Interview with Chairman of All Pakistan Motor Dealers Association (APMDA)

'Commercial import of used cars should be allowed Haji Muhammad Shahzad is the Chairman of All Pakistan Motor Dealers Association (APMDA) and over the years, has been a vocal advocate of car imports and greater competition in the automotive industry. BR Research had a chance to sit with Shahzad to learn about his views on demand dynamics in the car economy, his views on existing car manufacturers and the rising imports of used cars. Here are the edited excerpts of our conversation
BR Research: Let's start by talking a little about the demand of cars in Pakistan and how local manufacturers and imports are meeting this demand.
H.M. Shahzad: First of all, the automotive industry currently comprises of automobile assemblers and not manufacturers. Suzuki, Honda and Toyota have been operating here for nearly three decades but have only been assembling the vehicles, not manufacturing them.
Together they can assemble somewhere between 270,000 to 280,000 cars and imported cars annually are somewhere between 65,000 to 70,000 cars. But if you look at the needs of this country, given our population, I would say that the demand for cars is about a million currently, and these needs are not being met by either car assemblers or imports. The rest of the people who need cars are forced to purchase 10-20 year old cars, and you will still find this old variety on the roads across Pakistan.
The problem is that the locally assembled cars are out of the budget of an average Pakistani. Even the used imported cars that we bring in through the three Oversees Pakistani schemes (Transfer of Residence, Baggage and Gift) are not entirely affordable to a lower middle class man due to very high duties and taxes. I would say the cars assembled in Pakistan currently are among the most expensive cars in the world.
BRR: Why do you think local assemblers have not been able to reduce the prices of their cars?
HMS: They are just minting money as I see it. Today not a single car is on company price. Lack of competition within the industry has also played a role there. Take the example of next door neighbour India who currently has 27 companies manufacturing cars in that country. We have only had these three who have not even started manufacturing and are still highly dependent on Completely Knocked Down/ Semi Knocked Down (CKD/SKD) imports.
And let me tell you, they are in fact not even importing these CKD/SKD from Japan anymore. In fact, these imports are now coming from China, Thailand, Singapore and Malaysia whichever is the cheapest. To date, the deletion program which was planned by the government was never implemented. When the program was launched, it said that within five years, we will bring transfer of technology to Pakistan and move toward manufacturing. That was in 1983 and it never materialized. The deletion they have accomplished so far is merely cosmetic with few functional parts like radiators, tyres, seats,etc. Historically, these parts are being manufactured in Pakistan since the early sixties.
If local assemblers were working honourably, they would be one of the biggest exporters in the world. Today, Thailand and India are exporting. After utilizing its local needs and demand, India exports 2.7 million cars annually. But we are not even meeting our domestic needs, let alone exporting.
Without expansion of volume, car prices will not decrease. Even when importing parts, the more volume we import, the lower the price per unit will be. With revenues upwards of Rs 350 billion, why have they not spent money in expanding and localization?
BRR: Car prices are no doubt an issue. Another major issue is the premium dealers are charging to release these cars on time.
HMS: Yes, the waiting time for a Toyota is eight months and dealers charge Rs 250,000 over and above the price of the car to release the car on time. The issue is that you and I cannot go and book any of their cars and get it in the next two-three days. These cars are booked by their investors from their authorized dealers who charge the extra amount from customers. It's an illegal operation by these investors and car premium is plain black marketing and will persist if investors are not reined in.
BRR: Is it true that more people now prefer imported used cars over local cars?
HMS: There is a perception in the market that Japanese cars are the best. But the cars that these assemblers are making in Pakistan do not meet global quality standards. At the prices they are charging, why can't they deliver higher quality cars? The imported cars we bring in are according to international standards and have higher quality and road safety equipment. Consumer awareness has grown in Pakistan which is why more people prefer using imported vehicles now.
None of these assemblers have produced small 660cc cars that are the need of the Pakistani market. Of the 70,000 cars that are imported by us, majority of these are small engine-660cc or 1000cc cars. These local assemblers should not have objection against used cars imports because they are not even making the cars we are importing.
As for the prices; today a Japanese used imported car is selling for Rs 1.1million. Of this, we pay Rs 500,000 in taxes to the government. The leftover Rs 600,000 constitutes the cost of the vehicle, shipping and freight costs, as well as our profits. That's how cheap the car can be. If the consumer had the option to buy a cheap new car, why would he buy an imported used car? It doesn't make sense. The onus falls upon these local assemblers who haven't expanded production and haven't reduced prices.
BRR: What would you say to people who believe the used car imports are illegally brought in to the country through the Oversees' Pakistani schemes and they have created a black economy of sorts?
HMS: Used car imports are absolutely legal and they have been approved and authorized by the government of Pakistan. The specifics are also given in the new auto development policy that was launched in April 2016. The cars are imported on the documents of Pakistani nationals living abroad; their relatives living here in Pakistan take the permits and pay the duties and taxes imposed by the government. It is absolutely legal to import them in this way. The fact is that the used imported cars are the only competition that these assemblers have.
BRR: But aren't dealers exploiting a loophole in the policy? The scheme is for Pakistanis living abroad but these cars are being sold commercially by dealers.
HMS: As per the policy of the government, it is legal to import cars this way. These are three year old cars that are sent by oversees Pakistanis who get a profit on these cars. They send the cars and we pay their relatives living here the equivalent cost of the vehicles together with the profit. We are not sending any money abroad. In fact, we are getting foreign exchange into the country in the form of cars.
BRR: But some people argue that the schemes are being misused. The duties paid on these used cars are fixed duties which are much lower than those paid by authorized dealers of imported vehicles. Some also claim that no sales tax is collected while there are estimates that the government loses revenues on custom duties because of them. What do you say to that?
HMS: This is not true. We are completely compliant with all taxes. The duties are calculated with the incorporation of custom duties, income tax and sales tax by the authorities concerned and they are revised every year in the budget of the federal government. Different duties are fixed for 660cc to1800cc in the dollar amount and we use the current exchange rate to pay the duties.
We are not paying fewer duties. Because the cars are three years old, they get depreciation on the value of the car and the duty is calculated accordingly. But mind you, our duties are also very high.
In fact, we ask the government to register us wherever they want and allow us direct imports for commercial sales. The time is gone when we used to bring 10,000 cars. With our volumes and activity, tens of thousands of people have their livelihoods attached to this business. We are an industry.
BRR: What are the implications of the new SRO1067 (1) 2017 that was imposed to reduce the outflow of foreign exchange from the country?
HMS: The SRO says that the person on whose name the car is being brought should also send the dollar duty. But as I explained to you earlier, this is not possible. Two things will happen due to this. Firstly, the government should realize that this is the only facility that is available to an overseas Pakistani. He gets no other facility from the government. He already remits foreign exchange to support his family.
If he directs this money for payment of duties, his remittances will reduce, and thereby Pakistan's foreign exchange remittances will reduce as well. So what will the government gain? Secondly, this business will collapse completely. And the only victor would be the local assembler who will then manipulate the market and prices as he likes.
As for the outflow of foreign exchange; it is not being done by us. We pay the relatives of oversees Pakistani living here. Foreign exchange actually goes out when local assemblers import CKD/SKD cars to assemble here which is much more than the foreign exchange involved on import of used cars. They open Letter of Credit (L/C), we don't open L/C.
A much better way would be to allow import of used cars on commercial basis like others. All anomalies will then be resolved and it would be a level playing field for all concerned which by the way is the real job of the government. Another implication of this new measure will be loss of revenue of the government in the form of custom duties to the tune of Rs 80 billion.
BRR: Have used cars imports reduced over the past month since the SRO was released by the government?
HMS: The government has allowed all those cars to come in whose deals were finalized before the new SRO. Therefore, the impact will start to be felt from January next year.
BRR: What about those folks who say import of used cars are hurting local assemblers and will hurt the new players like Hyundai and Kia who are planning to come in?
HMS: Why is it that we can import old parts for any industry, and old clothes, but we cannot import old cars? We give them very little competition. First of all, the small cars we are importing are not being assembled by any of the three carmakers. And none of the new players are also bringing these cars when they arrive.
Moreover, like I said, our demand is currently about 1 million. If we are bringing 60,000-70,000 cars, that's merely seven percent of the demand. I am a great supporter of new players. I welcome them because more players will mean more competition to existing assemblers.
BRR: Local manufacturers in any industry argue that they create jobs for the people while traders and importers replace these jobs. What are your employment figures as importers of used cars?
HMS: Let's see, we have around 6,000-7,000 showrooms across Pakistan and any small showroom would employ 10-15 people. We should include here the indirect jobs that we create-the people associated with us, those that are involved in denting, painting, the mechanics, the after sales service providers, accessory makers, and then there are people who wash, clean and service the cars.
There is a long supply chain even in this industry and I would say it would put our industry employment figures to near a million people.