Auto industry: gripped by anxiety

The budget is around the corner, and with that Pakistani auto manufacturers are gripped with nervousness as their negotiations with government officials haven reached an understanding yet.
In the quest to increase the availability of low-priced cars, the Ministry of Industries and Production has proposed to relax the restriction on imports of used cars.
The government plans to relax the age limit on the import of used cars to 5 years from the existing 3 year limit and increase the depreciation rate to 2 percent from existing 1 percent.
This might be accompanied by a higher import duty on certain high tech parts, which were supposed to be localized by this fiscal year under the Auto Industry Development Program (AIDP). If implemented, the penalty would attract 50 percent duty, more than the existing 32.5 percent.
While the governments populist desire to lower auto prices may be commendable, its proposed solution will only destroy the local industry.
Since the onset of the fiscal crisis in 2008, the auto industry is among the worst hit in Pakistan. Massive depreciation in the rupee against yen and dollar, along with escalating commodities prices and rising inflation have tremendously increased cost of production.
Keeping in view purchasing power and poor financing facilities, car manufacturers haven been able to pass on the increased cost to customers. Barring Indus Motor Company, Pakistan Suzuki Motor Company and Honda Atlas Cars are currently running in losses.
According to automakers, the country will remain dependent on imports of high tech parts as it is not feasible to produce them locally due to the absence of economies of scale.
Moreover, the industry size is further divided into sub-categories based on cylinder size ranging from 800-cc to 1800-cc and each specification requires a different manufacturing facility.
Setting up manufacturing facilities at home will undoubtedly help boost the industrial base and reduce dependence on imports. But expecting auto makers to shift to locally produced parts in such fiscally constrained and tough economic times is unrealistic.
In essence, localization targets set under AIDP are based on the assumption that industry sales (cars & LCVs) volume would reach 0.5 million units by fiscal year 2010.
But, due to poor economic condition and higher
financing rates, auto sales in FY09 fell to around 0.1 million units from record sales of about 0.19 million units in FY07.
If the ministrys proposals are accepted, local manufacturers would be undoubtedly thrown out of business.
To ensure that the industry survives, the government needs to revise its tariff structure by reducing duty on imported parts, it will reduce prices of locally manufactured and assembled cars.
Likewise, the import of used cars should be restricted by increasing non-tariff barriers, while cutting the duty on brand new cars.
The way forward is to earn more rupee revenue for every dollar of import instead of earning less revenue.
Forcing locally produced cars to compete with new imported vehicles is a better way to compel local assemblers to remain competitive, rather than incentivizing the import of used cars, as most of the underhand activity at the customs department is on used car imports.
Moreover, the government can also take a cue from other economies that supported their automobile industries during the past two years. As a result of financial assistance and tax relief, car sales in those economies have risen to new record levels.
Perhaps a new Automotive Industry Development Program is the order of the day.