This column has at different points discussed the many virtues of greater competition in the auto sector; one that has long enjoyed protectionnot only from imports with tariffs exceeding 70 percent but also to a great extent from new players entering the market. Because of this protection, the growth in the sector has remained limited, and focus for the car makers has been to cater to the domestic market, foregoing the option to become competitive enough to export.
Capacity utilization for the firms; both Original Equipment Manufacturers (OEMs) and auto parts manufacturers has persistently remained low. For such a fast-growing population, car production in Pakistan has remained below 200,000 units in the past two decades.
With the new auto policy in place that has offered concessional rates to new entrants, there is hope that now Pakistan will see a wider variety of cars, perhaps at competitive prices in the long run. Prices set by existing car makers have continued to be higher than those in international markets because of low efficiency and a lack of competition that could potentially drive prices down given market dynamics.
As a point of comparison, motorcycle production has widely surpassed its decades-old low levels. Part of the reason is the rising demand for a cheap vehicle in growing cities and commercial hubs, but production was also boosted by the entry of new firms and new brands (mainly Chinese) that has garnered competition.
A recent case study conducted by the World Bank on South Asias automotive sector closely studying India and Pakistans potential in the auto sector highlights the issues of trade protection and low productivity to be primary reasons why both economies (India to a lesser extent than Pakistan) have not been able to become auto exporting nations.
While Indian auto industry has grown (India is one of the largest car producers in the world) it is still not exporting that much while Pakistani market is monopolized by three players and a dumping of used cars that meets the growing appetite for cars in the country.
The study reasons that because both countries have maintained tariffs for completely built units (CBUs) at such high levels, they have not been exposed to global good practices. Over time, high tariffs appear to have encouraged OEMs to focus on domestic market at the expense of exports limited competition from imports, it appears, has lowered the incentive for local OEMs to achieve higher efficiencies, the study argues.
How do they achieve this efficiency? Greater competition forces firms to bring down marginal costs and adopt efficient ways. In the short run, less productive firms will have to fight to survive while more productive firms will see increased production.
The study cites the example of Indian auto parts and commercial vehicles sectors gradually reduced import tariffs since the 1990s, and it did not lead to the debilitation of the industry but instead increased production and exports.
For now, the auto policy announced for the next five years has retained CBU rates between 50 percent to 100 percent along different engine cars. This, the policy claims, is to encourage new investors to enter this country where the vehicle will be adequately protected against imports. This makes sense in the short term, but lets hope that such a policy will not be kept in the long run, and past mistakes of continued protection will not be repeated.
There is no doubt this policy has borne fruit. Private sector players such as Lucky and Nishat have expressed interest while international brands such as Renault has already promised sizable investments. Competition will certainly be generated with new entrants. But in the long run, once the dust settles, tariffs for CBUs and parts imports will have to be gradually brought down.
Meanwhile, Pakistani firms that want to grow in scale will have to start thinking along the lines of becoming competitive in the global space; and perhaps become exportable. That means adopting international standards, investing in training and development of the workforce, increasing productivity, focusing on quality and moving up the global value chain through innovation, diversification and investment in research & development. Most of all, they have to start preparing for greater competition when such a time comes. And it very well may soon.
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