The Competition Commission of Pakistan (CCP) has recommended that the customs tariff on import of new cars must be reduced across the board to curtail protection to manufacturers, bringing it down to 5-10 percent as presently car importers are paying excessively high duties at the import stage.
A competition impact assessment study on automobile issued by the CCP on Saturday recommended that the atmosphere of competition could be improved significantly by allowing import of new cars at lower prices. This should be pursued along with the current investment policy to attract other car manufacturers in the country.
The scientific study recommended that the benefits of lowering tariffs on new cars will be manifold. One, it will make available greater options for the consumers who are currently stuck between a handful of models thereby increasing interbrand competition. Two, it will introduce new technology in Pakistan and improve safety standards.
Three, it will force the local manufacturers to compete in the local market, improving quality and decreasing price. Four, it will enable the car dealership and parts and after sales services market to develop to cater to the increasing variety of cars and technology.
These benefits will outweigh any other potential concerns regarding foreign exchange, loss of jobs and investment. In fact the local manufacturers are quick to point out that increasing prices are due to changes in exchange rate. Therefore there should not be any adverse affect on the foreign exchange reserves. If at all there is, it will be minimal.
The report made suggestions to increase both intra- and interbrand competition in the market and allow for greater market efficiency. It further recommended the change in market supply chain structure and terms applicable to purchasing vehicles:
The industry must move from a reactive demand-based model to a proactive supply based model in order to make it more competitive. As is the case with most manufacturers in developed countries, including Honda, Toyota, and Suzuki, customers place their orders directly with the manufacturers via Internet. This creates a direct linkage between the two, reducing the role of dealers, and helps the manufacturer in the inventory management and production planning process.
Consistent and long-term policies: The policy environment requires continuity, consistency and connectivity. Any change in the policies should be made giving due regard to the consumers and the prompt technology transfer rather than protecting the manufacturers/assemblers, the CCP added. The CCP observed that the absence of competition has let the local car industry to dictate the prices and Pakistani car market only has three major players, each of which dominates a different segment of the market based on the size of the car.
The assessment study on automobile further revealed that the concern vis-à-vis competition is the division of the market among the three players in the passenger car market, the steady market shares each of them enjoyed in the last decade, signifying a lack of competition. Clearly, any loss of competition in the market is bad news for the consumers, who have the same limited choices albeit at rising prices.
The absence of competition has let the local industry to dictate the prices. The continuous price increases of local automobiles since 2006 has put new cars out of range of middle-income groups. Statistics depict a fall in sales on year-on-year and on a month-on-month basis but the prices have shown an upward trend - Honda, Indus Motors and Pak Suzuki increased their prices thrice in 2008.
It seems that the local assemblers have adopted a strategy of increasing profits on limited production instead of increasing volumes. Most carmakers have been announcing plans to increase production volumes over the next few years but these plans have yet to come to fruition and the problem of late delivery of cars remains unchanged as a source of dissatisfaction among buyers.
It has not been uncommon for customers to pay additional money to ensure delivery of their vehicles within a short time period. Alternatively, customers pay the full price of the vehicles months in advance and the assemblers get benefits from their tied investment.
In the downstream market, dealers of the manufacturers/assemblers act as mere agents and have no real incentive to compete in the market. Study of the dealership agreements revealed, it is the company that controls the quantity to be sold and the price to be charged. These dealership agreements go on to eliminate intra-brand competition by disallowing discounts, the CCP study said.
It further said that faced with low volumes, under-utilisation of capacity, high prices, late deliveries, premiums, and slow transfer of technology, effective competition in the automobile sector is much more needed now than ever before to keep the industry afloat.
The CCP study said that the Automotive Mission Plan (AMP) 2006-2016 is a ten year plan that lays out its objectives in its vision quite clearly. The vision states "To emerge as the destination of choice in the world for design and manufacture of automobiles and auto components with output reaching a level of US $145 billion accounting for more than 10% of the GDP and providing additional employment to 25 million people by 2016." The vision thus spells out clearly the goal that the Indian automotive sector wants to achieve by 2016. Below we discussion some of the main policy features of the AMP.
Tariff Rates: It has been globally acclaimed that appropriately designed tariff structures attract investors. High tariff structures usually restrict flow of trade but may attract investment if the domestic market is big enough and growing at a high rate.
The prevailing bound rates at the initial stages of this Plan for the Commercial vehicles (Trucks and Buses) and MUVs (Multi Utility Vehicles) is 40 % and the tariff being 12.5%. Compared to advanced countries, the tariff rates in India are set at a much lower level for example tariff on trucks in USA is 25% and countries in EU have a tariff rate set at 22%. Thus the Government would examine and set the tariff rates for commercial vehicles in the future in this perspective.
India has also undergone negotiations of foreign trade agreements (FTAs) and preferential trade agreements (PTAs) with several regions and countries like Asean/Thailand/Singapore/Malaysia/China/Korea/Japan/BIMSTEC/Bangkok agreement, SAFTA/Sri Lanka/Mauritius/Chile, SACU/ Egypt and Gulf co-operation council. In the negotiations, care will be taken in deciding which tariff lines should be included. For a clear definition of the PTAs and FTAs care should be taken in preventing pass through imports from non- participating economies and trade deflections which may result from differential duty structures.
An unrestricted import of vehicles is likely to have an adverse impact on local manufacturing, GDP and employment. The government will also discourage the imports of used/ remanufactured vehicles and auto components in this category will not be treated as new.
The government will also provide incentives to the automobile manufacturers who produce vehicles suitable to be driven by the physically handicapped persons, the CCP added. Referring to Indian industry, the CCP said that the growth in the Indian auto industry is attributed to rising per capita income. Demographics have also helped since 70% of the Indian population is under 35 years of age. This implies a presence of a young population eager to be mobile than its older generation.
Within the sector, the growth can be attributed to more specific reasons. Commercial vehicle segment has grown primarily due to an increase in road infrastructure investments in the country. Better and cheaper access to credit has helped consumers across the board in securing vehicles of their choice. Growth in the two wheeler market has increased due to urbanisation.
Similarly, the demand for two-wheelers has also increased in the semi-urban and rural areas due to increase in income levels and availability of cheaper financing options. Besides growth in vehicles market, the auto component industry has also registered high growth rates. This is primarily due to the direct link this particular industry has with the manufacturing industry. 65% of auto component industry''''s sales are to the OEM, the CCP added.
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