Pakistan is supporting automobile assembling for over three decades. There has been an economic debate on the benefits of assembling cars in the country versus importing completely built units (CBU). The advantage of local assembling is job creation in the entire value chain and foreign exchange savings. On the other side, opening imports would put consumers at an advantage. Liberal economists meanwhile, argue the policy of providing persist support to the automobile industry could have potentially diverted productive capital from domestic industries where Pakistan actually has competitive and comparative advantage.
Successive governments (irrespective of their political leanings) have supported the domestic automobile industry. Three Japanese players for three decades resisted competition within and outside and at the same time kept localization of auto parts at low levels. In 2016, the then automotive policy was able to attract new players and today, there is much more competition in the market. Consumers have more options to buy, though localization still has not grown.
Now a new auto policy is in the making (majority of incentives are announced in this budget and rest are being worked upon) where the government has put its foot down to enhance localization apart from lowering taxes ad duties on locally assembled cars to enhance the pie by having lower retail price.
The SRO-693 protects the auto part makers in terms of giving them duty support. There are two kinds of classification of parts. Localized and un-localized. Those who are localized have higher import duty as compared to non-localized parts. The delta (at 15%) is kept to incentivize auto part makers to do R&D and build more parts at home and once they have economies of scale in any part, there is potential to export.
Unfortunately, that list of localized parts was last updated in 2006. Thereafter, if for any one model (or maker) any part was localized, other models (or makers) could keep on importing that part without paying any higher duty. This had discouraged localization of parts and auto parts industry had been stagnated.
The good news is that the list will be updated every six months now, and if any assembler localized one part, others will have to import that very part at a higher duty. Thus, others would be better off using that part locally. This gives incentive for auto part makers to invest in localization as they would potentially get more business to compensate for R&D expense. This might create more jobs and would have higher foreign exchange savings along with the potential to export parts.
Some still argue that foreign exchange savings would be low as auto part makers import majority of components and they add little value. Similarly, they argue that automobile assemblers import virtually all the engine, transmission, and suspension parts and the localization has little value addition as paint, glass and steel all are imported.
To counter this narrative, the Engineering Development Board (EDB) conducted an exercise to put a dollar value to the local value addition in the four-wheeler segment. According to EDB calculations, the import value of all locally assembled cars in Pakistan would have been $4.2 billion had these been imported.
The other calculation is done on the import of completely knockdown units (CKDs) in Pakistan and import of auto parts makers (as raw material) and auto parts by auto assemblers under SRO 655 and SRO 656. The number came out at $2.8 billion for last year. This implies that the net value addition locally (in parts and assembling) is $1.4 billion or 33 percent. If these calculations are valid, they can provide valuable information to support the government’s policy initiatives (and whether they are yielding results or not) while they can also be used as a base-line to evaluate the impact of the policy over the coming years.
However, before giving any verdict of it, we must investigate the veracity of these numbers and the underlying calculations. More on that in this space soon.
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