Jan 3 - 9, 2011

The federal government's firm stand against the local auto industry, which kept increasing prices of its products (5 times during last 2 years), has worked and Original Equipment Manufacturers (OEMs) have started reversing the trend fearing further punitive actions.

Actually, the decision to allow used cars import has played the trick and the OEMs mostly of Japanese origin have started reducing their prices.

On Tuesday, the largest local manufacturer Indus Motors hastily announced reduction of prices on its entire brand ranging from 15,000 to 40,000 rupees.

On the face of it, they have given an impression that the reduction is due to enhanced localization but industry sources say that it was due to the immense pressure that government exerted on local OEMs after they increased the prices instead of reducing when government asked them to do so early this year.

The government through Mir Hazar Khan Bijarani Minister Industries communicated the need to reduce prices to OEMs when he visited their plants after taking over the portfolio. However, the request was not even denied but on the contrary on the basis of appreciation in Yen the OEMs increased the prices.

Finally, the federal government allowed 5 years old cars to be imported under the personal baggage scheme instead of 3 years with depreciation allowance of 1 per cent on the value. The ECC gave its nod to the decision but the fact remains that the facility will cause an impact in the open market if small category cars below 1000CC are imported and that too to benefit the consumer and not the traders.

The experts believe that the decision though yet to be fully benefited or implemented has triggered the snowball effect and the OEMs have started to bow down to the government demand by reducing prices of their products.

The auto industry claims to have contributed Rs36 billion taxes to National Exchequer while investing in the local vending industry by bringing new technology in to the country. Only one local OEM, IMC claimed to have used locally produced parts in their products worth Rs15 billion only last year while the imported cars would not even have a backup of spares as historically they are not committed to establish supply chain.

The local OEMs also claimed to have stopped their enhancement programs due to inconsistent government policies. However, experts believe that a final decision by the government will help them in redesign their marketing strategies and production plans.

The imported used cars, experts believe, will create competition on one hand while they will become a challenge for local market when they will require spares, which are not to be supplied by the traders.

The government policy to allow import of used cars is expected to gear up arrival of used cars in the country from current 3600 units to five thousand units following relaxation of age limits from 3 to five years.

In fact, it is because of government's move to allow import of used cars that produced two pronged results firstly it helped reduction in prices of local cars and second forced the local car manufacturers to accelerate the pace of indigenization of the parts so far imported at the expense of precious foreign exchange. It may be mentioned that Japanese Yen appreciated by 106 per cent in just three years leaving no room for the local assemblers to absorb the increase but to pass on to the customers.

Easing the import policy in terms of relaxation of age limit of used cars from 3 to 5 years has now clicked successfully by containing the trend of continuing price hikes. This will also allow importers to fully claim the 50 per cent duty depreciation allowance, @ 1 per cent / month, that was previously capped at 36 per cent due to age restriction and hence further lower their cost. Meanwhile, Indus Motor announced reduction in the prices of Daihatsu Cuore and Toyota Corolla sedans effective December 29, 2010. The reduction ranges between Rs15,000 to Rs40,000 per vehicle.

It may be mentioned that with the permission given by the government to import used cars up to five years of age following increase in local car prices, the road side car vendors have come out in a big way for import of used car which is likely to make a serious dent into local car manufacturers.

The company spokesperson said that over last several months, IMC has made major capital investments amounting Rs2 billion in the Phase 2 of Press Shop project and also in the engine assembly and testing facilities. These projects are now reaching implementation and start up stage that enables the company to pass the benefits of enhanced localization and assembly to our valued customers, accruing from these projects.

The price reduction will be valid on all orders, received after December 29, 2010. The new selling price of the popular Corolla Xli will be Rs1,337,000 down from Rs1,354,000 and the new price of Gli will be Rs1,462,000 from the previous price of Rs1,479,000. The Altis MT (including Sun roof variant) price will be reduced by Rs35,000, Altis AT (including Sun roof variant) will be reduced by Rs40,000. Daihatsu Cuore prices will be reduced by Rs15,000 across the range of vehicles.

It may be recalled that the auto industry and the GOP has been in dialogue over car prices for some time. Weakening of the economic environment in the post floods scenario and strengthening of Yen adversely affected the business profitability for the company to consider any price reduction earlier. IMC is grateful to the Ministry of Industries and the Engineering Development Board for their support, which has enabled IMC to pass the benefit to the customers.

CONCLUSION: The auto industry has proved to be the mother of engineering giving a strong helping hand in the development of industrial base in all the leading economies around the world. In order to allow growth of automobile industry in Pakistan there is a need for bold corrective measures aimed at regaining the glory of the recent past when the auto industry was the most vibrant sector in the economy of Pakistan. The key factor behind the magic growth of this sector was easy and affordable access to car financing which tremendously helped motorization as well as added spark to overall economic activities in the country. The gist of the above arguments is to allow car financing on the pattern of export financing with a view to give a kick start to economic activity once again in the country.