The upcoming auto policy carries a mix bag of presents. Some industry players are unhappy. Government and Engineering Development Board (EDB) are bullish on the target of higher penetration of smaller cars and extracting export potential in the value chain. Other fears that the policy is not well thought out.
In a way the policy discourages new entrants. Over this, both government and industry are on the same page. The previous policy (2016-21) opened the conduit for new players. And today, around 12 players are in the car making business. The number was three prior to 2016. The number of cars (passenger cars and SUVs) sold in 2021 is slightly lower than in 2018. However, the number of players has quadrupled. If more players enter, the industry could be in for a blood bath.
The idea is to increase car production so that it reaches 500,000 in a year – more than double from current levels. For that, in the recent budget government reduced the FED on cars. Irony of the matter is that the FBR is now mulling options of raising FED again. That should not happen. The zigzag movement would not help. The players make investment and market take decisions based on government policies – as about one third of a car price is government duties and taxes. Car demand is highly elastic. How can government keep on flirting with taxes and duties and expect industry to commit investment?
The intention is to enhance the penetration of smaller cars. To this end, government has reduced sales tax on cars up to 1000cc along with other duties and benefits. Now, the FBR may normalize the sales tax on these cars under the IMF condition to end sales tax exemption in the upcoming money bill. Some are saying that the benefit shall reduce to 850 cc cars. What about those assemblers who have 1000cc models and are thinking about expanding the pie? What about the expenditure already incurred after government’s decision on the last budget?
There are policy incentives for hybrid and plug-in hybrids. But there are no timelines mentioned in the policy. In the last finance bill, incentives were given for one year. One big industry player is investing in the segment. However, others are reluctant due to lack of clarity about the period of the incentives. In the last automotive policy (2016-21), all the incentives along with the timeline were well stipulated. That kind of thought process and coordination is missing.
Similarly, earlier this government was supporting EVs and came with an EV policy to encourage local EVs assembling. Before any player could commit investment in EVs, the government came up with almost similar incentives for hybrid. When the hybrid is available at the same price (or less), there would be few buyers of EV. Now, no player as yet has applied for EV assembling licence. There is no target for EVs nor for hybrid penetration. Share of EVs and internal combustion engine cars in local production by target year (such as 2035 or 2040) should have been specified. The investors take such targets seriously, and without strong government commitment, it would be hard to attract investment in EVs assembling.
The policy focuses on smaller cars, bigger bikes, and auto parts. The idea is to have at least one or two models with over 100,000 units sale a year. In that way, localization shall increase and auto parts makers may gain scale to become competitive. Today, localization of Japanese players is close to 45 percent, while new entrants have a share of 10-15 percent. The government wants close to 100 percent localization in smaller cars – as is the case in tractor and bikes.
For bikes, rikshaws and tractors market, government wants change. The successful models in these segments are age-old. These are mostly localized and cost structure is efficient. The price is low, and sales are high. But there is no or little export. The export market demands innovation and better models. That is why the government is incentivizing bikes of over 125 cc, rickshaw of over 200 cc and new tractors.
Last but not the least is support to the part manufacturers. Here SMEs and small corporate have been exiting. This part of the value chain has been effectively neglected in previous policies as deletion never happened. The tariff-based policy could never upgrade the infamous SRO693. Moreover, aftermarket is full of smuggled and low duty paid parts. The local players find it hard to compete. Let’s see how successful the upcoming policy can prove to be for auto parts.
In a nutshell, the policy is not bad; but timings are. Auto is a cyclical sector. The industry is under pressure due to growing cost and supply chain shortages. The players (especially new entrants) are trying to consolidate and survive in tough times. Currently, they lack focus on expansion. Once the economic cycle takes a turn, players will once again turn bullish, and the new policy shall look better. Let’s hope good times return. Till then, FBR should not destroy the efforts made by ministry of industries.