The Competition Commission of Pakistan (CCP) has recommended that car assemblers should not be allowed to increase prices in the name of currency devaluation once booking is done. Automobile manufacturers assemble vehicles from parts sourced from within and outside the country.
Manufacturers have achieved high percentage of locally sourced parts for high volume vehicle models, although precision parts and components (CKD) continue to be sourced from abroad. Indus Motor, Honda Atlas Motors, and Pak Suzuki claim that 60%, 68%, and 75% of parts for their Corolla, City and Mehran brands, respectively, are locally sourced. In the passenger car category sub-compact, compact, jeeps, and SUVs are produced in the country. Light commercial vehicles, buses, trucks and tractors are assembled in Pakistan in the commercial category. At the moment there is complete reliance on internal combustion engine vehicles and no hybrid or electric cars are being manufactured within Pakistan.
According to a report prepared by the CCP after a public hearing, Pakistan automobile industry is essentially marred by a lack of competition, adding that complaints of quality, availability and pricing of passenger cars particularly is characteristic of an uncompetitive market where existing players are not facing any meaningful competitive pressure. As a result, consumers have to face the consequences.
The CCP has prepared the following recommendations, if implemented, would improve the situation in the sector and provide some relief to the consumers.
No price change after booking: We have received numerous complaints that manufacturers announce arbitrary price increases retrospectively even after a booking has been made usually on account of rupee depreciation. Automobile manufacturers take a calculated business risk when they apply the Just-in-time inventory model and do not hedge against currency value fluctuations. These are valid business and commercial decisions that automobile manufactures take. However, once customers book a vehicle, whether through partial or full payment, they have a reasonable expectation that any future price increase would not be applied to them particularly when they have to wait several months to get delivery of their vehicles for no fault of their own.
The CCP has strongly recommended that automobile manufacturers not apply price increases on customers retrospectively after booking has been made. Price increases announced by manufacturers should be prospective and only applicable on bookings made after the price announcements are made.
Removal of double taxation to allow for supply-push based wholesale automotive market: The current direct retail model selling vehicles based on demand pull is increasingly becoming unsuitable for Pakistan's market. This model concentrates business risk on manufacturers, making expansion and production decisions harder. This system also allows undocumented investors to make multiple bookings and then later sell cars on under-the-table premiums (on-money) to actual customers.
As a long term measure to discourage blockages created by undocumented investors looking to make quick money from premiums, and to allow for a more suitable supply push based wholesale model which cater to the growing demand, CCP has recommended that the government should consider appropriate changes in the advance/withholding income tax regime, particularly section 153 and 231B of the Income Tax Ordinance, 2001, to remove double taxation in order to encourage a documented wholesale car market.
Measures for reducing premium/on-money: The issue of long delays in car deliveries from assemblers is essentially due to supply of cars being unable to keep up with growing demand. The problem is unlikely to be resolved completely unless there is significant expansion by existing players. The entry of new assemblers and availability of new vehicles by next year may improve the situation provided the new entrants bring significant production capacity and an attractive vehicle range across all passenger car segments (sedans, hatchback, jeeps etc) and various engine sizes.
Short-term measures such as banning or taxing transfer of new vehicles within three to six months of initial purchase, proposed by some stakeholders including the assemblers, are likely to have no or little effect and should be avoided. However, there should be a mandatory requirement to pay for new car purchases through pay orders made on the customer's own account. This will help in reducing the incidence of multiple booking by investors on names of unrelated people and will assist in documentation of the economy.
During the open hearing, consumers pointed out the fact that there is no authority to implement the penalty (KIBOR +2%) introduced in the Auto Policy 2016-2021 on assemblers that deliver vehicles later than 2 months. As an immediate measure to overcome this lacuna, appropriate legislation should be undertaken to implement the penalty and an appropriate government body should be made responsible for its implementation.
Creation of a national automotive sector standards and safety authority: The current regulatory framework regarding the auto industry is fragmented and distributed across several departments of the Federal and provincial governments. This makes regulation and consumer protection ineffective. To ensure introduction of quality, safety and environmental standards, and to take care of consumer issues in the automobile sector, the Federal and provincial governments should work together to create an independent and empowered national vehicle standards and safety authority. The authority should have ample powers to: (i) introduce and enforce various standards relating to production, quality, safety, fuel efficiency, and emissions of both locally produced and imported cars; and (ii) deal with all consumer issues and complaints related to vehicle quality, manufacturer warranties, and after-sale services.
In this regard, a task force comprising representatives of all the relevant stakeholders including Federal and provincial governments should be formed to finalize proposals for creating the new organization.
Taxation based on innovation and efficiency: CCP have discussed in detail how government policies can encourage the automotive industry to innovate and bring in newer technologies. The Federal and provincial governments should consider incentivizing efficient and modern technology by replacing the existing taxation regime based on engine volume, to one that rewards fuel efficiency, lower emissions, and newer technologies. Furthermore, assemblers who import CKD parts of outdated vehicle models/generations beyond 2 years from the global average should be discouraged by charging them higher import tariffs.
Measures to support automotive part venders: The lack of localization of automotive parts is essentially a question of economies of scale and transfer of technology. As precision and sophisticated parts require substantial investment, it only makes commercial sense to produce them when there is demand for sufficient volumes. Currently there are no tier 1 auto part vendors in the country who supply directly to regional or global OEMs. The government can support part manufacturers by offering them concessional financing rates and other incentives aimed at starting R&D efforts, with the eventual goal of enabling local part vendors to gain regional and global Tier 1 status. Similarly, the use of smuggled and counterfeit parts must be discouraged through strong enforcement of intellectual property and custom laws.
Enhancing competition and supply through new entry: To address the lack of competition in the market in general, Federal and provincial governments should continue to support the timely entry of new assemblers in the market which will have a positive effect on the market in general. In the CCP's opinion, the incentives provided to the new entrants vis-à-vis the existing players should be maintained during the periods agreed with the new entrants as per the Auto Policy 2016-21 which is a major step in catalyzing competition in the market.
Consistency in automotive policy: the CCP has discussed in detail the importance of continuing existing automobile policies, particularly around taxation. The Federal Government should ensure continuity in policies that have attracted new entrants in the automotive manufacturing market. A vibrant and competitive automobile sector will only be built and sustained if players are able to enter and challenge the hegemony of existing players and put competitive pressure on them.
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