The government’s decision in the Budget 02-03 to reduce custom duty on import of built-up cars from 25 to 50 per cent and on motorcycles by 30 per cent might cause a serious set-back for a progressive manufacturing of vehicles.
In order to allow the local automotive industry to grow, the government should have left untouched the existing rates of custom duty and other taxes on locally-manufactured and built-up vehicles for at least three more years.
The reduction in customs duty will discourage foreign investors, which were negotiating joint ventures with local parties for manufacturing parts, which need higher technology and large investment as localization exceeds 50 percent in cars (in 800 cc car it is already 70 per cent) and 85 per cent in motorcycles.
In the current budget, the government has reduced the customs duties on imported cars on and the premise is that this would make the cars more affordable for the general public and create competition for the local manufacturers. However, the reality is that highest reduction has been for cars that are above 1800 cc, which means luxury cars. The import duty on such cars has been reduced from 250 per cent to 200 per cent. The local industry does not manufacture cars of the aforesaid capacity,except a few models comprising diesel engines.
In the budget, there is no relief for the common man as the prices of ghee, bread, edible oil, flour, pulses, diesel, cement, gas, soap, detergent and agricultural commodities are likely to go up. It seems the budget would alleviate the problems of the rich and aggravate the deplorable plight of the poor.
The engineering goods industry has grown rapidly over the years since 1970. There has been steady upward trend in the growth of all categories of engineering products such as metal products, non-electrical machinery, electrical machinery, and transport equipment.
The range of engineering goods now being produced in Pakistan includes diesel engines, assembled cars, agricultural machinery, machine tools, textile machinery, overhead travelling cranes, pumps, printing and book binding machinery, office machines, oil expellers and other edible oil extraction plants, flour / rice mills, fish trawlers, food processing machinery, cement plants,ice and cotton ginning plants etc.
Public sector corporations have played a major role in the setting up of engineering industries such as the Pakistan Steel Mills, (PS), the Heavy Mechanical Complex, and the Pakistan Machine Tool Factory, etc. There are a large number of foreign-owned enterprises (particularly in automobiles and electrical equipment) and a number of small and medium-sized engineering concerns in Pakistan. The main thrust of Pakistan’s policy now is to facilitate the development of supporting industries,upgradation of quality, product design and cost effectiveness.
A good example is the auto and allied industry that covers a broad range of engineering and industrial activity. On the upstream side we have steel (including high-grade alloys), aluminium and other “non ferrous” alloys, glass, plastic raw materials, chemicals (including paints and lubricants) and machine tool manufacturers. On the ancillary side we have foundries, forge sloops, precision machine sloops, press works, plastic moulding, electrical and electronic equipment, rubber products, hydraulic and pneumatic engineering.
Catering to Pakistan’s requirements of automobile industry, there are some 20 auto engineering industries and thousands of ancillary and vendor units. Pakistan is presently engaged in the manufacture/assembly of cars, trucks, buses, van / pickups, motorcycles, three-wheelers, 4-WD vehicles and tractors. In the automobile line, units like Pak-Suzuki, the Indus Motor, the Atlas Honda Motor, the Dewan Farooq Motors and the Gandhara Nissan have set up their units for vehicles of various ranges. About 850 vendors are engaged in the manufacture of different parts/components of these vehicles employing over 100,000 persons directly and 300,000 indirectly.
The indigenisation process in the auto Industry is proceeding satisfactorily and the local content in the automotive vehicles range from 45 per cent to 86 per cent. A rational tariff policy, indigenisation through vendor development and standards/quality control measures is being followed for the development of automotive sector to meet the future national demand.
After 2005, in accordance with the WTO ruling, there will be no duty on consumer items. This means that our own market would be open to foreign engineering products. In the present scenario the absence of standards and international quality products, which are competitively priced, are hampering our entry into foreign markets. That is why at present Pakistan’s exports are mostly relegated to relatively small market shares in the USA, Germany, the Middle East and Africa.
We ungently need to adopt with great alacrity recognizable quality standards in order to preserve our domestic market from foreign competition, expand in existing international markets and penetrate new ones. Various misperceptions are being voiced about automobile industry which at times have no basis in reality.
For instance, it has been opined that the domestic car engine technology lags years behind the world markets and that the people have not been allowed to acquire benefits of the new hybrid technology. The reality is that hybrid vehicles are twice as expensive as normal fuel vehicles. These type vehicles are usually bought by government organizations or companies for tax benefit. To-date only 102,000 units have been sold in the most advanced countries like Japan, the USA and those of Europe, which is a very small number. One can easily predict the fate of such products in Pakistan.
As for quoting on-road prices in India, the Indian rupee has a different rate against the US dollar and duties are different. Besides, the volume production is higher in India, 640,000 cars versus 40,000 in Pakistan. Therefore, a comparison of India and Pakistan prices should be made after adjusting the exchange rates and duty factors.
Today the automotive industry annually contributes over Rs30 billion to Pakistan’s GDP and is also paying approximately Rs8 billion per year in the form of taxes and thereby playing a pivotal role in the development of Pakistan’s economy.
Presently the auto industry has the capacity to produce 120,000 cars annually on a double shift basis. The Original Equipment Manufacturers (OEMs) have also been instrumental for transfer of technology, value addition and manpower development. As a consequence of car manufacturing in Pakistan, a vibrant auto vendor industry has emerged that is now not only supplying parts to local OEMs like Toyota, Honda, Suzuki, Nissan, etc., but also exporting internationally. Auto-part exports are approximately $20 million per annum. Due to the deletion policy, cars manufactured by OEMs now consist 50 per cent to over 70 per cent local components depending on the model.
Over the year vehicles manufacturing has been among the few industries that has continued to attract local and foreign investment even when the investment climate in the country has not been very favourable.
The development of the local car-manufacturing sector is a key element in the industrialization process. It must be remembered that the import of used cars as opposed to CKD parts would cause a major drain on Pakistan’s foreign exchange and retard the overall growth of the engineering sector.
The auto manufacturers are playing a significant role in the exports of the country. From July 2001, March 2002, auto parts exports have been to the tune of $27 million. Furthermore it is expected that by the end of the present financial year the total earnings from auto parts would be approximately $34 million.
