While already struggling to rein in the prices of sugar, wheat flour, ghee/cooking oil, steel bars and cement, Prime Minister Imran Khan has now vowed to tackle the issue of high car prices and low auto-part localisation.
In the last week of 2020, the federal cabinet directed the Ministry of Industries and Production (MoIP) to look into the production capacity of existing carmakers that have failed to increase their output in line with market demand.
The cabinet directed the MoIP to look into the reasons as to why the foreign automobile manufacturers failed to indigenise car assembling through deletion programmes. The cabinet asked the ministry to make a presentation on this issue.
The prime minister asked Minister of Industries and Production Hammad Azhar to find out why the three main auto companies, which have been doing business for up to four decades, have failed to localise the manufacturing of spare parts.
Despite claims of high localisation, buyers witness multiple price increases every year
According to the Pakistan Bureau of Statistics (PBS), imports of completely and semi–knocked down kits (CKD/SKD) for cars in the first half of 2020-21 swelled by 63 per cent to $372.6 million on rising car sales.
The prime minister was informed that the shortfall in the supply of locally assembled cars was leading to black marketing. Dealers were charging a premium or “on money” for immediate delivery.
It can be cautiously said that the auto sector’s stakeholders are more powerful than those of food and construction material sectors. Car assemblers dealt with previous enquiries by relevant ministries rather easily. They know how to handle the latest concern expressed by the prime minister.
Like the enquiries into sugar and wheat crises followed by soaring prices of steel bars and cement, the latest investigation into the auto sector may die its own death soon.
Despite claims of higher localisation of over 94pc in 70cc bikes and 60-65pc in cars, consumers witness multiple price increases for two- and four-wheelers every year. Assemblers blame the hikes on the rupee-dollar parity and surging raw material prices.
The government did not ask car and bike assemblers why they failed to pass on the recent impact of low import costs to consumers. The rupee recovered against the dollar from Rs168 in August 2020 to the current interbank market rate of around Rs160. One of the assemblers raised prices twice amid the closure of plants and dealership network at the peak of the coronavirus last year.
As the PBS issues only the total import bill of parts and accessories in value terms without mentioning volumes, it is hard to find out the per-unit cost of the import of parts and kits.
Iconic Suzuki Mehran ruled the roads for 30 years with multiple price hikes every year with 70pc local-part contents. Suzuki Cultus 1,000cc existed for 16 years followed by 12 years’ journey of Suzuki Alto 1,000cc. Nobody knows when the three-decade-old Suzuki Bolan and Ravi pickup will be removed from the production line.
Honda Atlas Cars Ltd (HACL) has kept the 2009 Honda City model unchanged for almost 12 years. Indus Motor Company (IMC) has also been slow in executing complete model changes.
People usually compare the prices of local products with international ones on the internet before making a purchase. However, consumers can’t do that for Suzuki Mehran, Cultus (1,000cc), Ravi, Bolan and 70-125cc bikes as these vehicles have been phased out in other countries.
Members of the Pakistan Automotive Parts and Accessories Manufacturers (Paapam) are divided on whether they should take up the issues of low localisation and high prices with the assemblers. Many clever members prefer to stay quite on this topic as any criticism will deprive them of future business from these assemblers.
Paapam Chairman Abdul Rehman Aizaz said there are varying degrees of localisation in different capacities and models. For example, localisation is low in the SUV segment. This encourages new assemblers to introduce SUVs before entering the sedan segment. Paapam is of the view that localisation in value as well as the number of parts is key to survival in a competitive environment. Localisation is one of the most important factors that can help in controlling prices. Motorcycles and tractors are its examples, he claimed.
He attributed the increase in the prices of bikes to over 40pc rise in steel, aluminium, copper and plastic resin prices.
As for the four-wheel segment, he said without localisation the prices would have gone up a lot higher because of the depreciation of nearly 53pc and additional taxes and duties that were imposed in the last two years. The current surge is due to an unprecedented hike in metal and resin prices.
A reduction in taxes will result in higher demand and sales that will bring economies of scale, he said.
Currently, the installed capacity for the car and SUV segment is around half a million units whereas the country is producing about half of it. “There is room for vertical growth if taxes are rationalised. This will also result in further localisation and investment in the part-making sector,” the Paapam chief said.
Former Paapam chairman Capt (retd) Muhammad Akram criticised car assemblers in January 2020. He was the only Paapam chairman in the last 15 years to grill them over low localisation and higher prices. He also highlighted that various SROs provide benefits only to local assemblers, not auto vendors and consumers. He claimed that localisation in 660-1,800cc cars was 45-55pc.
To facilitate localisation, the government had offered some incentives in the form of duty cuts on the import of raw material, sub-components and components through various SROs a decade and half ago.
One SRO extends benefits to local part manufacturers on receipt of an order for the development/local manufacturing of automotive parts for supply to automotive assembling units (AAUs). Accordingly, part manufacturers apply to the Engineering Development Board (EDB) seeking permission for the import of raw materials, sub-components and components on concessionary duty rates. The determining factor for allowing such imports is the value addition achieved by local manufacturers for supplying the final part to the AAU.
The automotive parts manufacturers (APM) are made to transfer all financial benefits granted by the SRO to the AAU at the very onset i.e. with the award of any purchase order. Thus, it leaves them with no space for future growth/technology upgrade.
The AAU allows the import of all sub-components and components at exorbitantly high prices only through its designated companies, thus making the end products expensive.
As sub-components and components are imported at a tariff that’s less than the CKD tariff, there is little incentive to develop these locally. Hence, the continuous import at exorbitantly high costs results in higher prices. The 15-year-old SRO has never been reviewed.
With the Input-Output Ratio certificate, auto-part makers are allowed to import raw materials, sub-components and components under concessionary duty rates for manufacturing of parts for Honda, Suzuki, Toyota etc.
In January 2021, senior Paapam members gathered in Lahore to applaud the prime minister for taking notice of high automobile prices. However, vendors doubt the claim of 60-65pc localisation by the assemblers. They say it is far less than the one reported by the assemblers.
To be fair, localisation virtually stalled. In fact, rollbacks, which mean re-importing locally manufactured parts at exorbitantly high prices, happened in the last decade owing to a diluted regulatory mechanism for the import of CKD kits for locally assembled vehicles, they observed.
In spite of having exclusive access to the domestic auto market for over three decades, the major car-assembling companies have failed to achieve localisation targets, thus facilitating the outflow of foreign exchange, they alleged.
EDB, MoIP, Ministry of Commerce and the Federal Board of Revenue have yet to devise a transparent system for regulating the imports of CKD kits for many variants of locally assembled vehicles. EDB with its meagre resources may not singularly handle the gigantic task of classifying auto-part imports directly affecting vehicle prices and promoting the local industry while ensuring the needs of the exchequer are met.
The fact remains that the three major car-assembling firms did not help in the development of the local parts manufacturing industry. Neither did they let parts makers enter their global supply chains. Thus, the entire industry is dependent on unregulated imports, resulting in higher car prices, vendors said.
Published in Dawn, The Business and Finance Weekly, January 25th, 2021