The auto industry in Pakistan is much in focus these days. Buyers of new cars have to wait up to six months to obtain models of their choice. Car prices are up even as the US dollar has fallen. Buyers are rightfully frustrated and their complaints have been heard in Islamabad. Ministers and government functionaries are caught in the middle as the government’s automobile policy is under serious attack.
The auto sector of Pakistan is faced with excess demand - or insufficient supply. Simply put, demand for cars exceeds supply of cars. As a result, car prices have risen - and will continue to stay high. Quality of cars may suffer because in times of shortages anything sells. Consumers will be further troubled and will predictably complain even more. Basic economics tells us that the solution to excess demand is to increase supply rather than government intervention and arm twisting of manufacturers. Car makers say they are capacity constrained and are doing their best.
Market: But how much is the government really to blame. The annual car market in Pakistan is small at approximately 42,000 units. In the auto industry individual car manufacturing plants in the EU and the US often have capacities of 50,000 to 100,000 units per plant per year. At these high production levels economies of scale and efficiencies of production are often at their maximum.
So what is the government to do to develop the auto and allied engineering sectors. More importantly - faced with a small and differentiated car market - what are the automobile manufacturers to do. Presently there are five major manufacturers in Pakistan competing in a small market of some 42,000 units, manufacturing about 15 models — some in batches of under 500 per year. The car makers are hamstrung - they have to work in a small market, produce several models, keep prices low, meet government conditionalities, yet justify their presence in Pakistan by providing acceptable profits to their shareholders.
Auto policy: The government in its wisdom formulated the auto policy which is presently in force where companies which assemble/manufacture cars in Pakistan are protected against imported cars. This is done through lower import tariffs on auto components and higher ones on built cars.To the government’s credit this policy brought some reasonable level of auto and allied manufacturing and was fine while it lasted.
But today we live in a changed world. Globalization, free trade, the WTO and similar catch phrases have rightly increased the expectations of car buyers. Frequent travel to the US, Europe, the Far and Middle East have also increased the awareness and demands of consumers who are no longer satisfied with the state of the automobile sector.
The satellite TV-empowered car buyer wants to know why he or she cannot buy a world class updated VW, Ford, Opel or Lexus. Particularly since he is already paying higher than world level car prices in Pakistan. At these high prices the buyer is fully justified in demanding world quality car models. But under the policy, manufacturers must assemble cars in Pakistan to qualify for import tariff concessions which make their products competitive and affordable. Very few large auto companies selling millions of cars worth tens of billions of dollars the world over can justify manufacturing facilities in Pakistan to sell a few thousand units per year. The result, the Pakistani car buyer remains isolated, deprived and, as he sees it, over the barrel, to a few local manufacturers.
Solution: For the auto sector the government rightly has two main goals: development of auto and allied engineering sectors in the country and no disbalance of trade in car import/export.
The revised government policy should be to permit free import (at reasonable and uniform tariff) of all automobile models manufactured all over the world. But every manufacturer should undertake to export from Pakistan auto components of exactly the same value as the cars they import into Pakistan.
Example: Ford Motor, with sales of $162 billion, wants to sell their cars in Pakistan. But they cannot justify setting up a plant to manufacture the 2,000 or so cars valued at approximately $20 million they expect to sell here. Under the current auto policy since Ford cannot justify manufacturing cars in Pakistan they cannot sell any cars here either since after high tariffs their imported cars become uncompetitive.
Under the proposed scenario Ford Motors would import into Pakistan all their world class cars and car models they could sell irrespective of where they were made and in return Ford would undertake to buy the same $20 million worth of auto components from Pakistan for export. Such exports could be one of many things which Pakistani manufacturers are proficient at e.g. tires, car seats, seat fabric, bumpers, door mouldings, windscreens, etc.
Win-win outcome: Under this revised scenario car buyers in Pakistan would be able to buy world class good quality and latest model cars made in Europe, Japan, the US, etc. And superior quality auto components exported from Pakistan would feature in cars bought by consumers the world over.
Pakistani car consumer would be far better off as he would be able to choose from many more car models at lower prices. The auto and allied manufacturing sector would have many more export oriented buyers and would not be dependent on the five car makers they are now. Additionally supply shortages as at present could be easily fixed by increased car imports. And the government would have to its credit an evolved auto sector and satisfied Pakistani car buyers.
Concessions: To be fair this scenario views the world auto manufacturers as partners in Pakistan’s progress. Therefore this proposal of: value of cars imported = value of auto components exported could be for three-year moving average. i.e. car imports need not equal auto component exports every year but for average values over three years.
To give further impetus to world car makers the auto components export condition could be transferable. Say e.g. Audi imports $10 million worth of cars into Pakistan but cannot identify the same amount of auto components for export. Audi should have the flexibility to transfer this export obligation to another auto company with or without compensation. This way cars can be imported by one maker and auto components exported by another. Yet total imports of cars and exports of auto components across the industry would match.
This framework for a revised auto policy is simple yet eminently workable for the auto industry. More importantly it is beneficial and empowering for the most important person in this equation - the Pakistani car buyer. It is not radical - just plain economic sense.