Pakistans auto industry has been ridden with a lot of speculation as far as government decisions and policies are concerned. Recent news regarding relaxation on the requirements for new entrants has left several in the industry disconcerted.
Reportedly the government is pondering over rules to allow even those foreign auto makers that produce just 100,000 units annually in their home countries, against the current minimum criterion of 500,000 units.
Representatives of the automakers association complain that allowing small tier automakers is an immature policy and has not been proposed in consultation with major stakeholders in Pakistan.
Originally, in the Auto Industry Development Programme (AIDP), the requirement of 500,000 units of production for any new player entering the market was set on the pretext that larger players have higher standards of production, and so their cars will be of a higher quality and durability.
However, given rising prices of automobiles amid reduced purchasing power, the government has resorted to proposing a relaxation on requirements for new entrants. This has been proposed in hopes of increasing competition within the industry, and thus compelling existing car manufacturers to bring down prices.
With better technologies and economies of scale achieved by newer car manufacturers, for example in Russia and China, the suggested change in new entrants requirements is likely to increase the availability of cheaper cars for consumers in Pakistan.
Initially, such a move may hit hard the sales of auto manufacturers already present in the country; but, analysts at leading brokerage firms, suggest that sustained competition, mainly price-focused, will ultimately increase overall sales of cars, expand the passenger cars market, and benefit all players in the long run.
However, there is speculation as to how this policy will be effectively brought about for the benefit of the industry at large. The real catch to this move is that the new entrants will be exempted from localization of auto parts for the first three years.
Sources in auto parts manufacturing industry have expressed concerns that the indigenization exemption will bring little good for the technological development of the auto industry.
Moreover, when larger players already present in Pakistani market have been unable to meet the targets, one can only wonder if new players will be able to achieve them, once they are required to commence indigenization after three years.
Critics also argue that when the existing players, including the economy assembler Pak Suzuki, are not achieving full capacity utilization, then how will the market absorb increased output from additional manufacturers.
But then again, there is a possibility that cars manufactured by these small new companies, if allowed by the government, may not have high cosmetic value and durability, and therefore would target the low-end consumer segment.
In any case, its too early to expect any auto assembler to set up its facilities for Nano-like cars in Pakistan any time soon, given the countrys fragile security and high cost of doing business.
So, while it might sound lucrative to invite new players, with relatively cheaper vehicles, in the market to increase competition, indigenization of auto parts has to be given priority in the meanwhile, as it forms the basis for establishing a sustainable auto industry.