The history of Pakistan's Automobile Industry dates back to the 50's when General Motors established a bus-manufacturing unit. Another major milestone was achieved with Pak Suzuki starting operations in the early 80's. In the early 90's Indus Motor Company was established to manufacture Toyota vehicles in Pakistan.
Shortly, Honda Atlas came with Civic and Gandhara Nissan entering the market with Sunny. Some years afterwards, Dewan Motors set up a plant to manufacture Hyundai and Kia vehicles in Pakistan introducing Korean vehicles to Pakistan. After struggling through qualms and repeated procedural modifications, the Pakistani Auto Industry managed to achieve double-digit growth in the preceding four years.
RAPID GROWTH:
Car demand has risen exponentially in last 5 years. The main contribution to the rapid growth in the industry was stable policies of the government This led to a sharp decrease in interest rates for car financing, increased foreign remittances and overall increase in disposable incomes of the middle class.
This sudden upsurge was not anticipated by the car manufacturers, thus creating a supply demand gap as increase in production capacity requires heavy investment, technology transfer, trained workforce and enhancement of capacity by local auto mobile parts suppliers.
These consistent policies gave the manufacturer's confidence to further increase their investments. Not only had the car manufacturers enhanced their activities but the auto vendors also extended their full support to the operations.
During this time local manufacturers have been able to establish various models, fulfilling the requirements and needs of diverse market sectors. Coupled with better macroeconomic management, increased per capita incomes and declining auto financing rates, in the last four or five years, there has been a huge increase in auto demand. This rise in demand gave further boost to the industry.
According to PAAPAM, the epic body representing the auto industry, by end of year 2004 the industry had achieved the following milestones:
PRODUCTION ENHANCEMENT:
The Automobile Industry of Pakistan has embarked upon an aggressive production enhancement tactic to meet the growing demand. With designed expansions, production will far exceed demand eliminating the demand and supply gap.
As a result, the market is likely to stabilise in terms of demand and supply with the increase in production by all major car manufacturers. To keep up an estimated demand of 150,000 vehicles the main car manufacturers, ie Pak Suzuki Motor Company, Indus Motor Company, Honda Atlas Cars and Dewan Farooq Motors have embarked on an aggressive capacity enhancement strategy.
Production Enhancement by Major Automobile Manufacturers (Graph 2)
With an estimated investment of Rs 2 billion Pak Suzuki has increased its production capacity from 50,000 units per annum to 80,000 units per annum. Similarly, Indus Motor Company has embarked on a two phase capacity enhancement plan following which the company will be able to produce 50,000 units per annum by April 2006.Honda Atlas has increased its production capacity in 2004 from 15,000 units per annum to 30,000 units per annum and plans are to raise production capacity to 38,000 units per annum by the end of 2005. Dewan Motors have also increased their production capacity to 18,000 units per annum.
By the year 2000-01, the total production of the industry stood at 49,000 units. With the huge investments in capacity enhancement over a period of four years, the car manufacturers are now producing 150,000 units. This means an increase of 300%.
CONTRIBUTION OF THE INDUSTRY:
By the financial year 2010, the car manufacturing industry was projected to contribute Rs 210 billion to the country's GDP. The enhanced activity would have brought increased investments in the industry to around Rs 54 billion from current Rs 17 billion. There would have been a number of jobs created through out the industry, with a projected 14,000 direct employment in the industry by 2010. In addition to these benefits, the increase in production would have provided for import substitution of $3,425 million, which means a foreign exchange savings to the tune of $1,475 million.
NEW PARTNERSHIPS & JOINT VENTURES:
The fast-paced growth of the industry has attracted further investment in the industry from other players. In mid 2004, Master Motors introduced pickup trucks in collaboration with Chinese manufacturers while Nexus Automobiles introduced Chevrolet in the local markets.
The company test marketed 800 cc-imported cars and due to a good response is now going to produce two models, Exclusive and Optra locally. Moreover, Roma Group of Companies has formed a coalition with Chinese auto manufacturers and aims to commence operations.
According to recent news items, French company Renault and German giants Volkswagen are planning to make noteworthy investments in the Pakistan markets. Adam Motors has launched the first Pakistani car, the Revo with engine capacities of 800 cc and 1050 cc. With extremely low prices, the company aims to make the dream of owning a car come true for more people.
BLOW AFTER BLOW TO THE INDUSTRY:
However the tremendous growth and optimistic projections detailed above will be totally negated by the recent policy changes announced in the Federal Budget 2005-06 and Trade Policy.
BUDGET 2005 - 06:
The recent policy change, announced in the budget for fiscal year 2005-06 will cause a downward drift because the import of used cars will now be subjected to a nominal duty of 25% for cars up to 1500cc and as little as 37.5% on other cars.
This will make the imported used cars cheaper than the locally manufactured cars. According to estimates, with the increase in depreciation rate, a two year old 800 cc car imported at approximately Rs 115,000 (Yen 180,000) will attract a duty of Rs 125,000 ( $4000 x .52 = $2080), thus costing Rs 240,000 which is considerably less than a locally manufactured car of similar capacity.
The duties on import of new cars have been further low-priced for the fiscal year 2005-06 by almost three times and by more than half in the last two years only. This duty reduction is bound to have a negative impact on local automobile manufacturing and does not bode well for increasing foreign investment in this sector in the country.
This increase in depreciation coupled with reduction in CBU duties, will cause massive inflow of used cars into Pakistan. This benefiting exporting countries while Pakistan will loose billions in taxes, import substitution and foreign exchange savings. Industry experts fear that the recent budgetary measures could result in a situation similar to the one created by the Taxi Scheme of the early nineties that allowed zero rated import of taxis resulting in massive decline in sales of locally manufactured vehicles and complete cessation of investment. Its due to consistent policies of the last four years that the local car industry had recovered to achieve growth has crossed 150,000 units/year in 04-05.
TRADE POLICY 2005 - 06:
According to the trade policy announced on July 21, 2005, vehicles up to three years old can be imported under the gift and personal baggage schemes. Overseas Pakistanis holding Pakistan origin card will be eligible for the import of old cars.
The most damaging part of the policy is that there will be no requirements to register the vehicle in the name of a Pakistani national prior to its import under personal baggage or transfer of residence scheme. With checks and balances reduced, the facility to the Overseas Pakistanis will be misused by backdoor investors. Neither are these used vehicles checked for performance or safety standards.
According to reports, as result of these policy changes, 35,000 used cars will be imported into Pakistan in the current fiscal year. This represents almost 40% of total market demand.
In an environment where all car manufacturers and vendors are enhancing capacities and making huge investments such an alarmingly high import of used cars will have a very negative effect on these investment plans. Contrary to other regional countries where policies are framed to effectively restrict import of used cars to promote local manufacturing the GoP is following a policy of encouraging imports.
An analysis of regional auto policies reveals that the gap between CBU and CKD duties is lowest in Pakistan ie 15% when compared with 85% in India and 60% in Thailand, both emerging giants of auto industry.
Almost all auto manufacturers in Pakistan are joint venture projects with foreign affiliates, the foreign partners provide foreign exchange equity, and are responsible for transfer of technology. Many of them are accountable for Technical Assistance Agreements (TAA) with foreign component manufacturers. These measures have been made vulnerable, portraying Pakistan as a less lucrative investment opportunity compared to other countries in the region that have investment friendly policies for the auto sector.
Contrary to the government's expectations of a positive impact through duty reductions, Pakistan has begun to face the ramification of the government's erratic policies. The Government with immediate effect should reverse its decision and adhere to its strategy of long-term policymaking disregarding the second hand car lobby. It's the government option whether they want Pakistan to develop as a strong industrial base or convert the Pakistani market into a global clearance ground for used and reconditioned vehicles.
In order to achieve self sufficiency the government must provide long term policy measures which in turn will allow the industry to make long term plans. Faced with the restrictions of the WTO agreement, the decision to open up the markets is understandable. However, a combination of Tariff and Non-tariff based barriers must be introduced by the government. This will reduce the imports and save the country from becoming a dumping ground for used imported cars. The need of the time is to have a consistent long term policy for the auto sector.
As experienced in the recent past, the consistency in policies is not only helpful in increasing the confidence level of the existing players but also in attracting new investment. The government must develop an understanding with the car manufacturers and vendors with regard to production enhancement and policy making.
If the policies are not supportive of investments made to increase production then it will have a negative impact on the industry in particular and economy in general. No industry in any country can grow overnight; it takes years to build them. Our auto industry is growing and if we want our engineering and automobile industry to grow and prosper further than serious thought and planning is required instead of erratic policies that favour trading and not local production.
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