PAKISTAN LOSING FOREIGN INVESTMENTS DUE TO VAGUE AUTOMOBILE POLICY
Mar 8 - 14, 2010
Pakistan is likely to lose a proposed investment of $150 million by Japanese giant Yamaha Motors because of its unclear automobile policy that only covers four-wheelers, hence making it 'not feasible' for any foreign company to manufacture bikes in the country. The authorities in Islamabad, even after lapse of 10 months, have still not included two-wheelers in the automobile policy that would allow foreign bike-makers to come and invest in the country.
Last year, Yamaha Motors announced to establish motorcycle manufacturing plant in the National Industrial Park at Bin Qasim in southern port city of Karachi with an investment of $150 million. The proposed Yamaha's plant is expected to create 25,000 jobs for Pakistani engineers and workers and many small industries could get a chance to produce auto parts. Analysts believe that Yamaha decided to make a direct entry into Pakistan by establishing a manufacturing plant to beat China, which has proved a tough competitor to Japanese bikes in the south Asian country. Yamaha's move to establish a plant in Karachi also reflects mistrust in the local manufacturing of Yamaha bikes, which have rapidly lost sale to Chinese bikes in the country where Japan was dominating the motor bike market.
The proposed Japanese Special Economic Zone (JSEZ) that was planned last year at an initial cost of $5 billion in the country has witnessed no progress even after lapse of seven months.
Yamaha is reportedly facing delays due to confusion about Islamabad's automobile policy. Though the company had submitted the proposal with Pakistan's Board of Investment almost 10 months ago, yet no reply has come from the government. If Pakistan includes two-wheelers in its automobile policy, it would have to reduce import duty and taxes on machinery and raw material.
Yamaha not only plans to assemble and manufacture motorbikes and engines in Pakistan, but it also plans to export these to the Middle East, Africa, Afghanistan and other countries. The motorcycle manufacturing plant would serve as a central location for Yamaha's move into other emerging regional markets. The geo-strategic location of the country gives Yamaha an added advantage to use it as a base for exports to neighboring Asian and African countries.
Last year, during a meeting with Noor Mohammad Jadmani, Pakistan's Ambassador to Japan at the company's headquarters at Hamamatsu, the President of Yamaha Takashi Kajikawa announced the company's investment plan in a new motorcycle manufacturing plant in the south Asian country. In the first phase, the company would assemble around 22,000 motorcycles by 2012, after that it would manufacture the motorcycles by using various domestically manufactured parts in Pakistan. In the final phase, the company would start manufacturing motorcycle engines in the country by 2017.
The Pakistani envoy informed about privileges, facilities and tax concessions offered in exclusive Japanese Special Economic Zone (JSEZ) being established at an initial cost of $5 billion in the country.
The local assemblers of motorcycles of various Chinese brands contend that after the arrival of Chinese origin motorcycles in the market, the prices of Japan origin motorcycles have significantly come down which means that previously the local manufacturers were overcharging. During last five years, the Japanese bike-manufacturers have been making downward adjustments in their prices.
Critics say that DYL Motorcycles Ltd, the local manufacturer of Yamaha motorcycles under franchise arrangement, created monopoly in the market by way of driving other competitors out of the market.
The Chinese bike makers are the key players in the rapid growth of the local bike industry. By the year 2005, there were 22 motorcycle manufacturing plants in Pakistan, which have increased to 53 now. In the same year, there were 19 plants producing Chinese motorcycles, which have presently reached to 50. 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. The bikes are now running side-by-side today with the Japanese counterparts on the roads in Pakistan. Even the imported Chinese bikes are also racing neck to neck with Japanese bikes.
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 at 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.
According to annual report of Atlas Honda Limited for the year 2006, the company had suggested valuation of 26 major parts to the Customs Valuation Department. As per report, the valuation advice for 15 parts was issued and working on remaining 11 parts was in the process. The already issued advice was partly implemented on different customs posts. Under-invoicing had emerged as a core issue for the organized industry, causing unfair competition and loss of revenues to the national exchequer in billions of rupees. The report had also mentioned about a raid on 10 units in the unorganized sector which had unearthed a huge tax evasion scam. Over Rs1 billion penalties had been assessed. According to the report, tax evasion was the main cause of price difference between Japanese bike and Chinese bike.
Several Japanese producers including Suzuki, Sony, and Marubeni have already shown interest in establishing their units in the JSEZ, which is being set up in Karachi for Japanese investors. Though the country has offered the best incentives for investment, including 100 percent equity, free flow of money with remittance of royalty and technical fee, yet the new Japanese entrants into the country have been rare in recent years due to security concerns. Present government has already 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.
In 2007, 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. The revised treaty will however impose taxes only on income made through operations of branches in the other country. Other revisions include rationalizing investment income tax levels for dividend, interest income and other fees. In this regard, Japan and Pakistan are expected to sign the agreement this year.