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Conditions for new car makers relaxed
MUSHTAQ GHUMMANISLAMABAD (July 07 2010): The government has relaxed conditions for new car manufacturers in an attempt to attract new investment in the auto sector but is hesitant to allow commercial import of used cars as was suggested by the Ministry of Industries and Production (MoIP) in a not too well argued proposal, sources close to Secretary Industries told Business Recorder.
"Government has approved a reduction of the condition on new entrants from 500,000 units to 100,000 units in annual production in countries other than Pakistan. For local manufacturers/ joint ventures the target of 100,000 cars will be achieved within three years from the date of operation subject to the prescribed international standards. Moreover there will be no other restriction on setting up new industries in automobile sector," the sources added.
The Economic Co-ordination Committee (ECC) of the Cabinet in its meeting on January 16, 2010 had decided that MoIP should hold meetings with manufacturers of automobiles and prevail upon them to lower the prices of cars. As an alternate, government reserved the right to consider import of second hand cars to facilitate common man.
The sources said ECC was informed on July 1, 2010 that in pursuance of ECC decisions, Minister for Industries and Production held a series of meetings with car manufacturers and sought proposals for reduction in the price of cars. The automobile manufacturers showed their reservation on decreasing the prices under the present economic scenario, ie (i) sales volumes of the industry decreased to 8 percent in 2007-08 and further decreased to 47 percent in 2008-09.
However, industry has started to recover in 2009-10 to the extent of 36 percent, but remains below the peak level of 2006-07; (ii) Pakistani currency depreciated by 11 percent vis-à-vis Japanese Yen, during April 2009 to April 2010 and 5 percent against US $; (iii) present production capacity of cars has increased from 88,000 cars in 2001-02 to 250,000 units in 2010 whereas at present industry is operating well below its capacity ie 50 percent; (iv) prices of main raw materials have increased by double digits; and (v) if tariff on imported parts was reduced from 32.5 percent to 20 percent that will entail reduction of prices from Rs 25000/- to Rs 30000/- per unit.
According to sources, ECC was also informed that Auto Industry Development Programme (AIDP) was finalised in consultation with all stakeholders, which replaced the deletion programme with the Tariff Based System (TBS). The five years tariff plan for auto sector was also agreed, which is applicable from 2007-08 to 2011-12 and it covers the import duties for the entire automotive sector, including the components, CKD kits etc.
It is estimated that localised part component cost about 40 percent less, as compared to the imported ones. Therefore, localisation is ultimately going to play vital role in the reduction of prices.
MoIP has proposed revision in new entrant policy, reduction in tariff on import of new cars, increase in age limit of used cars from 3 to 5 years imported under personal baggage, transfer of residence and gift schemes or allowing commercial import of used cars up to 3 years by amending the import policy.
ECC observed that the government has not been consistent in policies on auto parts. Due to non- implementation of the deletion programme the car manufacturers are increasing prices of cars on account of import of spare parts and enjoying tariff concessions at the same time.
It was observed that the car manufacturers are not utilising their full capacity on the pretext of less demand whereas they collect the car price about 4-5 months before delivery. Consequently, the depositors bear additional premium costs as well. ECC also observed that there should be no restriction on setting up of new car manufacturing units in the country.
ECC further observed that the proposal of MoIP has been submitted without requisite information/details regarding the profit/loss earned by the manufactures which was necessary to establish a benchmark. There was another view that instead of stressing bringing more and more cars on the roads, the government should prepare a comprehensive transport policy under which buses should be plied for transportation within the cities, which would not only decrease expenditure on fuel, but also lessen the burden on infrastructure.
It was proposed to allow import of used cars to compel local manufacturers to reduce the cost of production by utilising their full capacity. Besides the Auto car Industry should be persuaded to localise the industry, otherwise incentives may be withdrawn.
ECC also enquired about the functions of Engineering Development Board (EDB) and its contribution in the field of automobile sector. After detailed discussion the ECC deferred decision on the proposals regarding reduction in tariff on import of new cars as well as commercial import of 3 year-old used cars.
MoIP has been directed to bring a summary in the next ECC meeting with full information about profit/ loss of different units in the automobile sector. The summary will also contain proposals for improving the personal baggage, transfer of residence and gift schemes for the purposes of import of used cars, in consultation with the Revenue Division, Ministry of Commerce, Board of Investment and other stakeholders.
The ECC also decided that the government should ensure consistency in its policies particularly in the deletion programme in the automobile sector. EDB will give a presentation to ECC in the next meeting about its functioning and contribution towards automobile industry.
