Rarely does the government set targets that turn into reality. And the projection that car sales will hit 500,000 units by 2011-12 is no exception.
The assumed projections made under the 2007 Auto Industry Development Program were based on massive sales growth seen during the first half of the last decade, as industry sales volumes of cars and LCVs more than quadrupled to 187,436 units in 2005-06 from 45,783 units sold in 2000-01.
But as auto consumption met its near-term saturation and as the boom-bust cycle came to a screeching end in 2007-08, auto sales stopped growing at the same pace. In fact it witnessed a decline in 2008 and 2009.
This implies that the localization policy, which was based on flawed projections, needs to be revisited too.
Under the current policy framework, automakers have to localize certain parts (including alternator, starter motor, water pump, fuel filter, fuel pump, air cleaner assembly, seat recliner, and power steering, engine and transmission) used in vehicle manufacturing in the upcoming fiscal year. If they do not do so, they will have to bear higher customs duty on imports.
If localization rules are implemented in letter, then customs duty on imports of auto parts will increase to 50 percent from the present 32.5 percent. Industry officials say this will increase manufacturing cost by an average of Rs30,000-Rs40,000 per unit, which of course will have to be passed on to consumers.
But if the laws are to be followed in their spirit, perhaps it is best to reconsider the whole auto deal. And there are strong reasons to do so.
Pakistan doesn have adequate technology to produce hi-tech parts locally, since local production of these assemblies requires high capital cost and technological collaboration.
Plus, there aren any economies of scale. For instance, the size of passenger and commercial vehicle industry at home is an average 0.223 million, which is nearly one-tenth of the size of the Indian industry.
The industry size is further divided into sub-categories based on cylinder size ranging from 800cc to 1800 cc and each specification requires a different manufacturing facility. As a result, it is not economically viable to localize certain car parts.
Having manufacturing facilities at home will undoubtedly help boost industrial base and reduce dependence on imports. But expecting auto makers to shift to locally produced parts in such fiscally constrained and tough economic times isn realistic.
Despite the testing situation, government officials are bent upon localization citing the opportunity to export. But can Pakistan really sell cars overseas? The answer is simply no; not when regional players in China, India, Thailand, Malaysia are much more cost efficient than Pakistan.
The flipside, however, is that the industry was under protection for long and the localization policy was initiated at a very later stage. The automakers lobby, which kept on seeking rent during that period, failed to put adequate resources in action to become regionally competitive.
In other words, lack of monitoring and enforcement in the interim period, when the industry was under protection, has now dragged the policymakers to a lose-lose situation. If the protection continues, it would risk further rent seeking, but if the deletion policy is phased out as planned, then the industry would be badly hit.