The automotive policy 2016-21 has been a success. The domination of three Japanese players in four-wheeler segment was broken and numerous new entrants came, while consumers were given the option of compact SUVs which was not the case earlier. Now the next policy (2021-26) is in the making and some part of it is likely to be reflected in the upcoming budget next week. The aim is to submit the policy for approval to Engineering Development Board (EDB) by June end.
There are four main contours of the auto policy. There might be some incentives for small cars (850 cc and below) and the idea is to make people graduate from bike to cars by making cars affordable. The second part is to increase localization in domestically assembled cars. Third is to pave way for exporting auto parts, 2/3 wheelers and tractors. Last, but not the least is to continue the zest of enhancing competition in the market. Already, it is happening with eleven car makers in the market (from three) where a new model is launched every month.
The aim is to increase car production capacity to 650,000 units a year from existing 417,000 units in five years. For 2/3 wheelers, capacity is projected to increase to 7 million units, 100,000 units for tractors and 20,000 units for heavy vehicles. Once that kind of expansion takes place, affordability will come in tandem with enhanced competition and export avenues may open naturally.
Incentives shall be offered for innovation - for example if a company comes with inhouse design facility, it will receive tax credit. Duty draw back on local taxes and levies (DLTL) may be considered to make export attractive. Then for better environment, all car assemblers must follow EURO 5 standards for engines in due course of time.
There will be no extension of the existing policy 2016-21. It will expire and any car launched will have five years benefit in the form of low duty structure for five years from the time of launch of the car or by June 2026, whichever comes first. In the last policy, the new entrants captured the virgin market of compact SUVs. The focus of virtually all the players is now on high end cars. Those who have attempted to launch in affordable segment, have not seen much success.
The policy dilemma is to enhance the market of affordable cars segment (850 cc and below) which is termed as efficient, economical, and environmentally friendly (EEE) segment. The government is likely to announce refinancing scheme (through SBP) for EEE cars. The consumers will get cars at lower than market prevailing rates. There could be other incentives in the form of taxation and duties that may be unveiled soon.
For Electric Vehicles (EVs) and Hybrids there are existing policies where duty and taxes structures are relaxed as compared to internal combustion engines (ICE) –(read: EV Policy – nice and cautious start” and “Hybrid thoughts”). These are likely to continue without any significant change. EV parts in hybrid are likely to get similar incentives as stipulated in EV policy.
The real challenge is to expand the car market in Pakistan. The capacity is enhanced since new players came in, but the market size is yet to reach the peak of 2018. With 650K cars aimed capacity, the market needs to reach 500K. For that, overall duty structure on CKDs needs to be revisited. There might be some in the budget and automotive policy. But these would be gradual and happen over next five years. The idea is to not give any shock to the market and to let every assembler take adequate measures to adopt and adapt.
The tariffs now may not remain the same. And any change (reduction) will be gradual to not disrupt the market. Higher incentives would be in EEE segment where the growth could be higher. Unfortunately, the most affordable car for two decades (Mehran by Suzuki) is discontinued. The country needs a car in that price range.
The whole idea of new auto policy is pivoted over enhancing competition and incentivizing affordability. The aim should be to let the existing players (especially new entrants) cement their position in the market without giving them any new incentive. Incentives, if any, would be across the board.