With the government aggressively mulling over strategies to reduce car prices, game changing dynamics appear to be on the horizon for the local auto industry. The driving force behind the price reduction campaign is rapid escalation in the prices of locally manufactured cars during the past two years.
Since local manufacturers are finding it difficult to square with the government officials appeal - as it is difficult for them to absorb the costs on the heels of mushrooming raw material costs and inflationary pressures, amid low economies of scale - it appears that the government has been drawing a line under the movement by widening the doors for competition.
Therefore, in a quest to reduce car prices, the government relaxed the age limit on the import of used-cars to 5 years from the existing 3 years (under personal baggage, gift and transfer of residence schemes) earlier this month.
But thats not all; it has been learnt that if this decision doesn bear fruit in raising the demand for cars and in reducing car prices, government officials will use other options at their disposal. These include opening up of commercial import of used cars and increasing the allowed deprecation rate to further grease car imports.
Though the strategy to increase the availability of used-cars would undoubtedly reduce car prices in the secondary market, waging competition between imported used cars and locally manufactured new ones would badly hurt local industry that has been finding it very difficult to withstand the current environment.
On top of that, lately, a new entrant policy prepared by the Ministry of Industries and Production to invite international auto players, primarily Chinese manufacturers, to invest in Pakistan, has stoked concerns amongst local manufacturers.
Here, the concerns aren about the escalation in the number of manufacturers, but about the nature of incentives that will be awarded to new entrants. The new entrant policy permits import of CKD at steeply low customs duty to new investors for a period of up to three years.
The new investor will have to pay a duty of 5 percent during the first year, 10 percent during the second year, and 20 percent in the third year - as against the 32.5 percent customs duty currently paid by the existing manufactures.
The incentive in the form of lower import duty to new entrants would make it difficult for existing manufacturers to compete on price. Instead of granting inventory incentives, therefore the government should perhaps devise proposal that would attract new entrants without hurting the existing players.
To create a level playing field, it is appropriate to offer one-time incentives in the form of an import duty waiver on the import of machineries to setup a manufacturing plant. Besides, the government can induce investors by providing them land in industrial zones and near the seaport at low cost, uninterrupted power supply and regulatory protection amongst other such measures.