In a meeting with the Prime Minister, Pakistan Suzuki Company Limited (PSX: PSMC) has once again thrown the idea that it is open to (or going to?) invest $460 million into a new car assembling plant in Pakistan. There are conflicting news on the subject. On the one hand, it is suggested that the company has a plan in place with a site earmarked that would bring100,000 more every year. On the other hand is the suggestion that the new assembly would be contingent upon the company receiving similar set of incentives as offered under the auto development policy (AIDP) to the newcomers. Feels like Déjà vu.
These promises were heard last when the AIDP first came out in 2016. So just put it out there: it is great news if the company is in fact putting in investment into a new plant. But let this not be another wild goose chase.
The oft-repeated stance of the company has been that the substantive tax and tariff based incentives (significantly lower duties on non-localized and localized parts, and one-off tariff free machinery import) offered to new players should be extended to existing players as well in order to attract investment. Negotiations with the previous government did not proof fruitful. The then government, to its credit, stood firm in its decision that incentives would only be offered to Greenfield plants, or facilities that have been shut down and could be revived.
Since then, a host of investments—in cars and motorcycle assembly plants as well as commercial and heavy vehicles segments—have started to come in. Most notable are Kia and Hyundai who along with the local partners Lucky and Nishat have already set up offices and plants with management teams. They are currently in the market-testing phase with imported cars. Volkswagen has inked a deal with its authorized dealer for assembly. Nissan is coming back with local partner Ghandhara. Renault and Audi also have plans. And that’s just the non-Chinese investors.
The existing players have enjoyed immense demand and monopoly in the market owing to higher barriers to entry, and lack of policy direction and incentives for new investments to come. At very high import duties, consumers have had no choice but to turn to local cars or be happy with 3-5 year old used cars.
Over years, domestic players have earned the ire of car buyers who contend that despite operating for decades, the assemblers have not expanded in terms of variety of cars. They do not meet international quality standards and put in the bare minimum with no improvements in technology, functionalities and the overall car experience. Yet, they continue to raise prices. These prices are out of the budgetary range of the average consumer who is interested in procuring a car. Suzuki was the first one to enter the market nearly 30 years ago. It is now the market leader in the passenger car segment with a niche in small cars. In the outgoing fiscal, it alone sold nearly 150,000 units of cars having grown by 26 percent year on year. From the popular Mehran that has had a longer run than any car in the country to its latest introductions to the market like Wagon-R, there is no doubt that Suzuki will always find buyers of its car in a nation starved for smaller, relatively affordable cars. It is also knocking on the billion dollar revenue club.
The question becomes, would it be fair to give these decades old companies the same or similar incentives to new investors who have decided to inject so much money into the economy encouraged by the policy push. How else could they compete with such established brands that have a clear leg up with long running partnership experiences with vendor and supplier networks and a keen understanding of the Pakistani market?
Businesses are often fond of using the term “level playing field” to argue against import freedom. They feel they won’t be able to compete with imports and have a level playing field with them if the government keeps tariffs low. So how would existing players getting incentives be level playing field for the new entrants?
It does seem that the new government may be open to hearing these thoughts, and perhaps even update the auto policy. But that could be a huge setback for the industry and may even disrupt the planning of new players who may also lose confidence. This is not the time to amend a policy that is already in place and has yielded largely positive results. Least of all to appease some of the strongest and robust companies in the economy that are blessed with fast growing top-lines and enjoy brand loyalty to a great extent as well. Demand should be incentive enough for them.
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