Auto sector’s reliance on imports: inability or unwillingness?

Published December 28, 2014
This picture shows automobile workers preparing a vehicle at a workshop in Karachi. — AFP/File
This picture shows automobile workers preparing a vehicle at a workshop in Karachi. — AFP/File

KARACHI: Pakistan imports 57 per cent of its total auto-related raw materials from Japan, which implies that production cost largely depends on exchange rate which normally forms the basis of frequent increase in retail prices, according to the State Bank of Pakistan (SBP).

The observation was part of a special section — ‘Comparison with India: Where does Pakistan Stand in Automobiles Production?’ — in the central bank’s annual report 2013-14.

Pakistan’s auto sector still significantly depends on imports as indigenisation is limited to the manufacturing of steel metal parts, interior trim, seats, rubber and plastic parts, batteries, wheel rims, tyres and lighting accessories.

The more sophisticated moving parts (engine, transmission, etc) that require precision engineering are all imported as they cannot be made locally up to international standards.

In Pakistan, deletion programme (which sought to shift away from imported inputs) was introduced in 1985. Although the industry was kept heavily protected as part of the programme, it was unable to achieve the staggered indigenisation that had been envisaged.

This plan had to be completed by 2006 to remain compliant with World Trade Organisation’s (WTO) agreement on Trade Related Investment Measures (TRIMs) which disallowed countries to place local content requirements on domestic manufacturing sector.

After the deletion programme, Pakistan adopted Tariff Based System (TBS) under the Auto Industry Development Programme (AIDP-1) for the period of 2006-2012. The objective was to achieve a critical mass of production by 2011-12, which is required to develop high value-added sub-sector in the auto industry.

The auto sector was targeted to produce 500,000 units by end-June 2012. To achieve the objective, a long-term import duty structure was announced to help local assemblers formulate their production policies.

While the industry was kept highly protected during 1985-2006, duties were lowered in the development phase (2005-06 to 2011-12). However, the actual production of cars in 2011-12 stood below the target, at 132,661 units.

Demand dynamics

The SBP report said that although Pakistan and India share the same vision for their automobile sectors (promotion of local technology and designs, less dependency on imports, and achieving international competitiveness), Pakistan has not been as successful as its neighbour.

The local auto industry is characterised by a few assemblers and a limited number of products, whereas India’s picture is totally different. Pak Suzuki, Honda Atlas, Indus Motors offer a total of 11 products, while in India Tata alone has 17 products followed by Maruti 12, Mahindra 17, Hyundai 6, Nissan 4, Honda 6, Ford 4, Toyota 10, Chevrolet 9, Renault 6, Volkswagen 9, and 12 by other manufacturers.

This whole slew of options create a tough competition in the Indian market, much to the welfare of consumers.

Demand dynamics also differ in the two countries despite their similar socio-economic foundations. In India, 800-1,000cc cars dominate the market. In Pakistan, larger cars (1,300cc and above) are more popular.

Pakistan’s auto industry is utilising only 50pc of its capacity compared to India’s 75pc. The product range is limited here compared to India and demand for domestically produced cars is stagnant.

As a result, consumers prefer imported products as they offer more options. However, a wide range of domestically produced models can help increase demand and capacity utilisation.

India’s strength: indigenisation

The most important strength of India’s auto industry is greater indigenisation and domestic availability of raw materials. The industry has developed the capability to produce all automotive parts, ranging from engines, transmission apparatus, suspensions, brakes, and body and chassis parts.

This has made Indian auto sector not only immune from exchange rate fluctuations, but has also helped reduce its cost of production. India has the advantage of economies of scale because of a large domestic market. Competition from a number of domestic manufacturers has created more efficiency in the Indian auto sector.

The SBP said India has adopted a highly protectionist regime for its automobile sector by keeping import duties high at 100pc. Moreover, new vehicles can only be imported via the ports of Mumbai, Chennai and Kolkata; cars older than three years cannot be imported; used cars can only be imported through Mumbai port; and the import of vehicles with engine sizes 1,000cc to 2,500cc is totally banned.

Inability or unwillingness?

The above comparison shows that the domestic industry either cannot provide consumers with better quality vehicles at competitive prices, or it is simply unwilling to do so.

The dependence on imported components could not be phased out despite a long phase of protection. The State Bank believes that a more balanced development of Pakistan’s automobile sector requires increasing the level of competition by opening the market to imports.

While the State Bank of Pakistan endorsed the assessment of the Competition Commission of Pakistan (CCP) to reduce protection of the local market and allow the import of new cars, it also stressed that the automobile industry should be provided a long-term policy environment which should focus on developing local auto parts to reduce dependence on imports.

Greater indigenisation can help the industry avoid frequent changes in the tax regime and import policy, encouraging the production of small fuel-efficient cars of below 1,000cc, the central bank said.

Published in Dawn, December 28th, 2014

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