Automotive Industry
of Pakistan
Automotive Industry Overview
The automotive industry is thought to be at the epicenter of a country’s economy. Pakistan is no exception. The sizeable automotive industry of Pakistan - with the presence of world renowned automotive manufacturers such as JVs and TAAs - has the capacity to produce automobiles that can meet the entire domestic needs of the country. The active and ever-expanding large-scale manufacturing (LSM) sector of Pakistan, of which the automotive industry is a part of, has shown positive growth for over two decades, maintaining a share of 2.8% of the country’s Gross Domestic Product. It has managed to generate a total of Rs. 73 billion, second only to the petroleum sector. The industry has managed to create a turnover of Rs. 299 billion, along with a total of 1.392 million jobs for people, out of which 195,000 were direct jobs, leaving a job multiplier of 1:8 while simultaneously adding an approximate of Rs. 1.8 billion to the county’s foreign exchange reserves through value addition. Additionally, its registered membership base includes 2000 automotive parts manufacturers (APMs) of Tier 1 and Tier 2.
However, the industry has suffered decline since 2008, due to severe inconsistency as a result of rapid policy changes. The demand forecast produced a staggering overcapacity which led to high-margin losses. As per the current situation of the industry, new as well as used CBU vehicles are freely importable, where terrible misuse of schemes takes place (facilities such as SRO 577). Localization is expensive, and the critically low volumes eradicate all chances of competitiveness, and a resultant growth in the industry. There is dire need for the revival of a long term Auto policy, and the establishment of an enabling environment with interplay of consistent policies.
It is worth mentioning here that the industry has never produced on full capacity. It has the installed capacity to produce a total of 275,000 units of cars and LCVs per annum, but the maximum that production has risen up to is an aggregate of 187,654 units in the year 2007-08. In the current year 2012-13, only 136, 324 units were produced. The same goes for other types of vehicles in the industry. The highest production of trucks and buses also took place in the year 2007-08, with a total of 6,139 units although it had the capacity to produce 25,500 units. In 2012-13, 2,445 units of trucks and buses were produced. In the current year, 50,859 units of tractors were produced despite an overall installed capacity of 100,000 units, with the highest production of tractors being 838,665 units in 2010-11. 2/3 wheelers make a similar case, with 819,556 units produced in the year 2012-13 although the industry has the capacity to produce 2500,000 units of 2/3 wheelers per year.
Active members of the auto industry that are involved in the production of passenger cars and LCVs are Suzuki, Toyota, Honda, Hyundai, Land Rover, Karakoram Motors and Faw. Trucks and buses are being made by Hino, Daewoo, Isuzu, Faw and UD Trucks. Fiat and Massey Ferguson are involved in the production of tractors, whereas local companies producing 2/3 wheelers are Atlas Honda, Suzuki, Qingqi, Ravi, Piaggio, DYL Motorcycles Ltd, Sohrab, Hero, Habib and a few Chinese companies.
Trade Progression with India over the Years
the current situation holds, listing those items on the Negative List so no trade involving the items can take place. While the future prospects maintain that the Negative List from the Indian side will be eliminated through a series of phases, members of the Auto sector believe that it is possible to commence trade with India, in the form of imports from across the border, at normal tariff rates once the Negative List has been abolished. It is also possible to export to India at the South Asian Free Trade Agreement (SAFTA) duty regime, with a share of 8% for CBU and 6% for CKD.
Regional Auto Policy Comparison
A comparison drawn amongst the auto policies of different countries across the region shows that whereas the annual volume of cars produced in India is a total of 4 million units with 1.5 million units in Thailand and 1.1 million units in Indonesia, Pakistan lies far behind with an aggregate of 175,000 units produced yearly. The CKD duty that India and Indonesia get to pay is 10%, followed by 30% for Thailand, whereas Pakistan pays a total of 50% as duty tax. When it comes to the payment of CBU duty, Pakistan pays an additional 50% as regulatory duty along with the CBU duty, which is 100% for vehicles exceeding 1800cc, 75% for those falling between the range of 1501cc – 1800cc and so on. When evaluating the amount of protection placed on vehicles, Pakistan falls last, with a protection of 17.5-42.5% compared to 90% for Indian vehicles, 50% for vehicles from Thailand and between 5-30% for Indonesian vehicles.
In light of the above findings, the incentive for localization for Pakistan is such that it will lead to 100% excise duty exemption on vehicles that have at least 30% local content.
Threats and Opportunities Analysis of Trade with India
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Two/Three Wheeler Sector
Among all industrial sectors of Pakistan, the two/three wheeler sector is one of the most vibrant and dynamic, with its sales and production having an average growth rate of 31 percent for the last 10 years (from year 2000-01 to 2010-11). The market is defined by success of a single type of engine (70cc), which gives the local industry a unique advantage of being the sole makers of the product in the entire global market. Keeping this in context, the prospect of initiating trade with India would seem like an ideal opportunity for the automotive industry in Pakistan, were it not for the myriad of trade barriers enforced by the Indian government. These barriers can broadly be categorized into technical barriers, barriers created through requirement of approvals and permission, and well-disguised tariff applications.
Technical Barriers to Trade (TBTs) are a part of Non-Tariff Barriers (NTBs) and are essentially measures referring to product characteristics such as quality, safety or dimensions, including the applicable administrative provisions, terminology, symbols, testing and test methods, packaging, marking and labeling requirements as they apply to a specific product1.
Homologation
This discriminatory NTB targets all imported vehicles and parts coming into India. The process of certification of a part manufactured in India takes more than 9 months, and that of a part
manufactured outside of India takes even longer, with categorization as ‘failure’ being the usual
outcome. In 2004, after the testing facility in Ahmad Nagar refused to grant a homologation certificate to world premier luxury brand Bentley – product of a British based company – the Indian government amended their policy to allow an exemption to cars with a price tag of US $40,000. This allows the Indian government to effectively keep out foreign competition and to provide protection to its local industry. As a result, the two/three wheeler industry of Pakistan sees little hope in meeting the Indian standards when many global brands such as BMW have failed to make it through2.
Emission Standards
India’s emission standards, namely Bharat Stage 1 and Bharat Stage 2, have set their measuring method to a durability of 30,000 km, which is considerably hard to meet, as compared to EVER-40 set by Pakistan, Indonesia, Vietnam, Brazil and several other countries. This technical barrier to trade is an effective tool to keep competition away from the Indian market.
1
United Conference on Trade and Development (UNCTAD) 2
Tariff Barriers
Significant and cumulative tariff affects imported motorcycles. Import incidence in the area is over 134% of import value, to which extra charges such as port expenses (approximately 3%) and other incidences of clearance (2% of the CIF value) need to be added. Even if the basic custom duty component is reduced, the remaining taxes and incidentals exceed 25%. These coupled with the cost of approvals, permissions and certifications makes exporting cost of two/three wheelers to India quite prohibitive.
A comparison of landed cost of Pakistani export to India with the landed cost of Indian motorcycle export to Pakistan shows that whereas Pakistan incurs landed costs from a range of Rs. 42,480 – 105,405, the costs of Indian motorcycle export go up to as high as Rs. 161,192, implying that products from Pakistan are reasonably competitive when it comes to price, and even quality, however it is unfortunate that the strict non-tariff barriers make it next to impossible for Pakistani products to make a place for themselves in the Indian markets.
It is believed that a pragmatic and step by step approach is essential for trade normalization with India. The Pakistani market should be opened for Indian two/three wheeler industry to the same extent and level of access that India does for Pakistani products. Further, the Indian government will have to gradually remove NTBs from its side and undertake several confidence building measures to provide incentive to Pakistan for trade.
Justification of Import of Automobile Components from India
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Pak
Suzuki Motor Company Limited
India is progressively becoming a hub for Automotive Manufacturing with the Japanese and other foreign OEMs shifting their manufacturing base to India. The prime reasons for this are cheaper costs of production, a large domestic market, availability of raw materials, trained human resource and long-term government policies for foreign investment. The operations are not limited to just production and sales, but also the development cycles of new models from designing of vehicles to launch, including testing facilities for vehicles and components.
Additionally, since Pakistan and India are similar in terms of culture, language, and customs, and have commonalities of models such as Swift, Alto, Mehran car and Bolan van, the vehicles designed and produced in India will be a perfect fit for the Pakistani markets.
It is also believed that this might also lead to a transfer of technology from Indian Components suppliers to Pakistani vendors. Since the local vendors industry is protected by higher tariff on components which are manufactured locally under SRO 693, it will provide reassurance to the vendors from fear of import of Indian components into Pakistan.
With the growth of Indian industry on a rise, it is speculated that the cost of labor and other operations of business will be significantly higher than Pakistani vendors, putting the locals in Pakistan at a considerable advantage. This increases the possibility of manufacturers in Pakistan
supplying components to Indian OEMs in a few years’ time.
Recommendations for Trade
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Pakistan Association of Automotive
Parts & Accessories Manufacturers (PAAPAM)
A careful look into Indian engineering industry shows that in addition to having a large engineering industrial base, its raw materials are home-based, it does not face any energy crisis or an international image problem, and exports in auto parts are well supported by the Indian government and tuned up to well over US $12 billion in the last year, averaging a 40% annual growth.
It is seen that India retards investment into Pakistan through enactment of insurance and banking restrictions, equity restrictions in investments by Pakistani nationals in Indian companies as well as investment restrictions by the Reserve Bank of India on Indians wanting to invest in Pakistan. For reasons noted above, the Pakistan’s automotive industry is currently not positioned well for an onslaught of Indian finished auto goods.
Members of the Pakistan Association of Automotive Parts & Accessories Manufacturers (PAAPAM) believe that, as promised at the time of AIDP implementation3, the Government of
Pakistan should fulfill its commitment to support the auto parts makers with Productive Assets Investment schemes, Human Resource Development Program, Technology Acquisition Scheme, Auto Industry Investment Policy and Auto Cluster Development. These schemes will ensure greater competitiveness for the local auto parts makers, in the absence of which industry will suffer great
losses. An example of this is the Pakistan’s Car sector which will become competitive after achieving a production volume of 500,000 vehicles whereas the current demand for four wheelers is estimated at 250,000 vehicles. Same applies to the Motorcycle sector, which must cross an annual production of 5 million, where current production is a mere 1.7 million.
It is safe to assume that the government of Pakistan will also have to take capacity-building measures to protect its local industries. The Ministry of Commerce must remain cognizant of ground realities
3
AIDP:
facing each industrial sector of Pakistan and negotiate such policies that offer increased trade opportunities to Pakistani companies. The TDAP/WTO cell should carry out a detailed study of the TBTs and NTBs restricting the export of Pakistani auto products, initiate seminars to enhance the understanding of trade with India, support trade fair participations in India, and most importantly,
facilitate branding of Pakistan as an “Engineering Destination”. The State Bank of Pakistan should
enhance the value of SME assets to Rs. 400 million for Engineering Auto Industry in order to avail SME preferential markup regimes. It is also suggested that Federal Board of Revenue (FBR) should change the Auto Parts Import Regime from Kilograms to Units, set up Auto related import structures (such as NTBs), and commence 15% export rebate on Auto Parts exports. Engineering Development Board of Pakistan (EDB) is recommended to ensure development and usage of local engine and transmission components in Pakistan, reinforce Quality and Standardization Cell within EDB, commence AIDP implementation with adequate funding, and lastly, negotiate the inclusion of Pakistani vendors into the Indian OEM supply chain with local OEMs. Pakistan Standards Quality Control Authority should set up a dedicated Automotive testing lab, introduce Pakistan National Automotive standards for all sectors, provide inter-ministerial interfacing with import requirements of FBR, subject all imports to quality and environmental certifications and harmonize quality standards and testing laboratories between both countries. Lastly, Pakistan Environmental Protection Agency must be responsible for ensuring vehicular emission standards compliance on imported auto parts and components, and impose compliance requirements on all CBU imports including used vehicles. These measures will substantially improve operations of the automotive industry, and increase their competitiveness against Indian products.