CHECKING THE AUTO PRICE HIKE

SYED FAZL-E-HAIDER
(feedback@pgeconomist.com)
Feb 7 - 13, 20
11

The government recently allowed the import of five-year used cars to check the auto price hike. The government plans to import 15,000 to 18,000 used cars under these schemes over the next six months. The decision has probably been taken to provide an alternative to people to buy cheaper cars. It would also yield additional revenue. Some analysts believe that the government has actually created an instrument of competition against car assemblers by allowing import of used cars. They however contend that the car age for imports from three years to five years will not serve any purpose as the gap between the selling cost of the local cars and imports under the present duty structure is very high, which will ultimately decline the import of used cars.

Rising prices of locally-manufactured vehicles has made it difficult for the people to buy car. The local auto manufacturers have been overcharging the genuine customers by collecting "premium" and selling cars much at a much higher price than their official retail amount. The government's decision sends a message to the powerful local manufacturers and assemblers to reduce their car prices. Toyota Company has already reduced prices of local cars by a maximum of Rs40,000. The country has witnessed fluctuation in local car production, as production is linked with consumers' purchasing power and increase in mark-up rate.

According to one estimate, the domestic car production reached 120,000 units in 2009-10, but used import cars remained at 5,000 units during the same period. There is a 50 per cent duty on import of cars of up to 800cc, 55 per cent on 800 to 1,000cc, 60 per cent on 1,000 to 1,500cc, 75 per cent on 1,500 to 1,800cc and 100 per cent on cars exceeding 1800cc, along with regulatory duty of 50 per cent.

Most cars in the country have dual fuel options and run on compressed natural gas (CNG) which is more affordable than petrol in the country. Many locally made cars such as Suzuki Mehran, Suzuki Cultus, Suzuki Ravi, Suzuki Bolan, Diahatsu Cuore, etc are globally obsolete cars from the 1970s or 1980s which are no longer produced or sold in any country other than Pakistan.

PakSuzuki, Indus Motors, and Honda Atlas are major passenger car assemblers in the market. Paksuzuki has almost complete monopoly in the small car segment as it faces almost no competition other than the single odd Daihatsu Cuore produced by Indus Motors. Toyota Corolla, Honda Civic, Honda City, and the Nissan Sunny are currently the only cars in production. There are still no locally made SUV, Mid or Full sized sedans available.

Pakistan automobile industry witnessed rapid growth in past five years. Despite significant production volumes, transfer or technology remains low. Last year, the country did not adopt any automotive emission or safety standards. Therefore, most cars manufactured and sold in the country are still carburetor based and do not meet any international emission standards.

The passenger vehicles, which are currently assembled in the country include Suzuki Mehran, Suzuki Alto, Suzuki Cultus, Suzuki Ravi, Suzuki Bolan, Suzuki Liana, Toyota Corolla, Honda Civic, Honda City, Nissan Sunny and Diahatsu Cuore.

Local auto vendors fear that the government's decision has put at stake the jobs of 200,000 employees and skilled workers in automobile parts manufacturing units. They predict a loss of thousands of workers jobs due to the import of used cars.

Local auto industry is blamed for continuously and unjustifiably increasing prices. Despite global recession, the auto industry recorded a whopping 933 per cent profit during October-December 2009 as compared to the corresponding period last year. Toyota Indus and Pak Suzuki recorded profits of 429 and 453 per cent respectively whereas Honda Atlas 36 per cent decline in its annual profit.

The production cost, fuel cost in addition to other inflationary effects challenged the auto industry in 2009 due to global recession but despite these factors, there was a 28 per cent jump in sales. The companies reduced their marketing expenses by 10 per cent.

Pak Suzuki's Mehran sales swelled to 1,905 units in August 2010 from 1,306 in July while Cultus and Alto sales also rose to 1,050 and 1,141 units in August 2010 from 704 and 631 units respectively in July 2010. Sales of Liana and Swift went up to 34 and 226 units in August 2010 from 17 and 195 units in July 2010. Bolan sales also increased to 1,000 units in August 2010 from 850 units in July 2010.

Local manufacturers argue that increase in car prices has been made to partially offset cost increases they have been forced to absorb owing to the depreciating rupee and other inflationary conditions affecting the economy that have pushed up the complete knock down (CKD) and the local vendor parts costs despite efficiencies and strong efforts in reducing own operating expenses. The rupee has depreciated five per cent against yen, which translates into over Rs30,000 per vehicle on imported CKD and over Rs10,000 in local vendor parts. The cars are more expensive in Pakistan compared to India and other countries because of current exchange rates.

Local auto market has a wide capacity of more foreign manufacturers. The government should attract more foreign manufacturers to set up plants in the country by providing improved law and order and better investment opportunities. The government's decision on import of reconditioned cars could halt further investment by multinational auto companies in Pakistan.

It was under the government of former Prime Minister Benazir Bhutto that the import of reconditioned cars was banned in January 1994 to protect the local industry, especially Toyota and Honda, as both the companies had set up their plants in 1994-05. Since then, the dealers were unable to import used or reconditioned cars because of heavy customs duties. During the 10 years (1994-2004), the demand for vehicles went up, but the companies did not expand their production in keeping with the rising demand.

The government needs to analyze the impact of its decision on local industry in the light of the data of imports of used cars during 2005-2006, the period of substantial import of used cars. Is the import of used cars the only option to tame auto inflation? Who will ultimately be the beneficiary or affectee of the government's decision on import of reconditioned cars? The rationale behind the decision should cover and address all the issues, which may arise after its implementation.