The automobile industry in Pakistan has long enjoyed a competition free environment to operate in. Many policymakers have argued that the protection afforded to the sector by the state has led to complacency in the ranks of automobile manufacturers.
This was confirmed by the long list of complaints brought forward by consumers and local auto parts manufacturers alike at the Competition Commission of Pakistan’s (CCP) hearing on competition concerns in Pakistan’s auto sector back in April this year.
Buying a car in Pakistan is a cumbersome process to say the least. If you go by the proper method, prepare to wait for months before getting your hands on the wheel. Otherwise be prepared to dole out an exorbitant sum as a premium (on money) to get early delivery.
Then there is the quality of locally manufactured vehicles which often lack elementary safety features and substandard build quality compared to international variants. None of the three car manufacturers have really brought any innovation in their models and most new cars are upgrades or uplifts with aesthetic changes to the design.
Adding further pain to consumers are the frequent increases in price with Honda, Suzuki and Toyota all increasing their prices multiple times in the previous year alone. In its recently released opinion on the state of competition in the automotive sector in Pakistan, the CCP has concluded that these complaints establish a lack of competition in the sector where existing players are not subject to meaningful pressure.
To that effect, the CCP has offered a number of recommendations to alleviate consumer inconvenience. For starters, it has emphasised the need for auto manufacturers not to apply price increments on customers retrospectively once bookings have been made which is a welcome step.
It also believes that in order to encourage a more supply push based whole sale model as opposed to the current direct retail model, the government should consider revising the advance/withholding income tax regime, specifically Section 153 and 231B of the Income Tax Ordinance, 2001. This will serve to remove double taxation so that a documented wholesale car market can emerge.
Most of the Commission’s other recommendations are what has been known for a while now but has not been implemented. These include the need for legislation to appoint a government body for implementing the penalty of KIBOR plus 2 percent for assemblers that delay vehicle delivery by more than two months. Recall that this penalty was introduced in the Auto Policy 2016-21.
The need for a national automotive sector standards and safety authority has also been felt for a while now and again implementation is the real hurdle. Regulation in the auto industry is spread around federal and provincial government departments and consolidation is the need of the hour.
As far as localisation of auto parts is concerned, the CCP is right in pointing out that the fundamental barriers have been the inability of local parts manufacturers to achieve economies of scale and adequate transfer of technology. There are no vendors who have become part of any regional or global supply chain also called Tier 1 vendors.
Even though government incentives might play a part in assisting local parts manufacturers, it is also about the willingness and mind-set of local players to develop themselves to become part of a large supply chain system which means stepping out of their comfort zone and competing in a larger sea with much bigger fish.
Finally, the addition of new entrants should be encouraged in the coming years as well. This is the surest way of encouraging competition amongst existing players. Not only will this provide more options to consumers at an affordable price range but also foster a more outward looking approach in the auto sector.
Many of the recommendations that the CCP has pointed out are not novel but instead applying them in practice is the real challenge that policymakers face due to elite capture by existing players in the sector.
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