Aug 04 - 10, 2008

While Japan has agreed to help set up two power plants of 500MW each in Pakistan, Islamabad has assured Tokyo of establishment of Special Economic Zone (SEZ) for Japanese investors on priority basis, which would be equipped with basic infrastructure.

While talking to a visiting 15-member Japanese business delegation on July 23, federal Minister for Finance, Privatisation & Investment Syed Naveed Qamar vowed to find out the impediments being faced by the Japanese investors in Pakistan.

The government of Japan and the Japanese investors are keen to modernise basic infrastructure in Pakistan through Official Development Assistance (ODA), JICA and JPIC funding in health, education, water and communication sectors, according to the head of the Japanese delegation, Mr Makoto Kakebayashi. Japan's Marubeni company has also offered to provide 75 GE American railway locomotives to Pakistan at a cost of $200 million.

Last year, Japan had reached basic agreement with Pakistan to revise a nearly 50-year-old tax treaty to promote investment and build closer economic ties. Under the current treaty, when a Japanese company has a branch in the country, Pakistani taxes are levied on all the income made within the country even if it is made through a direct business with its headquarters in Japan. The same applies to companies in Japan. But the revised treaty will impose taxes only on income made through operations of branches in the other country. Other revisions include rationalising investment income tax levels for dividend, interest income and other fees. In this regard, Japan and Pakistan are expected to sign the agreement by the end of this year. Japan has been stepping up efforts to revise tax treaties in recent years. It revised its tax treaty with the United States in 2004 and since then, it has revised tax treaties with India, Britain and signed similar agreements with the Philippines and France. It has recently been in talks for similar deals with Australia, Kuwait, the United Arab Emirates (UAE), and the Netherlands.

Pakistan's finance minister has directed the Board of Investment (BOI) to prepare a workable report suggesting remedial measures to remove all sorts of hindrances and bottlenecks to encourage the Japanese business sector to enhance operations and investment in the country. The Japanese study group comprises important heads of Japanese companies that focus on investment, business opportunities and bilateral trade between both the sides. The group will prepare a study report on scope, extent, problems and prospects of Japanese investment in the country.

China has so far proved not only a hard competitor but a bottleneck to Japanese business to enhance operations and investment in Pakistan. Under FTA deal with Pakistan, the China is selling Pakistan more and more goods ranging from household items to textile plants and highly-sophisticated and latest technology items, besides getting cheap raw material and easy access to Pakistani ports for onwards export of its goods to world destinations at reduced freight rates. By introducing the modular-type manufacturing, Chinese manufacturers are producing labour-intensive products by mobilizing cheap labour force in Pakistan.

A few years back, Japan was dominating the motor bike market in Pakistan. Presently, the Japanese makers of Honda, Yamaha and Suzuki motorcycles are losing their sales to Chinese bikes. Out of 53 units assembling two wheelers in the south Asian country, 50 Chinese units are competing with 3 Japanese assemblers units. Owing to the rising competition with their Chinese counterparts, the Japanese bike makers have slashed prices of various models for improving their sales volume, which have been on the decline for the last three years. By offering bikes at very competitive rates, the Chinese have captured market in Karachi, which is the country's financial, industrial and commercial hub. The sale share of Chinese bikes in Karachi has been more than 80 percent.

The Chinese bike makers were selling 70cc bikes at Rs34,500-38,000 as compared to Rs54,000 by a Japanese bike maker. About three years back, the Japanese bike was available at Rs68,000. "It was the competition that forced the maker to reduce the rate. Due to intense competition, Atlas Honda had to reduce its 70cc bike prices to Rs54,000 from Rs68,000", a local analyst said. "The strong point of the Chinese bike assemblers has been the difference of Rs 20,000 to Rs 25,000 as compared to Japanese bike makers coupled with attractive colors, extra features and galore of designs," another analyst argued.

The Japanese bike-makers had begun slashing the prices of their products in September 2004 to attract more buyers. The move was aimed at improving market share and customer base at a place overjoyed over entry of the Chinese bikes, both local and imported. Last year, Japanese bike makers reduced prices to improve the sales. The market leader Atlas Honda reduced price of the CD-70 to Rs49,990 from Rs54,000, while CG-125 is now priced at Rs69,990 as compared with Rs71,000. CG-125 Delux model and CD-100 are now being offered at Rs75,990 and Rs59,990 as compared with Rs76,900 and Rs64,000 earlier. Honda CD-70 was priced at Rs68,500 till May 18, 2003 and currently it is available at Rs49,900 showing a decrease of Rs18,510.

Local market people link the cut by Japanese bike makers to the entry of Chinese bikes which created a healthy competition, thus proving benefits to end-users to select the bikes as per their pockets and savings. Japanese bikes are still more popular in rural and urban areas of the country but if the Chinese bike makers also reduce prices, they are likely to capture more markets in the country and prove a hard competitor to Japan in motorcycle manufacturing. In last four years, the Japanese bike-manufacturers have been making downward adjustments in their prices.

In 2006, a complaint was lodged by one of the leading Japanese bike assemblers, Atlas Honda Limited, with the Customs Valuation department alleging that the motorcycle parts are being imported from China by the commercial importers and the bike assemblers on 'under-invoiced' value. Atlas Honda Limited had also submitted a list of specific items wherein the under invoicing is rampant, which is hurting the local manufacturers of these components. The valuation department had conducted a detailed investigation on the complaint lodged by Atlas Honda that motorcycle parts of Chinese origin were being under-invoiced. After the inquiries, the directorate issued the list of 15 parts to its relevant collectorates about 70cc motorcycle auto parts of Chinese origin and issued orders for implementation of the value at the time of assessment of the goods.

The Pakistani manufacturers would not be able to survive even in the domestic market if they continue to imitate the Chinese strategy and to import components from China, says a recent study conducted by the Japan International Cooperation Agency (JICA). Islamabad is yet to decide whether it would make the Pakistani industry a subcontractor of the Chinese industry to avoid direct competition or it would promote the integral-type manufacturing.