The Competition Commission of Pakistan (CCP) has said that Pakistan has not made any commitment to WTO to cut tariffs on the import of automobiles or auto parts till date and there is no WTO obligation to reduce customs duty in automobile sector. The CCP updated Competition Impact Assessment Study of the Automobile Sector in Pakistan released here on Thursday, however, as a signatory to the WTO Agreement on TRIMS Agreement, Pakistan should not adopt measures that are trade-restrictive (anti-competitive) and have trade distorting affects.
It said that the production of cars in Pakistan takes place at 16 manufacturing plants. Consumers often have to wait for months before receiving new cars. Most carmakers have been announcing plans to increase production volume over the next few years. Even though the installed capacity of the manufacturers/assemblers can easily cater to the need of the local market, yet the actual production of their units has not been up to the mark. It also depicts that all the manufacturers/assemblers have excess installed capacities. The excess capacities maintained by the incumbent firms act as a barrier to entry for the potential new firms and helps in maintaining their respective market power. By not utilising their excess capacities, the incumbent firms signal their inward looking approach towards domestic market.
Pakistan automobile industry is inward looking and it tries to protect itself through the use of regulatory instruments. Pakistan needs to develop the automobile industry instead of protecting it and in this regard, imports have a disciplinary impact on domestic firms. Currently, the import of cars is allowed only under the gift, personal and baggage schemes with restriction on allowable age limits. The policy for import of cars with an allowable age limit of 5 years remained in practice until 12 December, 2012. This policy was changed and the allowable age limit was again reduced to 3 years in December, 2012. Furthermore, on 31 August, 2012, the depreciation rules were also changed. If the cumulative effect of both these policy changes is taken into account, the government has further tried to protect the domestic automobile industry at the expense of consumers. For safety and quality standards, government established in 2000, Pakistan Standards and Quality Control Authority (PSQCA) which has so far developed standards for only 2 wheelers. Due to the absence of regulation, the domestic automobile manufacturers do not offer safety features such as Anti-lock Breaking System (ABS), airbags and emission standards along with quality specifications such as alloy rims, power steering and windows in all their vehicles. In addition, Pakistan has an aging automobile population which is an increasing burden on the economy due to increased emission levels and growing safety hazards. The current dealership/supply chain structure in the industry does not allow for meaningful competition as Dealerships are behaving merely as agents of the manufacturing companies and have no real incentive to compete in the market. Due to delay in deliveries, premiums are charged in the secondary markets, the CCP added.
The commission said that there is constant pressure from automobile manufacturing sector to ban the import of used cars completely, thereby restricting competition by foreign cars, albeit used. The automobile manufacturers have argued that a ban will help local manufacturers boost sales and when volumes grow, production cost will go down, thus benefiting the end users. The automobile manufacturers have previously been successful in one way or the other to restrict the import of used cars. Subsequently, the age limit for the import of cars was reduced from 5 to 3 years during 2007-08. The Federal Board of Revenue also reduced the depreciation rate from 2 to just 1 percent on the import of used cars in 2008, which further increased overall rates of duties and taxes on the import of used vehicles. On the other hand, assemblers have failed to bridge the gap between supply and demand, especially of cars of 800cc and 1,000cc engine. The production of higher engine capacity cars remains the focus, which is apparent from the fact that in 2011, 1,300cc or greater capacity cars made up more than 83 percent of total production, study added.
It said that the current dealership/supply chain structure in the industry does not allow for meaningful competition. Dealerships are merely agents of the manufacturing companies and have no real incentive to compete in the market. 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. It must be noted here that the existing booking structure contributes to the lack of competitiveness. Customers, by paying the full price of the vehicles months in advance, are not just covering the product based variable costs for the companies, but are also losing interest they could have earned in the capital markets. On the other hand, the companies are enjoying a break on investment as well as reaping the interest that accrues on the advance payments made by the customers. For these reasons, it seems appropriate to revise the dealership and booking arrangements so as to solve the problems that have been highlighted.
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