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Automotive industry: path to self-reliance.

INTRODUCTION

Although assembly of automotive vehicles has been going on in Pakistan for the last 40 years or so, yet the state of the automotive industry has not changed as much as it should have. A programme to locally develop the various automotive components and parts, was initiated in early 70's. However, this localization/indigenization programme regretfully remained rudderless for almost 18 years. Only for the last two years or so some serious efforts have been made to give direction to this indigenization programme. Even now the lack of clear policy guidelines coupled with non-standardization of makes/models, continued reduction in the custom duty and sales tax levied on the CKD packs, unwillingness of the foreign principals to assist in the localization of various components, improper implementation of the deletion programme, under invoicing, smuggling and misdeclaration of imported parts to avoid customs duty have resulted in tardy growth of the automotive vehicle industry in the country.

The current state of the automobile assembly plants and vendor industries is a clear reflection of the negative impact of various government policies that have been enforced from time to time. It has become imperative for us to develop an automotive vehicle industry in Pakistan. For the last decade, the country's economy has been growing at an average rate of 6-8 per cent and the same growth rate i.e., between 12-16 per cent per annum. If this very high growth rate is expected to continue during the balance period of the current plan period. In order to sustain such a high growth rate, it will be necessary for the transport sector to grow at an average rate twice that of the GNP growth rate of the transport sector is not maintained through implementation of clear policy guidelines and development of a soundly based automotive vehicle industry, it will most certainly have a negative impact on the expected growth rate of the GNP.

At present, Pakistan is spending over $500 million for the import of automotive vehicles, agricultural tractors and allied spare parts. This is expected to reach a level of over $ 1.5 billion by the year 2000. In order to stop/reduce this large drain on our meagre foreign exchange resources it is essential that the automotive vehicle industry is developed on scientific lines using local raw materials and other elements of value added to the fullest.

The development of the automotive vehicle industry will also have a tractive effect on the overall industrialization of the country. It will provide the basic infrastructure for the manufacture of tractors and allied farm equipments. The needs of the defense forces will also be met by the automotive industry as most of the wheeled army vehicles are either designed and manufactured by subsidiaries of automotive vehicle manufacturers or they purchase the major components from them.

The automotive vehicle industry also has a rejuvenative impact on metal wiring, fiber glass, wire and cable, electrical components, paints, plastics, rubber, synthetics, textiles and glass industries.

It is also expected to contribute to net economic welfare. For every 100 workers employed in the automotive vehicle industry, about 900 are generally employed in other sectors to supply it with raw materials and semi-finished products. In addition, the automotive industry will keepp the widening technological gap between the development countries and Pakistan to a manageable magnitude through overall upgrading of the entire technology base.

Historical Development of

Automotive Industry in Pakistan

The first automotive plant in Pakistan was set up in 1949 by General Motors and Sales Co. This plant had started on an experimental basis, but it rapidly grew into an assembly plant for Bedford trucks and Vauxhall cars. Based upon its progress and experience, other entrepreneurs collaborated with US based firms to set up three assembly plants. In addition, Hyesons established the Mack Truck plant in 1963. All these plants were, however, restricted to semi-knocked down assembly operations only. The Mack Trucks assembly plant was set up with a view to manufacture vehicles on a progressive manufacturing basis. According to the planning t hen done, one hundred per cent manufacturing target was to be achieved in seven to ten years time. By the time the industry was nationalized in 1972 the progressive manufacturing achieved stood at:
 (%)
Bedford Trucks 24
Jeeps 17.7
Cars 5.7


A programme to locally develop the various automotive components and parts was initiated in the 70's. PACO was established to advise the government in developing policy guidelines for the growth and development of this industry and to set up assembly and components manufacturing facilities in the public sector.

After the nationalization of key industries the automotive manufacturing units were renamed and their functions redefined. A Board of Industrial Management was constituted to formulate a national policy for industrialization and to oversee and coordinate the functions of the automobile units. However, the desired national approach in this regard was not present and consequently targets remained undefined. Cogent strategies and directions for future plans were not made during the 70's and early part of the 80's.

In order to make the automobile industry dynamic, it was felt necessary to integrate public and private sectors. This realization brought about the addition of a few new undertakings in addition to the reorganization of several existing units. Awami Autos was renamed to become Pak Suzuki Motor Company Ltd. to commence progressive manufacture of Suzukii vehicles including 800 c.c. passenger cars. Progressive manufacture of Fiat Tractors was assigned to a new joint venture company Al-Ghazi Tractors Ltd., under the management of the Habib Group. The Republic Motor Co. was renamed as Hino Pak to become a joint venture company under the management of Al-Futtaims-a UAE based group. One more plant, Ghandhara Nissan, was sanctioned to undertake the manufacture of trucks. In addition, three more tractor plants were set up in the private sector. The latest joint venture establishment in the automobile industry is the Toyota - Indus Motor Company plant which is expected to commence production in 1992.

Problems Faces by the

Automotive Industry

Attempts in the past to develop automotive industry in Pakistan have not been very successful due to a number of major impediments. Despite a good potential for the local automotive vehicles components and spare parts industry, the progress made in this area has not been very significant. Some of the problems faced by the local vendor industry are as given below: Absence of a comprehensive policy on the induction of automotive vehicles and their local manufacture. The integrated industry status of vehicle industry has not been recognized as yet with the result that a foreign sellers' market persists and local trading operations thrive. The actions of the government are geared to suit the interests of foreign principals and their local agents. Trading and importing of spare parts, components and completely-built-up units has been implicitly encouraged.

Lack of standardization: Unit and unless adequate standization is brought about and production sizes made economical, it will not be possible to develop the automobile and component manufacturing industry adequately.

It may be recalled that five tractor assembly plants had been sanctioned. Out of these five, one plant has completely stopped operation and two other plants are operating marginally. As a consequence only two plants are fully operational controlling almost 90 per cent market share between them. Standardization has taken place but at a very high cost to the national economy.

The case of trucks assembly plants is also quite similar. Out of the four makes. Bedford has almost stopped production and Isuzu is marginal. Hino and Nissan together control 90 per cent market share. Inspite of this 'forced' standardization due to market forces, the volume of production is so low tht it does not warrant economies of scale. It may be noted that in case of trucks up to 60 per cent of deletion/localization has been planned. However, all the items to be developed locally are actually non-critical in nature. The remainder 40 per cent items which require huge investments will certainly prove uneconomical for small production sizes.

In case of two and three-wheelers, the situation is quite similar. There are five makes and over 15 models competing for a total market f 80,000-90,000 units per year. Due to uneconmic production volumes it will not be economically feasible to develop the remainiing critical components locally. standardization will again be forced through market forces. As stated earlier, in my opinion, we in Pakistan are not in a position to allow standardization through market forces as this is a very costly route. Government policy can be effectively used to bring about standardization.

The local assemblers of trucks, buses, tractors, cars, pick-ups, vans, 4x4 vehicles, motor-cycles etc., are interested in buying local components only at deletion prices which are prefixed by the foreign principals. It must be kept in mind that these deletion prices are not economically real and the foreign principals prepare these deletion prices in a manner that the prices of components that can be manufactured locally are kept very low intentionally. In otherwords, the deletion prices are "rigged" by the foreign principals in a manner that the items which cannot be made in the country are priced higher. It is not always possible for the local manufacturer to compete with the lower (rigged) deletion prices.

The local assemblers are not willing to give any prive preference to the local automotive component manufactures. The Government has allowed 15 per cent price preference to the local manufacturers which is not adhered to at all bythe assembler. It may be kept in mind that unless and until the local vendor industry does well economically, it will not be able to develop. And without the vendor industry the automobile industry cannot develop. The cost of production of components made locally remains high which cannot compete with the arbitrarily fixed low deletion price. The most important factor which adversely affects the local cost of production of components is the extremely high incidence of customs duties, taxes and various types of surcharges. Although the Government has allowed reduced customs duty on import of industrial raw materials the levy of the Import and Iqra surcharges, excessive import license fees and other import charges makes this concession almost meaningless. In fact in case of zero duty on imported raw materials, this incidence of import charges comes to 32 per cent. The normal custom duty on industrial raw materials is 20 per cent making the overall impact of 52 per cent. This extremely high rate of duty and taxes on imported raw materials makes the local cost of production excessive.

The second most critical factor affecting the local cost of production is the extremely high rate of financial charges ranging between 15 per cent to 22 per cent per annum both for working capital and capital investment. Throughout the world even in developed countries, the engineering industries get preferential rates of financing ranging betwee 3-8 per cent per annum.

The Government of Pakistan, acknowledging the fact, made financing available for locally manufactured machinery at 3 per cent (which has subsequently been increased to 6 per cent). However, this facility has not been made available to the vendor/component manufacturing industry due to some understandable reasons.

The dis-economies of scale due to small production/runs/small orders also adversely affect the local cost of production, due to excessive per unit costs of labour, warehousing and manufacturing overheads. All the above factors contribute towards making the local vendor industry's cost of production higher than imports.

It may, however, be noted that a number of above mentioned factors are controllable by the government which can help in reducing the costs of production substantially.

The foreign principals are very reluctant in transferring technology. The technical collaboration agreements are drafted in a manner that gives full control to the foregin principals with regard to the approval of a component developed locally. The foreign principals take a very long time to approve the locally developed component to suit their interests as approval would mean that they would lose that much business. This is also the reason why the foreign principals disallow any deviation in specification/characteristics of a locally developed component. As there is no standardization in the country, it is extremely difficult, in fact economically impossible, to meet the requirements of all the various makes and models of automotive vehicles. This factor is seriously affecting the local development of auto parts. A major exception in this regard has been a public sector tractor assembly plant which has achieved the highest delietion through the combined efforts of the foreign principals and the local management. Deviations have been permitted without compromising the quality of end-product.

As stated earlier, costs of financing in the country are extemely high. Loans are being made vailablee at very high costs of financing and are not even available easily as the development financial institutions (DFIs) have a preference for other industrial sectors rather than the automotive industry having long gestation period and lower rates of return.

Smuggling, under-invoicing, mis-declaration at the customs examination stage and other malpractices normally reserted to by importers have greatly damaged the local vendor industry. The entire market is flooded with smuggled parts many of which are sub-standard. The Government needs to protect its own revenues by tightening the customs and thus also help the local vendor industry. It is interesting to note that local vendors are being able to compete with the already low deletion prices of OEMs but are not able to compete in the open market.

Export incentives need to be given to vendor industry. In the case of tractors and motorcycles, the county is today in a position to export some parts and components. Export rebates/incentives in this regard will certainly induce the local industry towards exports.

Recommendations

The automobile industry is a complex industry affected by a number of interesting social economic and technological factors. In order to develop it in a cogent manner and to achieve self-reliance in this area of vital national importance, it is necessary that various remedial measures are taken by the policy makers after conducting a thorough and indepth study of its problems and difficulties. In this connection, broad policy options are available under two scenarios. The first option assumes achievement of the 80 per cent deletion level with implied levels of protection and other non tariff measures.

Under this policy, it is suggested that an economically realistic pan wise localisation programme should be prepared and monitored very closely to ensure its successes. Most of the past efforts in this direction have not met with success because of the rigging of the deletion allowances by foreign manufacturers. Localisation of parts and components should be phased over an eight year period to achieve 80 per cent local content.

As a number of components can be common in varioius classes of vehicles, detailed technical studies should be conducted to determine exactly as to which part are common between various classes and types of vehicles. Major world manufacturers such as General Motors, Ford, Toyota, etc., use engines, gear boxes, transmissions, steering mechanisms, shock absorbers, wheels, etc. which are common between various classes and types of vehicles in order to benefit from economies of scale. The same should be done in Pakistan.

Standardization of vehicles in the country is necessary. In case of trucks/buses and tractors it should be decreed as assembly plants have already been set up. Additional suggestions in this regard are briefly described below:

a) Model variants of trucks should be restricted through commonisation of engines and other major assemblies, within interchangeability. No new make should be permitted to establish a manufacturing facility in the foreseeable future.

b) Keeping in view the low demand/volume for small tractors, it is suggested that proposals for manufacture of small tractors may be defered.

c) Standardization can be left to market forces and competition in case of cars, 4-wheel drive vehicles, pick-ups and vans.

Presently four assembly plants are producing six to eight different models of trucks and five assembly plants are producing ten to thirteen models of tractors in order to meet the total country's annual tractors. Due to this proliferation of makes and models economies of scale can never be achieved by the vendor industry. Therefore, their standardization should be decreed on the basis of a detailed technical and financial study so that losses are minimized.

Only one assembly plant is presently producing cars, 4x4's, pick-ups and vans. Due to the introduction of the locally assembled Suzuki range of above mentioned vehicles other competing imported CBU's have been driven out of the market thereby creating certain amount of standardization.

One additional local assembly plants initiate production of passenger vehicles having engine capacities of 1300cc and above, 4x4's, pick-ups and vans, the same phenomenon that has happened in case of the Suzuki range is expected to take place thus creating standardization of these vehicles in the country.

d) The import of reconditioned and second hand cars are a consistent drain on foreign exchange due to higher requirements of imported spares and also serve as a barrier for the manufacture of local components as local manufacture becomes uneconomical due to lac of volume. Import of only large cars of over 2000cc engines and costing over five lack rupees may be allowed to a few. Ideally, however, all imports in any form should be banned.

The second recommended policy option proposes accomplishment of deletion through provision of tariff protection only, the protection being increased with the extent of localisation. Under this option it is suggested that:

- A tariff policy be framed which is consistent with a predetermined level of inefficiency which the Government is willing to tolerate. Existing tariff structure for automotive vehicles will have to be modified as previous measures have greatly hurt the local industry.

- Presently the import policy for auto and tractors parts and components as well as the customs duty is identical. The government must differentiate between parts developed and made locally to international standards which are being supplied to assembly plants. Imports of genuine parts locally produced must be restricted to the principal agents of foreign manufacturers such as Millat, Pak-Suzuki, Atlas, Dawood Yamaha, etc.

Since the assemblers are already processing such parts locally, this would ensure availability at all times at competitive prices. This policy would help vendors to utilize installed capacity to the fullest and in addition generate more revenues for the government by avoiding under-invoicing.

- As per government policy the minimum level of tariff protection to locally manufactured goods is 80 per cent. However, at present 60 per cent Custom duty on all spare parts is levied with no distinction for local parts. It is suggested that these local parts should be subject to a minimum duty of 80 per cent.

- Alternatively, a three-tiered tariff structure may be formulated. Parts in the first tier enjoying the existing protection of 40 per cent should comprise of only those parts which have already been deleted. Further two tiers should be created where parts would enjoy 55 and 70 per cent nominal protection respectively, depending on the sophistication required in manufacture of such parts.

- The local vendor industry requires protection (at least initially) from cheap imports. Sufficient protection/incentives need to be given to the local assembler to ensure localisation of parts. Financial penalties and incentives should be given to ensure implementation if the localization programme. All assemblers who have not achieved a 30 per cent deletion level should be required to pay an additional 10 per cent surcharge of CKD pack prices over the duty level as specified above.

Under the second scenario, the import duty on basic raw material needs to be revised. The present duty levy of 20 per cent (besides 5 per cent Iqra, 10 per cent Import Surcharge, and 5 per cent Import License Fees, etc.) should be exempt on basic raw materials which are either not available or whch cannot be made locally in the near future in the country.

In addition to the specific suggestions described under the two policy scenarios, a number of general recommendations to expedite local manufacture of vehicles follow as under:

All public sector agencies, including NLC, armed forces, KTC, SRTC, PUTC, etc., should patronize locally assembled vehicles and should not be permitted to import vehicles in CBU condition even against foreign assistance.

Assembly units should establish long-term relationship with their local vendors. This will promote mutual confidence and encourage the ancillary industries to undertake development work for the original equipment manufacturers (OEMs).

PACO is in a key position to play a role in the development of the local automotive industry. The overall organisational structure and corporate planning procedure within PACO needs to be studied so as to improve planning and development, so that a more coordinated approach can be developed for use of public sector facilities. Further, PACO should start performing its originally envisaged role of assisting the Government in developing a proper policy for the automobile sector of the country.

It is suggested that locally made Bedford truck components be integrated into the new vehicle manufacturing programme if possible; alternatively the feasibility of purchasing the remaining facilities from Vauxhall Motors may be examined.

Assembly units may be encouraged to take a significant equity stake in each other's operations with a view to intensify utilisation of common facilities.

Technical collaboration agreements should be implemented in letter and in spirit. It is regretfully pointed out that most of the existing technical collaboration agreements seem to be one-sided favouring the foreign manufacturers. In many cases, the local assemblers are not implementing all the provisions of these agreements for reasons best known to them.

All existing technical collaboration agreements should be carefully reviewed by a selected committee of experts to be appointed by the Government and instructions issued to all local assemblers for implementation of their agreements properly.

The Fiscal Anomaly Cell of the Government should be reactivated to deal with various existing fiscal anomalies speedily.

Research has revealed that little or no R&D is presently being undertaken in the automotive industry. Indigenous R&D and design capabilities will have to be developed in order to become trully self reliant.

Automotive industry does have potential for export given the proper incentives - Once the proposed tariff structure is implemented and permission granted to undertake production of cars 4x4 vehicles, pick-ups and vans, the prices of these vehicles are expected to come down drastically, creating a positive effect on the demand for these vehicles. The local production would become large enough to enjoy economies of scale, thereby, creating a situation that auto parts production would become internationally competitive.

In order to expedite this process, it is suggested that export rebate of 25 per cent be given for export rebate of 25 per cent be given for export of auto parts (as is being done by many countries e.g., Turkey, Iran, Taiwan, etc.); cheaper short-term and long-term finances are provided to the vendor industry (as is being done in Japan, Korea, Taiwan, etc.). The cost of these incentives will be more than off-set by their benefits in the very short-run.

Various rebates that are available to the engineering industry in general and the automotive industry in particular, entail such lengthy and cumbersome procedures that it is practically impossible to obtain refund of these rebates.

It is suggested that either this system of first paying duties/levies and then claiming refunds at a later date should be abolished or the procedure should be simplified so that refunds can be obtained without too much delay and efforts.

The local vendors industry needs protection against smuggling, under-invoicing and other mal-practices of the importers. The system of fixing ITPs which was adopted by the CBR a few years ago ahs not functioned well because of the fact that the CBR and Customs did not properly implement the same. It is necessary that this existing system of ITP fixation be simplified so that it may be implemented properly.

The menace of smuggling is rampant throughout the country and the Government needs to exercise its due authority to stop this menace.

CONCLUSION

Pakistan has come a long way towards self-reliance in the automotive sector. The success of indigenization of tractors cannot be down-played. However, a lot still needs to be done to attain self-reliance. Adoptions of the above mentioned recommendations will certainly go a long way in this direction.
COPYRIGHT 1991 Economic and Industrial Publications
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1991 Gale, Cengage Learning. All rights reserved.

Article Details
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Author:Ahmad, Junaid
Publication:Economic Review
Article Type:Cover Story
Date:Apr 1, 1991
Words:4069
Previous Article:Pre budget proposals.
Next Article:Automobile industry in Pakistan: history and prospects.
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