Car assemblers and some of their vendors are expected to clash at a meeting of Auto Industry Development Committee (AIDC) called by Engineering Development Board (EDB), in Islamabad, today. The vendors industry is hurting primarily due to the shrinkage of sale of 800 cc cars on account of lack of bank financing. Car sales have plunged from 200,000 plus to a low of 100,000 per year.
Last year, the sales improved to 130,000 cars a year. Bulk of this increase, however, came in 1300-1600 cc category and not in 800 cc vehicles. As a consequence, most vendors have received lower orders in the last two years. Despite depreciation of the rupee, increase in electricity and gas tariff and core inflation running in excess of 12 percent - the local assemblers price hike, from April 2009 to April 2010, has been between 1.5 to four percent, claim the assemblers.
At present, the vendor industry pays zero duty on raw material: five percent on sub-components; 10 percent on components; and 20 percent on assembly for a larger assembly. Locally assembled cars up to 800 cc enjoy protective duty of 50 percent; 1000 to 1500 cc cars attract duty of 60%; 1500-1800 import tariff is 75%; and luxury cars of from 1801 and above are slapped with an import tariff of 100 percent plus a regulatory duty of 50 percent.
This regulatory duty was imposed as part of the scheme to reduce imports of non-essential goods in the pre-budget period of FY2008-09, by the then Finance Minister, Senator Ishaq Dar. Government of Pakistan, on the advice of WTO Geneva mission 2007, had agreed to forego the condition of mandatory purchase of locally manufactured parts by car assemblers.
At the same time Geneva mission to Pakistan had advised Government of Pakistan that the condition of mandatory purchase of local parts by car assemblers be made a policy dictate in exchange for higher protection for local assemblers in the form of very high tariff protections on import of vehicles in the country.
It may be pointed out that Government of Pakistan, at the behest of the vendor industry, had tried to seek fourth extension of two years since the termination of cut-off period of agreement on Trade Related Aspects of Investment Measures (TRIMS). The programme was supposed to terminate during 2000 but on the insistence of vendor industry, extensions were sought three times.
The agreement recognises that certain investment measures restrict and distort trade. It provides that no contracting party shall apply any TRIM inconsistent with article 111 (national treatment) and XI (prohibition of quantitative restrictions) of the General Agreement on Tariffs and Trade (GATT). To this end, according to parts manufacturers, an illustrative list of TRIMS agreed to be inconsistent with these articles was appended to the agreement.
The list includes measures which require particular levels of local procurement by an enterprise. Local content requirements or which restrict the volume of value of import, such an enterprise can purchase or use to an amount related to the levels of products it exports (trade balancing requirements). In simple words, the mandatory purchase of local components for local manufacturing is disallowed by TRIMS.
Government of Pakistan disallowed use of local components in all other engineering manufacturing during the year 2003 except auto industry due to WTO requirements. But the Government of Pakistan, to protect local assembly of cars, sought three extensions of two years each to circumvent WTO rules. However, WTO Geneva mission advised Government of Pakistan to restrain from making fourth application for extension.
Thus 2006 was the last year in which local content requirement could continue as mandatory purchase item by car assemblers in exchange for higher tariff protection on imports associated with Non-Technical Barriers (NTBs). Car assemblers later agreed with the Government of Pakistan to continue with the indigenization subject to providing them lower tariff protection on import of complete built units. The other conditions to agree to indigenization related to lower depreciation and lower number of years of used cars for imports in the trade policy.
Most countries in the region have high tariff for import of used cars. In Thailand, the tariff is in the range of 167 to 190 percent, while in India a two-year old vehicle attracts import duty of 108 percent. Completely built up units either new or old take away local jobs. At present, around 350,000 people are employed in car assembly and ancillary vending and sales force.
Car assemblers are in favour of local indigenization of: (a) bulky parts (by size and weight); (b) having high volume; and (c) those with high labour content. The present protection of 17.5 percent (32.5 on raw material for local protection versus 50 percent duty on 800 cc car) or 27.5 percent differential on 1000-1500 cc vehicles is regarded as sufficient. However, the volume for nine types of engines needed for the main variety of local assembled cars is thought to be inadequate. Honda motorcycle makes 45,000 engines per month for 70 cc two-wheelers. The volume of car sales do not justify making local engines. "The economy of scale is not there for making engines locally," says a leading assembler.
The EDB had formed a committee to make budgetary recommendations in which car assemblers once again sought second freeze of indigenization of engine and transmission parts. However, the committee did not agree to encroach upon the decision of ECC and recommendations were made to continue with the Auto Industry Development Plan (AIDP), a policy given by the ECC for the development of indigenous parts against policy favours through tariff and non-tariff protection for car assemblers.
Representatives of the assemblers met Federal Minister of Industries Mir Hazar Khan Bijarani and complained that car sales have dropped ahead of the Federal Budget FY2010, due to uncertainty with regard to government policy for the future which will impact car prices.
They stressed for continuation of the present policy and maintain certainty in medium and long-term - so that more investment in this sector could become attractive. Claims of cartelisation by Japanese companies in Pakistan Automotive Manufacturers Association (PAMA) were denied with a retort that South Korean Hyundai has been a member of PAMA.
Further, it was alleged that reputed vendors such as: General Tyre; Master; Ravi; Almas; and Razi Sons were not complaining. "It is only vendors which were dependent on supplying parts to 800 cc vehicles are indeed hurting, because of high interest rates and fall in auto leasing. We can feel their pain. But their pain would not be reduced if pain is caused to assemblers."
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