INTERVIEW: PARVEZ GHIAS, CEO INDUS MOTOR COMPANY
LOW IMPORT DUTY ON CBUS MAY HURT LOCAL AUTO INDUSTRY.
May 21 - 27, 2012
Parvez Ghias, chief executive officer of Indus Motor Company, was quite confident while speaking on the growth potential of automobile industry in Pakistan. However, he linked the growth and price stability with pro-CKD approach rather than having a softened view for commercial imports of vehicles.
Parvez Ghias gave his views and reaction over state of affairs in auto industry especially regarding tariff structure and leniency of the government towards imports of used cars.
What would happen if the gap between complete knock-down (CKD) and completely built-up unit (CBU) tariffs was narrowed down in the forthcoming automobile policy as auto industry development program (AIDP) is about to expire in coming June?
Commercial imports of vehicles at comparatively cheaper rates either CBUs or used vehicles would naturally affect the local industry and there are examples of countries where policies favoring to imports badly affected the domestic auto industry, he said.
In this respect, we can refer to the experience of Australia where 90 percent of vehicles were locally made and about 10 percent of vehicles were imported sometimes back. But, today the situation is quite different from what it used to be in the past. Now, Australia is a net importer of 30 percent of vehicles while only 30 percent are manufactured within that country. The drop in local manufacturing was the outcome of the import based policies adopted by the policymakers in Australia.
Bangladesh is yet another example which is a net importer of vehicles as their leaning was towards imports instead of building up their own auto industry, he remarked.
He said there is a huge market existing in Pakistan with a population of over 180 million plus, which offers opportunities for the investors to cater to the growing needs of employment
At the moment, the government bodies like engineering development board (EDB) are in the process of making decisions to bring a change in the tariff structure regarding import of CKD and CBUs and the matter regarding influx of used cars which potentially poses a threat to the local industry including a well established vendor industry.
The reduction in duty on imports of CBUs will naturally affect the local industry including vendor industry, which is not only generating sizeable revenue to the exchequer but also doing extremely well in creating jobs, which ultimately strengthens the government's efforts for poverty reduction.
EDB is willing to bring a change in duty structure in respect of CBUs by bringing it down to 40 per cent. The rate of duty on cars of 1000cc is currently at 50-55 percent and below 850cc at 50 percent, 850- 1000cc at 55 percent while 1000-1500cc at 60 percent, 1500 to 2000cc 75 percent, and above of that is 100 percent.
EDB has also proposed that the duty on import of cars up to 1000 should be 40 percent, and up to 1500cc 50 percent and 1500-2000cc 60 percent. These recommendations have been made to frame a new automobile policy, as the present automobile policy is about to expire in June this year so the EDB feels that the new policy should be framed for ten years.
At the moment, if any automobile company has localized a part and another manufacturer in the market desires to import the same part that will be liable to pay 50 percent duty. This was to tempt the assemblers to go for maximum localization. However, EDB now feels that this rate of duty deems regressive and should be relented at the rate of CKD.
CEO Indus Motor Company observed that at the moment the government is considering about softening of the rules in the policy for new entrants. It may be recalled that earlier the new entrants were required a track record of production of at least 5000 vehicles. However, but that requirement was dropped to 4000 vehicles some three years back. It is now surprising to know that the policy makers are considering to do away with the past production capacity record to zero for the new entrants in the auto industry.
Opening the way for new entrants without ensuring quality standards and a strong background of producing autos is a source of concern for auto industry because this will allow anybody into the sector that may create a quality chaos as well as environment complications. This could be a free for all situations in the industry and the people without recognized experience are feared to go like screw driver operation that could create a mess in the sector and may hurt the hard earned reputation of the industry of last 22 years.
The industry people have their concerns about system of ensuring quality of the products in case every body is allowed to enter in the industry. All these issues are likely to be discussed in next meeting with the ministry concerned.
Actually, the differential between duty rates of CKD and CBUs is meant to support growth of local manufacturing base and enhance productivity. Since auto industry significantly contributes towards job creation and generates economic activity in the large number of sub-sectors, permission to import new or old cars at easy terms may hamper the positive movement in the industry.
Naturally, we would like to be an industry competitive internationally. The government however has its own perception towards price or rates of the vehicles.
We have suggested to the government that if they desire to lower the prices, they should set a target towards rates of the vehicles. In this respect, the government should consider our recommendations which are designed to increase the volume of production to the level of at least 350,000 per annum. If we achieve that level of production then it can drop the price by 10 percent and with growth in the volume of production, prices will decrease further. So, there should be some logic for rationalization of prices.
Parvez Ghias said that journey of automobile industry in Pakistan is 22 years old during which the industry has achieved various milestones especially in terms of quality production as well as indigenization to some extent. However, as far as the volume of production is concerned, there is still a lot of room for improvement.
Seasonal increase in sales number or Punjab government sponsored taxi scheme cannot be taken as a benchmark for increase in volumes. There is tremendous scope of motorization and demand growth in future, as at the moment, we have only 11 cars per thousand persons.
There is a general perception that there is a 14-15 percent growth in production volume, yet the figures speak differently. The total number of cars and commercial vehicles that were sold during July-March 2012 was 128,000 as compared to 111,000 sold in the similar period last year. Total 20,000 cars were sold under Punjab Taxi scheme in nine months this year. Since the taxis scheme is an exception case and does not happen every year so the volume of 20,000 cannot be taken as regular production.
Minus 20,000 units from 128,000 means that this year total sale was 108,000. In fact, the market has declined primarily due to imports of used cars. Actually, the import of used cars at a massive scale is the major reason behind the decline in sales or production.
In July-March, some 32,000 used cars were imported while the number is likely to touch the level 40,000 by the end June of this fiscal year. If you look at the size of the revenue earned by the government on import of these used cars, it is much below than what could have been received in case of sale of local cars.
The policymakers should take the experiences of countries into account, which had gone for imports of used cars and what happened to their local industry. It deems fit to conduct a comparative study of those countries. For that matter if you look at Thailand, India, Japan and Korea, they are auto producing countries and doing extremely well. There is a common factor in the auto industries of these countries. They prefer CKD operation and discourage CBUs. There is a visible difference between imports and local production of these countries if you look at the graph of local manufacturing and CBUs that will make things clear about the wisdom of growth of volume in these countries.
There are examples of those countries too that decided to soften import policies and now they are no more auto producing countries rather they have become net importers of vehicles. Take the example of Australia, there is a demand of one million vehicles per annum because it is a big country and has a limited population. However they started reducing duty on CBUs for the reasons they knew better but resultantly the volume of local production was drastically reduced and all the five leading manufacturers packed up their business from Australia. Obviously, the auto industry suffered a lot. However, they have other opportunities and little concern about jobs. Currently, the automobile industry provides approximately 200,000 direct jobs and more than a million indirect jobs in Pakistan. Therefore, if the commercial imports of vehicles are allowed on easy tariffs, local industry as well as people attached with this industry for their bread and butter would suffer heavily. Pakistan has a huge 180 million plus population. We have to accommodate them. We have to provide jobs to them besides fulfilling other social responsibilities. Rationalization of tariffs especially for CBUs from 50 to 25 per cent means that the manufacturers should pack up and go home.