Failure to achieve localisation by auto assemblers: government threatens to withdraw incentives

The government has threatened to withdraw incentives to auto assemblers if they fail to achieve localisation, as stipulated in the Auto Sector Development Plan (AIDP), besides revision of agreements allowing Original Equipment Manufacturers (OEMs) to export Complete Build-up Units (CBU) and components in the world market.
The Engineering Development Board (EDB) conveyed concerns of the Economic Co-ordination Committee (ECC) of the Cabinet to the local OEMs at a meeting in Karachi a couple of days ago.
According to the EDB, Japanese companies, with market share of 99.6 percent, are dominating the market, resulting in a monopoly situation. The Board also believes that continued tariff protection beyond initial investment period is an impediment for new investment in the auto sector.
Local auto assemblers have also been accused of deviation from deletion required timeframe under the AIDP. For instance, the Board observed that Suzuki Motors Company, after 30 years of operation, has achieved 50 to 70 percent localisation, whereas, given that the technology is old, at least 95 percent deletion levels could have been achieved.
The EDB, which is being criticised for taking assemblers on the Board, argues that no product quality standards are applied in Pakistan, and there is a visible difference between local and foreign assembled cars.
The EDB's meeting was based on the ECC observations and various summaries moved by the Ministry of Industries, Ministry of Commerce on price reduction and summary moved by Planning Commission on tariff rationalisation.
The ECC had constituted four subcommittees, out of which one has to propose auto tariff. The ECC in its meeting on August 23, 2011 took serious notice of slow working on PC tariff rationalisation and requested the Ministry of Industries and EDB to meet the stakeholders to evaluate the auto sector future and current regime.
The EDB proposals are as follows: (i) low affordable price of Pakistani cars; (ii) revised new entrant policy to contain tariff rates for CKD first year 5 percent, second year 10 percent, third year 20 percent with incentives based on Special Economic Zone (SEZ) industries; (iii) testing and RD facilities to be upgraded; (iv) re-visit agreements of OEMs to export CBU and components to world-wide markets; (v) downward revision of the import tariffs; (vi) existing level of protection increase due to yen-dollar parity; and (vii) minimum level of standards by PSQCA with consultation of stakeholders.
The decision of the ECC in changing the new entrant production in Auto Industry Development Plan (AIDP) from production of 500,000 units to 100,000 units outside Pakistan argues that in case of "local manufacturers/joint ventures the target of 100,000 units to be achieved in 3 years from date of operation subject to prescribed international standards' moreover there will be no restrictions in setting of new automobile units in Pakistan."
The ECC has observed that there should not be any restriction in setting of new car manufacturing units in Pakistan.
Pakistan Steels Mills (PSM) has achieved 70 percent deletion after 30 years where the technology is too old and at least 95 percent deletion would have been achieved.
The ECC has sought the following details: (i) profit /loss of the OEMs to set a benchmark; (ii) it is preferable to formulate a good transport policy to support the transport system in Pakistan; and (iii) allowance of used cars to compel auto manufacturers to reduce prices by using full capacity to reduce the production cost.