The COVID-19 pandemic has adversely affected growth in key sectors of Pakistan’s economy and the auto sector is not an exception. The country’s auto sector was already facing a slump before the outbreak of the coronavirus pandemic for many reasons including massive devaluation of rupee, high taxation, skyrocketing inflation and higher interest rate. The auto sales plunged 34% to 175,611 units in the first 11 months of 2019 compared to 235,491 units sold in the same period of the previous year. The irony is that due prevailing dismal situation in the auto industry, some car manufacturers like Indus Motor Company and Honda Atlas Cars Pakistan introduced non-production days last year.
Automobile is an export driven-industry providing lucrative investment opportunities for foreign investors. The country’s automobile market is dominated largely by Japanese and Korean manufactures like Suzuki, Honda, Toyota, Hino, Hyundai and Mazda. Many foreign manufacturers including Chinese are reportedly in negotiations with Pakistan to start assembly operations in the country. These manufacturers may be lured to establish the manufacturing and assembling units in the country. Pakistan may seek help from China, its closest friend in order to develop automobile industry in Gwadar. China’s vehicle market is the world’s third-largest behind the United States and Japan, but the after-market segment is in its relative infancy. In the United States and Europe, after-market sales account for roughly 70 percent of the auto industry.
China’s auto market has gone into overdrive in the past ten years as millions of Chinese bought their first cars. Now, the market for replacement parts and service centres is racing to catch up. The government can mobilize the private sector for setting up the manufacturing and assembling units in the new port city of Gwadar. The country has already announced a 15-year tax holiday for the proposed EPZ that has been planned near the Gwadar port for local and foreign investors. Serious efforts on the part of the government can start at least assembly operations in Gwadar. The assembling units in the country are already assembling most of the world leading brands and the government can facilitate the private sector to set up assembling units in Gwadar.
A major reason behind decline in sale of cars was the high interest rate that made car financing tougher and discouraging people from buying cars. In the first five months of current fiscal year 2019-20, total sales came in at 55,407 units compared to 100,997 units in the corresponding period last year, which meant a 45% decline.
Last year, the rupee depreciated 35% against the US dollar that mainly hit the auto sales in the country. The sector was further hit by imposition of taxes by federal government including federal excise duty (FED) and additional customs duty. The government imposed 2.5% FED on vehicles having engines of less than 1,000cc, 5% on engines ranging between 1,000cc and 2,000cc and 7.5% on engines of more than 2,000cc. The government also levied additional customs duty, at 5% on raw material.
Some observers believe that reduction in taxes imposed on locally assembled cars in the budget for the current fiscal year will not lift the gloom in the country’s automobile industry. They believe that the auto sales have slumped mainly on account of the ongoing drive to document the economy and not owing to the rising prices of vehicles. According to the Pakistan Automotive Manufacturers Association (PAMA), the automakers sold 43 percent fewer cars during the first half of the current financial year to December from a year ago. The industry sold 59,097 vehicles during this period, compared to 104,038 vehicles sold last year.
Under the new auto policy of the present government, 18 new car manufacturing plants had been set up, five of which were on production line now. The competitors include Chinese and Korean companies. The market prices are to be determined by the demand-supply factor and the government cannot fix the rates under the policy. The officials hope the prices of cars will decrease as the production goes beyond the demand level. Under the auto policy, the companies have been given a concession of zero tax on import of machinery, but the companies are assembling cars in the name of manufacturing.
Critics say that the automobile industry has been closed under a preconceived plan, and a cartel has been formed and poor quality vehicles are being assembled in the country. They contend that a mafia is in control to ensure immediate delivery on the payment of an additional amount in the name of ‘own’. Car manufacturers kept on increasing prices without any check and failed to meet their commitments under which downstream factories were to be set up. The cartel in auto industry is discouraging new investment in the sector. There is a high need to put a check on prices of ‘locally manufactured’ cars. A price and quality control authority also needs to be established in the country. Transparency and consistency in policy is highly needed to restore the confidence of the auto sector investors.
The country direly needs a comprehensive auto policy that could attract new foreign manufacturer and create a healthy competitive business environment. Presently, the country is a Japanese-dominated market. Volkswagen, the Germany’s biggest and the world’s second largest automobile manufacturer in terms of market share, has shown its willingness to do business in Pakistan, provided a competitive business environment is available. No plan to break the monopoly of existing car assemblers will not succeed unless and until the unholy alliance of assemblers and bureaucrats are not broken. It is this nexus that has ever blocked preferential incentives for new foreign players in the auto sector.
The country lacks a comprehensive automobile policy covering two-wheelers. The present automobile policy only covers four-wheelers, hence making it ‘not feasible’ for any foreign company to manufacture bikes in the country. The country is likely to lose a proposed investment of $150 million by Japanese giant Yamaha Motors because of its unclear automobile policy. In 2009, Yamaha Motors announced to establish motorcycle manufacturing plant in the National Industrial Park at Bin Qasim in southern port city of Karachi with an investment of $150 million. Yamaha had reportedly submitted the proposal with Board of Investment five years ago, but it was facing delays due to confusion about Islamabad’s automobile policy.