HIGH PRICE AND IMPORT DUTIES

TARIQ AHMED SAEEDI
(feedback@pgeconomist.com)
Nov 15 - 21, 20
10

Automobile sector in Pakistan is said to be highly concentrated since only three auto assemblers dominate the market and hold the major shares in production and sales of all categories ranging from 800cc to 1500 and above cc. Competition commission of Pakistan in its report published two months back highlighted ten brands around which sales and production revolve. The implication of such concentration leads to oligopolistic ambience, where unfair competition is promoted at the expense of customers.

There are nine car assemblers in the country but Honda Atlas, Pak Suzuki, and Indus Motors possess the major market shares in small car and high-end segments. In 800cc segment, however, Pak Suzuki has the highest market share while it also maintains lead in 1000cc category. Overall, Pak Suzuki has 63 percent market share, followed by Toyota 28 percent and Honda nine percent. In 1300-1600cc segment, other brands outpace Suzuki.

According to the data complied by All Pakistan Motor Dealers Association (APMDA), Honda Atlas, Pak Suzuki, and Indus Motors have increased prices four, five, and five times respectively in 2010. In 2008, Honda Atlas, Pak Suzuki, and Indus Motors pushed prices of their models four, six, and seven times respectively. Similarly, in 2009 they inflated prices five, six, and four times.

Rise in prices is basically attributed to skyrocketing cost of production. Freefall of Pak rupee against dollar and yen is also a reason behind high cost of inputs. During last one year, Pak rupee has lost 12 to 15 percent of its value per yen. Similarly, industrial activities are affected by the interruption in power supply and precarious law and order situation. These all factors are increasing prices when products arrive at consumer end. Recent imposition of one percent excise duty on cars will also likely to increase the ex-factory price of automobile. Apart from these costs, premium (own) also adds to price of automobile. Although, assemblers have presented their standpoints on premiums and declared it illegal, practice of charging extra money has not been rooted out completely. Investors book cars on fake ID cards and create artificial shortage through picking up units in bulk. CCP's report highlighted a case in which one person has more than 700 cars booked through fake IDs. Indus Motors kick started an awareness campaign to curb this practice of hoarding. Yet, there still needs concrete steps to discourage booking of cars by non-genuine customer.

Critics fire broadside at assemblers whose aggregate outputs are not sufficient to meet local demands because of capacity underutilisation, thereby causing high price and illegal practice of charging extra money (premium) on early deliveries. Total capacity of Honda is around 50,000 units per annum, Pak Suzuki 150,000, and Indus 53,040. Nevertheless, they are all aggregately producing much less than their capacities. Auto industry development plan (AIDP) approved in 2007 set achievable target of 500,000 units production by 2012 from 200,000. To the dismay of commoners, this target seems to be unattainable as local assemblers are in no mood in recent future to expand their production despite revival of auto sales. July-Oct data showed 10 percent year on year growth in auto sales and this trend will persist despite imposition of one percent excise duty, according to an analyst.

Auto financing is also about to begin full-fledged. This will also give boost to local demands of automobiles especially small passenger cars that have biggest target markets in the country.

It is notable that present government has fully supported local assemblers to upgrade local auto sector and improve their top and bottom lines. Commercial imports of used cars are not allowed except imports under transfer of residence, baggage, and gift schemes for expatriates. Previous government tried to promote free market economy besides easing taxes and duties on import of automobiles. AIDP also envisaged bringing down duty rate on imported CKDs to the level of those on imported parts. Yet, the plan was not materialised. Indeed, further restrictions were imposed on imports. Prohibitive regulatory duty of 50 percent, reduction of depreciation rate from two to one percent to thrust duties and taxes, and age limit of three-year are a perfect recipe of discouraging imports.

Despite this intimate pampering, let alone price relief to customers, localisation itself is struggling to go up. Local assemblers use only 30 per cent of local parts and this fact is alone enough to justify opening up market to international entrants. CCPs report advocates commercial import of used cars will attract foreign investments and provide more choices to customers. Besides, it will drag down prices as happened when market was opened equally to manufacturers of two and three wheelers. Increase in prices of locally assembled passenger cars has become a common phenomenon in Pakistan and only level field playing field for importers would be beneficial for the government, customers, and the industry. This will also generate revenue for the government.

Import of used cars under transfer of residence, baggage, and gift scheme is consistently declining year on year. Total cars imported in financial year ending June 2010 stood at 4,000 as against 36,000 a year ago and 70,000 in a year before that. What kind of a protectionist auto sector policy is this such that neither has elevated indigenisation from a mere 33 per cent and nor brought price relief to inflation-hit customers?

Prices will come down if local demand and supply gap is filled. According to CCP, the import of used cars at present involves 80 to 90 percent foreign exchange remitted from Pakistan. Therefore, prohibitive taxes and duties on imports of used cars on the bases of saving foreign exchange are unjustified. Auto experts also say that commercial import of used cars will provide local vendors with an opportunity to expand and upgrade to meet replacement parts' demands driven by imported cars. Technology transference will be definite advantage of import liberalisation, they believe.