mother of all Industries as it encompasses a number of other industries such as Steel, Plastic, Rubber, Fabric, Glass etc., nearly all countries have progressed by developing their automotive industry. If we need to progress as a nation, we must support our industry (specially the automotive industry). Pakistan's automotive industry has proved its potential when the required encouragement was provided by the Government, why has the Government changed its policy when it was clear that it was a win- win situation all around?