OPPORTUNITY OF BECOMING AUTO EXPORT HUB

AROOJ ASGHAR (arooj.asghar@hotmail.com)
May 19 - 25, 2008

Pakistan is amongst a few countries which manufacture all kinds of vehicles i.e. 2/3 wheelers, motorcars, LCVs, tractors, prime-movers & trucks and buses. The automobile sector of Pakistan has shown significant growth in the last couple of years. Since 2001-02 the automobile market has grown immensely whereas it is expected that market will cross the milestone of 500,000 units by year 2010 if it maintains the growth rate of around 8% per annum. Investment-friendly policies and up-gradation of production facilities by manufacturers are considered as prerequisite for achieving the automobile vision 2010. In order to take effective contribution in the national economy of this sector, it is important to have high quality standards, enhance skill training institutes. Local manufacturers of auto parts and assemblers are expanding their facilities as well as creating new employment opportunities and generating demand for several types of services.

In the industrialized world the automotive industry generates about 10% of the revenue and annual size of the automotive exports has grown over US$650 billion. According to Fortune magazine the automotive and allied industry is the largest employer and second largest investor after chemical industry. It is also called the "mother industry", because it has given birth to various other businesses. That is why many countries, especially those with high population have chosen the automotive industry to be the engine of economic and strategic growth. In today's fast globalizing world, changing models, improving fuel efficiency, cutting costs and enhancing user comfort without compromising on quality are the most important challenges of the industry. The government's strong commitment on investment in the infrastructure projects particularly the roads and highways, ports and shipping and Pakistan's unique geographical location providing an easy ground access to Central Asian Republics, China, Afghanistan, Iran and India is expected to push the auto industry growth in the cars, LCVs and HCVs sectors.

The total country requirements are generally met from the local production except the import of certain categories of trucks & prime-movers. Though car production in Pakistan has increased manifolds during the last few years but Pakistan's share in global car production is negligible. In a recent report published by Economist, it is estimated that cars per 1000 persons ratio in Pakistan is around 10 whereas it is 780, 600, 13, 12 in USA, Japan, India and China respectively. This clearly shows that there is enough room available for expansion of this sector. There are various factors which have contributed in the development of this sector, including various incentive schemes for electronic goods, auto policy, liberal adjustment of tax regime to lower duties on raw materials and intermediate products etc... The auto industry contribution to other sectors of the economy both tangible and intangible is highly significant. The tremendous demand of automobile has resulted in increased production thus providing over 200,000 direct employment opportunities with more than 300,000 people working in the vendor industry besides contributing tax revenues in the national exchequer as commercial vehicles, motorcycles and tractors paid Rs28 billion, Rs11 billion and Rs4.50 billion respectively last fiscal year and it is estimated that these numbers will be improved in the current fiscal year.

Major automobile companies in Pakistan have joint venture agreements with foreign multinational companies, source of inflows of foreign direct investment in the country. The automobile industry operates under franchise and technical cooperation agreements with leading world manufacturers and can be broadly categorized into various segments, i.e. cars and light commercial vehicles (LCVs), two and three wheelers, tractors, trucks and buses and vendor industry. Presently, the automobile industry mainly comprises of more than a dozen manufacturers of passenger cars, commercial vehicles, motorbikes and tractors, and over 800 down stream vendors supplying various indigenous component to these Manufacturers.

The government has issued Auto Industry Development Program (AIDP) in January 2008, which offers five-year pre-announced tariff structure on CKD, CBU, and auto parts for all categories of vehicles, policy and incentives for new entrants and about liberalized import of used cars, establishment of Rs 6 billion fund for competitiveness, export plan of US$350 million, technology acquisition, research and development of two auto clusters for establishing the sector on solid grounds. Vision statement of Ministry of Industries is, according to the document, "to make auto industry a global player, achieving competitiveness through a critical mass of production, contributing to the GDP by 5.6% by 2012, attracting large investments, development of technologies and human resource through a well structured policy framework formulated in consultation with stakeholders." The statement clearly shows the importance of auto sector in Pakistan's economy. The Auto Industry Development Program covers the next five year road map of tariff and non-tariff initiatives along with the collaborative implementation and assessment of policy through the stakeholders, expresses government's keenness and urgency to take this industry global. Last year, auto Industry transited smoothly from the Deletion Programs to a competitive Tariff Based System (TBS) which showed that the industry is ready to cope with the challenges. Encouraging thing is that both the government and the industry has set the goal to become a part of global supply chain and exporting 2/3 wheelers, cars and tractors in particular.

Recently the Pakistan Automotive Manufacturers Association (Pama) has expressed regret on the deviation from the agreed position under the AIDP and urged the government to ensure to remain consistent in policies. Moreover, they have requested the government to include pronouncement of auto-related tariff for the next five years in respect of cars/LCVs (large commercial vehicles) in the Finance Act 2008. If this becomes the part of the Finance bill then the chances of achieving the targets set out in AIDP will automatically be enhanced. AIDP was initially approved in November 2006 and according to that document, there was no withholding tax and federal excise duty but recently government has imposed both withholding tax and federal excise duty at the rate of 2.5% and 1%. Local auto industry has compounded growth of 50% in recent years which can be good indicator of further growth prospects.

The auto industry, during last five years, has increased its capacity considerably. Auto manufacturing concerns believe that there is no need to import cars because they have still idle capacity as their production is less than their capacity. Like India and Thailand, Pama has recommended application of non-tariff barriers, reduction on depreciation from 2% per month to 1%, subject to a maximum of 25%, registration of vehicles in the name of returning Pakistanis for at least one year, reduce used vehicle life from 3 to 2 years, and complete abolition of gift scheme.

In addition to manufacturing and assembly of vehicles, trading spare parts in after-sale service is also part of auto industry. Spare parts dealers import these parts mainly from Middle East, China and Taiwan. According to various media reports, these imports are grossly under-invoiced and in order to avoid duties these items are misdeclared. It is not only difficult to calculate the exact size of this segment of the sector but also affects badly the revenues of the state. In order to control this, imposition of sales tax at retail stage on spare parts for automotive vehicles across the board should be levied. The growth of auto component industry is directly linked to the growth in assembly sector. As Pakistan auto industry is expected to reach a critical mass of production of cars and LCVs within next 4 to 5 years, the production will become more competitive, technologically advanced and taking its due share in the global supply chain.

The prices of locally manufactured automotive vehicles are less than the landed cost of imported vehicles. But these are higher than the CIF values of imported vehicles. That is one of the major reasons why the automotive industry in Pakistan has not been able to make a breakthrough in the foreign markets. In the domestic market however, the profit margins are estimated at 10% to 20% of return on equity (ROE) depending on the brands, manufacturing companies and consumer preference, etc.

In short, automobile industry of Pakistan has great potential and can achieve new heights provided a balance be maintained between production levels of vendors and assemblers, stable policies, continuity of governmental policies and assistance in financing investment and taxation, as there is a growing demand from local consumers along with the potential to export in foreign markets. The real challenge will be the implementation of AIDP, its assessment and monitoring, and to make efforts to keep it on the path as determined jointly by the government and the industry. Value-addition should be a national priority to improve Pakistan's position on the value chain as well. Moreover, 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, and enhance competitiveness. Pakistan is among few countries where cost of manufacturing is lower than several other countries and has the potential to become an export hub for auto parts and sub assemblies.