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The state of automobile industry in Pakistan and the role of imported and used cars

Published on 22nd Sep, Edition 38, 2014

 

The automobile industry and the auto parts manufacturers in the country have been suffering greatly due to the inconsistency in import policies and the widespread import of used cars taking place in the country. Personal baggage schemes are being used by used car importers, which are meant only to help overseas Pakistanis to import their used cars into the country. A number of the cars being imported in this scheme do not seem to be owned by overseas Pakistanis and instead, the scheme is being used to import used vehicles from Japan.

The Chairman of the Pakistan Association of Automotive Parts and Accessories Manufacturers, Usman Malik stated that the import policy was relaxed back in December 2010, which allowed five years old used cars to be imported into the country. This policy was then reverted back to allowing only three years old cars to be imported in December 2012 in order to help the local automobile industry. Within the span of these years, 92,000 used cars were imported. Despite the limit being brought down to 3 years, a further 17,968 units have been imported into the country. These cars can still be found for sale in the showrooms of various auto retailers and are still considered to be a burden for manufacturers selling locally manufactured auto parts as their sales tends to get affected.

It is sad to see that Pakistan has no car brand, which is its own. Vehicles, which are the closest, the country has to being called the local car brand are those which are locally assembled and yet face strong competition from cars, which are imported in the country. Furthermore, the Pakistani automobile industry is dominated by Japanese car makers namely Honda Atlas, Pak Suzuki Motors and Toyota Indus Motors.

In 2013, the combined sales of local car assemblers declined by 22 percent. One of the reasons behind this was a decline in the consumer’s purchasing power. With inflation at a high, individuals think twice prior to purchasing a car. Furthermore, maintenance expenses also drive up the cost causing demand to fall.

If the government reduces duties on imported vehicle it will offer relief to middle-income car users. Approval of the Economic Coordination Committee will be required, which would allow an Auto Development Policy to be created for the next five years. Doing so would cause a shift in the policy of protecting local auto assemblers while in the past; the Federal Board of Revenue was against such measures in order to protect the interests of domestic assemblers.

In the previous fiscal year, the value of imported vehicles in the country stood at Rs121 billion. Rs69.1 billion were paid in taxes along with Rs42.3 billion in customs duty. Government officials are of the opinion that while tariffs are to be rationalized, the Federal Board of Revenue will still earn higher revenues as car imports are expected to experience a surge.

In the past, the automobile sector was not able to perform well. This was due to volatile sales volume along with inconsistent policies. Due to such factors, the auto industry, which had strong hopes associated with it and which was seen to be a promising industry failed and continues to face similar problems. With the PML-N government having a pro-business reputation, space is expected to be given to the struggling industry.

 

In comparison, India currently stands as the 6th largest manufacturers of vehicles in the world i.e. Passenger Vehicles and Light Commercial Vehicles. In the fiscal year 2013, India produced 4.1 million units of cars annually which were 29 times greater than the level of production which occurred in Pakistan. Pakistan recorded to have manufactured 0.14 million units during the same period.

In the past, auto assemblers in Pakistan were dependant on Japan, Malaysia and Thailand for providing it with completely and semi-knocked down kits. While Pakistan can import cheap supplies from India, due to trade restrictions between the countries, this is not possible. Due to similar reasons, car importers in the country have to import cars from Japan instead of a country which is geographically closer.
If the government were to allow auto assemblers in the country to import automobile parts from India, which Pakistan does not produce while at the same time imposing a ban on importing new/used cars, it would allow local assemblers to be able to reduce car prices and thus help the local industry grow once again.

Recently, the State Bank of Pakistan has decided to increase the age limit on importing used cars from 5 years to 9 years. SBP stated that the import of such cars would be financed through commercial banks. Car deals and analysts were of the opinion that doing so will help in increasing the sale of used cars allowing individuals to purchase lower end models without having to pay high amounts as down payment.

The current age limit of used cars is 3 years. Such a move made by the State Bank will not only increase the sale of older model cars but it will even not affect 3 years scheme as these are already being financed by banks.

In the outgoing fiscal year 2014, car imports declined by 51 percent primarily because of a reduction in the age limit of imported cars from 5 to 3 years in 2012. This was the second consecutive time when Pakistan experienced a decline in the import of its cars. In 2014, only 22,220 units were imported in comparison to 45,378 units which were imported in 2013.

Considering the issue as a whole, the country’s local automobile industry is unable to thrive due to a number of reasons. With the used cars age limit being such which did not help the industry to grow, the latest decision by the SBP is likely to grant some relief. Trade restrictions with India too do not help Pakistan much, which forcefully causes the country to look into Japan and surrounding countries. Rather than focusing on bringing in used cars, Pakistan needs to look after its own local industry.

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