Automobile Sector Study 2013

Published on May 2016 | Categories: Types, Government & Politics | Downloads: 63 | Comments: 0 | Views: 368
of 44
Download PDF   Embed   Report

Automobiles and competitive advantage for automobile producers in Pakistan.

Comments

Content

Competition Impact Assessment Report of the Automobile Industry of Pakistan January 2013

COMPETITION COMMISSION OF PAKISTAN

This study assesses the level of competition in the Automobile Industry of Pakistan.

1

DISCLAIMER

The views expressed in this Report do not necessarily reflect the Commission's views or position arising out of, or impacting upon, any inquiry, investigation or other proceedings carried out by the Commission. Neither the Commission, nor its Members, employees and any of its consultants, assume any legal liability or responsibility for the accuracy, completeness or any third party use or the result of such use of any information contained in this Report. Publication of this Report is designed to assist public understanding of competition issues.

1

2

Contents DISCLAIMER 1 2
2.1 2.2 2.3

1 4 6
6 7 8

EXECUTIVE SUMMARY THE AUTOMOBILE SECTOR: A GENERAL OVERVIEW
The Steps of Production A Focus on the Core Competence From Producers to Buyers

3
3.1 3.2 3.3

THE AUTOMOBILE SECTOR IN PAKISTAN
Introduction Brief History and Key Players Marques and Market Shares 3.3.1 The 800 cc Segment 3.3.2 The 1,000 cc Segment 3.3.3 The 1,300-1,800 cc Segment Demand for Cars The Supply Situation 3.5.1 Imports 3.5.2 New Entrant Policy Car Prices 3.6.1 Price Parallelism 3.6.2 Safety Standards, Quality & Emission Control Policy Payment of Premium by Buyers 3.7.1 Honda Atlas 3.7.2 Indus Motor Company 3.7.3 Pak Suzuki Dealership Agreements and Booking System 3.8.1 Dealership Agreements 3.8.2 Booking System 3.8.3 Observations

9
9 9 10 14 15 16 Error! Bookmark not defined. 19 20 23 27 30 31 33 33 34 34 35 35 36 36

3.4 3.5

3.6

3.7

3.8

4

RECOMMENDATIONS AND THE WAY FORWARD

37 39
39 39

ANNEX 1: METHODOLOGY
1. Sources of the Methodology 2. Identify the Relevant Markets

2

3 3. Identify the Competitors 4. Examine the Market Structure 5. Look for Barriers to Entry 6. Look for Anticompetitive ConductI i) State-Owned Enterprises ii) Public Procurement iii) Regulated Sectors iv) Trade Policy and Industrial Policy v) Unequal Enforcement of Laws and Regulations 39 39 40 40 40 40 41 41 41

ANNEX 2: GOP’S AUTO INDUSTRY DEVELOPMENT PROGRAMME (AIDP) 42

3

4

1 Executive Summary
A competition assessment is the assessment of laws and their impact on the sector; concentration levels of the players in the sector; and the behaviour of market players and their effect on competition. A competition assessment analyses the strength of competition in the sector and identifies any factors impeding efficient competition. The automobile industry was established in Pakistan in 1950 and since then has fluctuated through different phases of remaining in private and public controls. From 1980s onward, the control of the automobile industry remained in private hands. For the purpose of this report, the competition assessment of the passenger cars in the automobile sector in Pakistan has been analyzed. Presently, there are three major car manufacturers/assemblers in the car industry in Pakistan namely; Pak Suzuki Motor Company Limited, Indus Motor Company Limited (Toyota) and Honda Atlas Cars Limited. Between 2001 and 2011, car sales in Pakistan increased by 217% and the sales of the above mentioned three players mainly contributed towards this growth. Indus Motors, Pak Suzuki Motors and Honda Atlas have increased their sales by almost 322%, 241% and 217% respectively in this time period.1 Currently, in the 800 cc and 1000cc market segment, Pak Suzuki is the sole local manufacturer/assembler while in the 1,300-1,800 cc, the state of competition is slightly better with Honda, Suzuki and Toyota competing amongst each other for market share. Parallel fall in prices in 2009/10 along with rise in prices by manufacturers in the last 3 years from 2010-12 may be a cause of concern from a competition perspective. In all the three market segments, the manufacturers/assemblers have excess installed capacities which act as barrier to the entry of potential new firms. By not utilizing their excess capacities, the incumbent firms signal their inward looking approach towards domestic industry. In addition, the first Auto Industry Development Programme (AIDP) has failed to meet its production targets and has not changed market dynamics. Pakistan automobile industry is inward looking and it tries to protect itself through the use of regulatory instruments. Pakistan needs to develop automobile industry instead of protecting it and in this regard, imports have a disciplinary impact on domestic firms. Currently, the import of cars is allowed only under the Gift, personal and Baggage Schemes with restriction on allowable age limits. The policy for import of cars with an allowable age limit of 5 years remained in practice until 12 December, 2012. This policy was changed and the allowable age limit was again reduced to 3 years in December, 2012. Furthermore, on 31 August, 2012, the depreciation rules were also changed. If the cumulative effect of both these policy changes is taken into account, the government has further tried to protect the domestic automobile industry at the expense of consumers. For safety and quality standards, government established in 2000, Pakistan Standards and Quality Control Authority (PSQCA) which has so far developed standards for only 2 wheelers. Due to the absence of regulation, the domestic automobile manufacturers do not offer safety features such as Anti-lock Breaking System (ABS), airbags and emission standards along with quality specifications such as alloy rims, power steering and windows in all their vehicles. In addition, Pakistan has aging automobile population which is an increasing burden to the economy due to increased emission levels and a growing safety hazard. The current dealership/supply chain structure in the industry does not allow for meaningful competition as Dealerships are behaving merely as agents of the manufacturing companies and have no real incentive to compete in the market. Due to delay in deliveries, premiums are charged in the secondary markets.

Major recommendations of the report to improve competition, both in the short run and long term are: 1. Opening up of domestic market to the import of new cars at reasonable tariffs and reducing protection of local industry to allow foreign competition for the benefit of consumers will bring in new technology and offer more choice to the consumers. This increased competition will reflect in better pricing and improved quality, as well as availability of cars on demand. The recent reduction of allowable age limit for import of cars from 5 to 3 years in December, 2012 will further protect the domestic automobile industry which is already inward looking. Import of 5 year old vehicles provides a better competitive environment in the local automobile industry; however the idea of

2.

1

PAMA website, http://www.pama.org.pk/

4

5
increasing the age limit from 5 years to older than 5 years on the import of used cars may be subject to strict road worthiness tests. It is preferable for the import of used cars to be open, rather than allowed under the Gift, Personal and Baggage Schemes that add transaction costs. It is also necessary to have stringent evaluation measures to assess the depreciation and actual values of the used imported vehicles. 3. Removing the entry barriers imposed by higher tariffs for imports by significantly lowering the tariffs and making them relatively more uniform across all automobile categories. This will make cars more affordable, push the local assemblers to be more competitive, and incentivize the automobile industry to strive towards international standards and pricing. The tariff structure needs to be finalized in consultation with the National Tariff Commission (NTC). The recent measure of lowering the depreciation allowance needs to be reconsidered as it may reduce consumer welfare by increasing the price of imported used cars.2 Mandatory testing for emission and road-worthiness are needed to be introduced as part of a regulatory regime and renewal of registration of vehicles may be contingent on passing of requisite tests in line with developed countries. Dealerships are merely agents of the manufacturing companies and have no real incentive to compete in the market. It is proposed that strict laws should be implemented that prohibit both parties (manufacturers and dealers) from charging any premiums from the customer. Increased competition would also eliminate the premium problem, as cars will be readily available and customers will not have to wait for 6 months before receiving their car after having paid the full price in advance.

4. 5.

6.

2

FBR Custom General Order (CGO) 13/2012

5

6

2 The Automobile Sector: A General Overview
The global automobile industry of 2012 has come a long way from the “horseless carriage” of the 1890s, emerging as a market leader in the manufacturing activity, providing employment to one in seven people in the world, either directly or indirectly. Termed as the ‘industry of industries’ by the renowned Peter Drucker, the automobile indust ry in the USA set standards in manufacturing activity by innovating mass production techniques during the early 1910s. The Japanese soon followed by offering lean production techniques in the 1970s. Riding high on economical revival in many developing countries in Asia and Europe, the industry’s global output touched 64.6 million vehicles in 2005. Recently, China and India have attracted the attention of global auto-makers, vying for setting up a cost-effective export-base for meeting the demand from Asian markets. Despite government controls, the Chinese market witnessed car sales of around 14.5 million in 2011.3 A booming economy and a low interest regime also helped India in crossing the one million unit sales figure in 2004 for the first time. The sale of commercial vehicles showed a record growth of 29% over 2003. Foreign automakers such as Mercedes Benz, Volkswagen, General Motors (prior to bankruptcy), Honda, Toyota, Ford, Fiat and Mitsubishi endeavoured to set up their manufacturing units in India to tap the growing demand. However, the recent global automobile industry crisis in 2008-2010 saw the auto industry pass through a difficult period, mainly due to substantial increase in the prices of automobiles. This discouraged purchases of SUVs (Special Utility Vehicles) and pickup trucks that were the primary focus of the American "Big Three" automakers namely General Motors, Ford, and Chrysler. As a reaction to this crisis, major manufacturers including the Big Three and Toyota implemented creative marketing strategies and offered substantial discounts to improve sales. In China, the government reduced taxes on automobiles in order to spur flagging sales. In Europe, the European Commission offered a common rescue package to all the EU member states.4

2.1 THE STEPS OF PRODUCTION
From the design of a car to getting it to a customer, a number of steps are involved. Design (High Value Addition) - After researching consumer wants and needs, automakers begin designing models, which are tailored to the public demand. In the past, this design process has taken up to five years. Today, however, through the extensive use of computers, it is possible to develop prototypes, or “concept cars,” from scratch in less than a year. Raw Materials (Low Value Addition) - These include rubber, glass, steel, plastic, and aluminium. Over the past few years, the cost of raw materials has increased significantly, mostly due to the price increase of oil and natural rubber. Also, companies are now using aluminium and plastic in place of steel whenever possible in order to reduce the weight of the automobiles, which in turn improves fuel efficiency, but more prone to roll-over Parts (Medium Value Addition) - Tires, windshields, and air bags are examples of car parts. Parts may be manufactured by third parties based on the specifications provided by the car manufacturer. Assembly (Medium Value Addition) - Due to the combination of rising raw materials’ costs and consumers’ eternal search for the lowest price, companies are looking for ways to cut costs out of the manufacturing process. Recent trends to reduce costs include using fewer parts in each vehicle component or common parts between

3 4

http://www.reuters.com/article/2012/01/12/china-auto-idUSL3E8CC2C720120112 Car Industry." TOP STORIES. N.p., n.d. Web. 09 Oct. 2012.

"Germany's Steinmeier Calls for EU to Rescue Ailing <http://www.dw.de/dw/article/0,,3801809,00.html>

6

7
different models, minimising industrial waste and pollution, and having parts delivered to assembly plants on a justin-time basis. Marketing (High Value Addition) - Marketing is an integral part of the value chain, since it is the primary basis for consumers’ perceived values. Automakers and individual dealers work together to create national, regional, and local marketing strategies that include television and radio advertising or special incentives offered to customers. Distribution and Sales (High Value Addition) - After production is complete, automobiles are shipped to dealerships around the world to be sold. Dealers also often offer incentives to increase sales.

2.2 A FOCUS ON THE CORE COMPETENCE
In the 1890s, the automobile industry in the US was horizontally de-integrated. Manufacturing units evolved in regions with skilled labour. By the middle of the 20 th Century, however, Ford and GM brought about consolidation in the industry. The companies themselves were vertically integrated. The market was oligopolistic in nature. Huge production costs deterred new firms from entering the market. GM emerged as the market leader, wielding high influence over market prices. By 1920s, Ford perfected mass production techniques. The company also took initiatives for a high degree of vertical integration by owning its own steel mill and forging factory. Other players followed suit to achieve substantial cost savings e.g., the take-over of Fisher Body by GM. Quite contrary to the vertical integration in the US auto-makers, Japanese auto-makers practiced ‘relational contracting.’ The practice of ‘Just-In-Time’ delivery as part of the lean production techniques gave rise to a healthy relation between the assemblers and the suppliers of automobile components. By the 1980s, however, the industry showed renewed signs of vertical de-integration. Chrysler formed strategic tie-ups with suppliers for major components, and in turn concentrated only on designing, assembling and marketing. These initiatives helped Chrysler to realise the highest average profit per vehicle amongst the Big Three. All the components of a car were outsourced to suppliers who offered lowest prices. This trend has become prevalent to the extent that numerous part suppliers cater to the needs of a particular manufacturer, as shown in (Figure 1). The same is the case with auto part suppliers and manufacturers in Canada, China, Japan and India, where the automobile industry is highly fragmented and is facing increased consolidation.

Figure 1: Consolidation in the Parts Industry (Source: Autonews.com)

7

8

2 . 3 F RO M P RO D U C E R S TO BU Y E R S
Once a quintessential example of a producer driven industry, the automobile industry has in recent years become less producer and more buyer-driven. Ever since the inception of the Japanese lean model of production and the “just in time” era, automobile makers have slowly made a transition towards designing and manufacturing automobiles that increasingly match customers’ wants. This determines the designing and modelling of new vehicles. The industry’s move toward a buyer-driven market is also apparent in how cars are becoming more customisable from the factory, rather than through aftermarket parts. Also, the characteristics that signal a move toward the buyer-driven model are more apparent in countries that have a longer use of passenger vehicles, such as the US. The market has become saturated and has become more of a replacement market, where choice matters.

8

9

3 The Automobile Sector in Pakistan
3.1 INTRODUCTION
The automobile industry plays an important role in the development of the national economy in terms of revenue generation, foreign exchange, human resource development and technology transfer. Statistics show that as of January 2010, the auto sector in Pakistan employed 215,000 individuals, directly represented US $ 1.09 billion in investments and contributed US$ 3.6 billion to the GDP of the country. It is also an important source of revenue to the Government of Pakistan and contributed US $ 0.82 billion annually to government’s exchequer through taxes (Table 1).5
Table 1: Pakistan Automobile industry key statistics6 Employment (direct) Investment Contribution to GDP Contribution to Revenue Foreign Exchange Saving 215,000 US $ 1.09 billion $3.6 billion Indirect Taxes US $ 0.82 billion US $ 1500 million

3 . 2 B R I E F H I S T O RY A N D K E Y P L AY E R S
The automobile industry in Pakistan came into being with the establishment of a public limited company called National Motors Limited (NML) in 1950. The NML was established by General Motors, USA, to make both passenger cars and commercial vehicles.7 From that point onwards, the industry has undergone different phases. It remained in the private sector until 1960 and during that period, an indigenisation level of 20% was achieved. The 1970s saw a period of nationalisation and a public sector company was formed with the name of Pakistan Automobile Corporation (PACO). From 1980s onward, the process of privatisation started and the private sector re-entered the industry. Different vehicles e.g. Suzuki, Toyota, Honda, Hyundai, Santro, Kia, Cuore, Revo, Proton, and Chevrolet cars were introduced by PACO, Pak Suzuki Motors, Indus Motors, Honda Atlas Cars, Dewan Farooq Motors, Adam Motors, Proton, Geely and Nexus Auto. Currently, the automobile industry in Pakistan has three major car manufacturers/assemblers. Pak Suzuki Motors (Pak Suzuki) is a joint venture formed in 1983 between the Pakistani government and Suzuki of Japan. Pak Suzuki is in the business of assembling, progressively manufacturing, marketing and distributing Suzuki brand vehicles in Pakistan. Both parties have entered into a Technical Assistance Agreement. Pak Suzuki manufactures cars for the middle-income group in Pakistan. Indus Motor Company Limited (IMC) is a joint venture company set up by Toyota Motor Corporation, Toyota Tsusho Corporation, and members of the House of Habib. All three parties have entered into a Technical Assistance Agreement in which IMC has been granted a license to manufacture Toyota cars in Pakistan. In late 2010, it began domestic production of the Toyota Hi-Lux, a utility vehicle. Similarly, Diahatsu Motor Co. Limited (Daihatsu) has signed a Technical Assistance Agreement with IMC, granting IMC a license to manufacture Daihatsu motor vehicles in Pakistan. The third important player in the automobile market is Honda Atlas Cars (Pakistan) Limited (HACPL), which is also a joint venture between the Atlas Group and Honda Motor Co. Ltd., Japan. The company was created by the merger of Panjdarya Limited and Atlas Autos Ltd. in 1988. HACPL has signed a Technical Assistance Agreement with Honda to assemble, manufacture, market and distribute the Honda Civic and City cars in Pakistan.

5 6 7

Exchange rate used for currency conversion: 1 USD= 84.5 PKR Information received from Engineering Development Board (EDB) in April 2012.

Asif, Muhammed “Diagnostic Study: Auto parts Cluster in Lahore” United Nations Industrial Development Organization (UNIDO) an d Small and Medium Enterprise Development Authority (SMEDA), June 2006

9

10
Other manufacturers/assemblers with a smaller presence in the country include Gandhara Nissan Limited (GNL) and Dewan Farooque Motors Limited. GNL was incorporated in 1981 and has a Technical Assistance Agreement with Nissan Motor Co. Japan and a Joint Venture Agreement with Nissan Diesel Co. Japan for the progressive assembly of passenger cars and other commercial and heavy duty vehicles. In 1998, Dewan Farooque Motors Limited signed Technical License Agreements with Hyundai Motor Company and KIA Motors Corporation as the manufacturer and distributor of Hyundai and Kia vehicles in Pakistan. Nissan and KIA have stopped operations in Pakistan since 2005, whereas Hyundai has stopped producing cars since 2010, largely due to financial difficulties being faced by the Dewan Group.

3.3 MARQUES AND MARKET SHARES
According to Pakistan Automobile Manufacturers Association (PAMA), in 2011, eleven models by four manufacturers account for all automobile sales in Pakistan. Japanese marques have the largest share of automobile sales, followed by those of South Korea. The market for passenger cars is highly concentrated as measured by the Herfindahl-Hirschman Index (HHI) and shown in Table 2 below.8
Table 2: Concentration Indices of the Automobile Sector, Pakistan Passenger Car Manufacturer Honda Suzuki Toyota Others HHI Market Share (s) 8.62 % 62.18 % 27.84 % 1.35 % > 4715.72 s^2 74.30 3866.35 775.07

Three companies, namely Pak Suzuki Motors, Indus Motors (Toyota), and Honda Atlas dominate the market. In 2010/11, the top-selling car with an engine capacity of 1,300cc or above was the Toyota Corolla, followed by two Honda models, the City and the Civic. Among smaller cars, the models most in demand were the Cultus, the Bolan and the Mehran, all made by Suzuki. Between 2001 and 2011, car sales in Pakistan increased by 217%. The market shares of the three main car producers also show significant changes. These changes, however, are not uniform and uni-directional. Table 4 shows the changes in the market shares of the three main car producers in Pakistan since year 2006. One can clearly see that the Pak Suzuki’s market share was 59% in 2006, which has risen slightly to 60% in 2012. Indus Motors, the producers of Toyota cars in Pakistan, has registered significant growth by increasing its market share from 19% in 2006, to 29% in 2012. Honda Atlas, on the other hand, has seen a decline of around 2% in market its share since 2006. Similarly, other car producers have also seen their market share decline by a little over 7% in these six years. Figure 2 shows the same trend.
Table 3: Car Production & Sales from 2006-2012

CAR Daihutsu (Cuore) Net difference Suzuki (Mehran)
8

800CC P S P-S P

2006-07 12,786 12,776 10 36,988

2007-08 12,406 12,204 202 36,249

2008-09 5,803 5,852 (49) 13,239

2009-10 5,145 5,301 (156) 22,271

2010-11 6,280 6,007 273 25,935

2011-12 3,635 3,857 (222) 33,839

The Herfindahl-Hirschman Index (HHI) is an index that measures market concentration, a function of the number of firms in a market and their respective market shares. The HHI is calculated by summing the squares of individual market shares of all the participants. The higher the HHI, the less competitive the market is. For example, an HHI>1800 is the indication that market is highly concentrated.

10

11 35,131 (1,292) 21,594 22,540 (946) 0 0 0 59,068 61,528 (2,460) 2011-12 13,600 13,693 (93) 15,288 16,288 (1,000) 0 0 0 28,888 29,981 (1,093) 2011-12 5,396 4,977 419 7,089 7,142

S Net difference Suzuki (Bolan) Net difference Suzuki (Margalla) Net difference Total 800CC cars produced Total 800CC cars sold Total Net difference in 800CC category CAR Suzuki (Cultus) P-S P S P-S P S P-S P S P-S 1000CC P S Net difference Suzuki (Alto) P-S P S Net difference Hyundai P-S P S Net difference Total 1000CC cars produced Total 1000CC cars sold Total Net difference in 1000CC category CAR Honda (Civic) P-S P S P-S 1300+CC P S Net difference Honda (City) P-S P S

37,007 (19) 15,520 15,566 (46) 0 0 0 65,294 65,349 (55) 2006-07 29,880 29,837 43 21,546 21,988 (442) 2,225 3,470 (1,245) 53,651 55,295 (1,644) 2006-07 5,610 6,513 (903) 10,461 11,848

35,526 723 17,250 17,209 41 0 0 0 65,905 64,939 966 2007-08 27,662 27,563 99 18,805 19,097 (292) 2,028 2,227 (199) 48,495 48,887 (392) 2007-08 5,813 5,762 51 8,220 8,439

13,421 (182) 9,639 8,664 975 0 0 0 28,681 27,937 744 2008-09 9,181 9,198 (17) 6,641 6,550 91 327 404 (77) 16,149 16,152 (3) 2008-09 4,985 4,662 323 6,755 6,482

22,513 (242) 10,541 11,439 (898) 0 0 0 37,957 39,253 (1,296) 2009-10 12,453 12,658 (205) 10,665 10,794 (129) 212 244 (32) 23,330 23,696 (366) 2009-10 5,648 5,908 (260) 7,852 8,212

24,119 1,816 14,359 13,311 1,048 0 0 0 46,574 43,437 3,137 2010-11 12,414 11,428 986 12,873 11,932 941 0 0 0 25,287 23,360 1,927 2010-11 6,408 6,365 43 9,294 9,121

11

12

Net difference Suzuki (Baleno) Net difference Suzuki (Liana)

P-S P S P-S P S

(1,387) 0 0 0 5,964 6,067 (103) 0 0 0 35,036 35,782 (746) 0 0 0 0 0 0 0 0 0 57,071 60,210

(219) 0 0 0 2,605 2,983 (378) 0 0 0 33,672 33,640 32 0 0 0 0 0 0 0 0 0 50,310 50,824

273 0 0 0 684 851 (167) 0 0 0 27,054 26,760 294 0 0 0 0 0 0 0 0 0 39,478 38,755

(360) 0 0 0 900 1,025 (125) 2,578 2,353 225 43,382 43,510 (128) 0 0 0 0 0 0 0 0 0 60,360 61,008

173 0 0 0 614 470 144 4,376 4,080 296 41,419 41,111 308 0 0 0 0 0 0 0 0 0 62,111 61,147

(53) 0 0 0 334 450 (116) 7,128 7,040 88 46,352 46,207 145 0 0 0 0 0 0 0 0 0 66,299 65,816

Net difference Suzuki (Swift) Net difference Toyota (Corolla)

P-S P S P-S P S

Net difference Nissan (Sunny) Net difference Kia (Classic NGV) Net difference Kia (Spectra) Net difference Total 1300+CC cars produced Total 1300+CC cars sold Total Net difference in 1300+CC car category CAR Total cars produced including all categories Total cars sold including all categories Total Net difference including all categories

P-S P S P-S P S P-S P S P-S P S

P-S

(3,139) 2006-07

(514) 2007-08

723 2008-09

(648) 2009-10

964 2010-11

483 2011-12

P

176,016

164,710

84,308

121,647

133,972

154,255

S

180,854

164,650

82,844

123,957

127,944

157,325

P-S

(4,838)

60

1,464

(2,310)

6,028

(3,070)

12

13
Source: PAMA website

Table 4: Market shares of the Three Major Companies (%)

Company MS of Suzuki MS of Toyota MS of Honda Others
Source: PAMA website

2006-07 61% 20% 10% 9%

2007-08 62% 20% 9% 9%

2008-09 47% 32% 13% 8%

2009-10 49% 35% 11% 4%

2010-11 51% 32% 12% 5%

2011-12 60% 29% 8% 2%

Figure 2: Market Share of the Three Major Car Producers in Pakistan

Source: PAMA website

A better picture of market share is revealed if one divides the car market in Pakistan into relevant product markets according to the engine sizes. From the consumer’s perspective, while the cars of different engine sizes are substitutes with respect to products characteristics and intended use but they are not substitutes with respect to price and affordability. This way one can also see market share as an indicator of market power. For this purpose, let us divide the car market into the following three different categories based on the size of the car engine: 1. 2. 3. 800 cc 1,000 cc 1,300cc-1,800 cc

13

14
3.3.1

The 800 cc Segment

The 800 cc car market has only one producer, Pak Suzuki, with Indus Motors (Daihatsu Cuore) discontinuing production in 2012 making Pak Suzuki, the only player operating in this market segment. Although the Suzuki Mehran and Bolan are just under 800 cc and Daihatsu Cuore is a little less than 850 cc, for our study we have classed them in the same engine size category. Also, though the characteristics of the Bolan are different from the other two cars (passenger carry configuration vs. a sedan), nevertheless, we consider it practical to include it in the comparison. Table 5 shows the number of cars produced and sold in the first category from 2006 to 2012. The production and sales data does not portray a consistent behaviour by the incumbent firms in this market segment. In some years, production exceeds sales while in others, it’s vice versa. Different reasons may be ascribed to this phenomenon such as risk averse behaviour by the incumbent firms, supply chain and planning decisions. One can see that when the car market is subdivided according to engine sizes, a better picture is revealed. One can clearly see that this market is dominated by Pak Suzuki Motors. Table 6 shows the actual market shares of the two companies in this category. Pak Suzuki holds much of the market share of more than 85% in 2011, which has risen to 94% in 2012 with market share of Indus Motors (Daihatsu Cuore) falling from 14% in 2011 to 6% in 2012. Figure 3 shows the same information graphically.
Table 5: Number of Cars Produced and Sold in the 800 cc Category

CAR Daihutsu (Cuore) Net difference Suzuki (Mehran) Net difference Suzuki (Bolan) Net difference Suzuki (Margalla) Net difference Total 800CC cars produced Total 800CC cars sold Total Net difference in 800CC category
Source: PAMA website

800CC P S P-S P S P-S P S P-S P S P-S P S P-S

2006-07 12,786 12,776 10 36,988 37,007 (19) 15,520 15,566 (46) 0 0 0 65,294 65,349 (55)

2007-08 12,406 12,204 202 36,249 35,526 723 17,250 17,209 41 0 0 0 65,905 64,939 966

2008-09 5,803 5,852 (49) 13,239 13,421 (182) 9,639 8,664 975 0 0 0 28,681 27,937 744

2009-10 5,145 5,301 (156) 22,271 22,513 (242) 10,541 11,439 (898) 0 0 0 37,957 39,253 (1,296)

2010-11 6,280 6,007 273 25,935 24,119 1,816 14,359 13,311 1,048 0 0 0 46,574 43,437 3,137

2011-12 3,635 3,857 (222) 33,839 35,131 (1,292) 21,594 22,540 (946) 0 0 0 59,068 61,528 (2,460)

Table 6: Market Shares in the 800 cc Car Market (%)

CAR (800CC)

2006-07

2007-08

2008-09

2009-10

2010-11

2011-12 14

15

MS of Suzuki MS of Daihutsu
Source: PAMA website

80% 20%

81% 19%

79% 21%

86% 14%

86% 14%

94% 6%

Figure 3: Market Share in the 800 cc Category

Source: PAMA website

3.3.2

The 1,000 cc Segment

The 1,000 cc car market is dominated by Pak Suzuki, with Hyundai showing no production and sales since 2010. Table 7 and 8 show the numbers of cars produced and sold and market shares in the 1,000 cc category. The production and sales data in Table 7 present a similar behaviour by the incumbent firms as is observed in 800 cc segment. Figure 4 shows the market shares graphically.
Table 7: Number of Cars Produced and Sold in 1,000 cc Car Category

CAR Suzuki (Cultus)

1000CC 2006-07 P S 29,880 29,837 43 21,546 21,988 (442) 2,225 3,470

2007-08 27,662 27,563 99 18,805 19,097 (292) 2,028 2,227

2008-09 9,181 9,198 (17) 6,641 6,550 91 327 404

2009-10 12,453 12,658 (205) 10,665 10,794 (129) 212 244

2010-11 12,414 11,428 986 12,873 11,932 941 0 0 0

2011-12 13,600 13,693 (93) 15,288 16,288 (1,000) 0 0 0 15

Net difference Suzuki (Alto)

P-S P S

Net difference Hyundai Net difference

P-S P S P-S

16 (1,245) Total 1000CC cars produced Total 1000CC cars sold Total Net difference in 1000CC category
Source: PAMA website

(199) 48,495 48,887 (392)

(77) 16,149 16,152 (3)

(32) 23,330 23,696 (366) 25,287 23,360 1,927 28,888 29,981 (1,093)

P S P-S

53,651 55,295 (1,644)

Table 8: Market Shares in the 1,000 cc Car Market (%)

CAR (1000CC) MS of Suzuki MS of Hyundai
Source: PAMA website

2006-07 96% 4%

2007-08 95% 5%

2008-09 97% 3%

2009-10 99% 1%

2010-11 100% 0%

2011-12 100% 0%

Figure 4: Market share in the 1,000 cc category

Source: PAMA website

3.3.3

The 1,300-1,800 cc Segment

Tables 9 and 10 show the numbers of cars produced and sold and the market share of different companies in the 1,300-1,800cc category, respectively. One can see here that the state of competition is slightly better than the other two categories. Honda Atlas, Pak Suzuki and Indus Motors (Toyota) compete amongst each other for market share. The competition was more direct in this segment until 2011. When Honda launched the latest

16

17
variant of the Civic in early 2006, the engine size was standardised at 1,800 cc for all four models. The previous variants had engine sizes of 1,500 cc (the EXi) and 1,600 cc (the VTi). When Toyota launched its latest variant of the Corolla in 2008, it discontinued its popular 1,600 cc SE Saloon and pushed the 1,800 cc Altis as a replacement which in 2011 dropped to 1,600cc engine capacity. One also does not observe a wide variation in production and sales data as is the case in 800cc and 1000cc market segment. A more pronounced competition in this market segment may be a reason in limiting market power of the incumbents. Looking at Table 10, one finds that this category is essentially dominated by Honda and Toyota with the latter having the greater share of the market. Figure 5 shows this market share information graphically and reveals an interesting trend between Honda Atlas and Indus Motors. The graph for the two companies almost indicates an exactly opposing trend. The market shares for this category seem to be too neatly divided between the companies. This trend requires careful examination.

Table 9: Number of Cars Produced and Sold in 1,300-1,600 cc Car Category

CAR Honda (Civic)

1300+CC P S

2006-07 5,610 6,513 (903) 10,461 11,848 (1,387) 0 0 0 5,964 6,067 (103) 0 0 0 35,036 35,782 (746) 57,071

2007-08 5,813 5,762 51 8,220 8,439 (219) 0 0 0 2,605 2,983 (378) 0 0 0 33,672 33,640 32 50,310

2008-09 4,985 4,662 323 6,755 6,482 273 0 0 0 684 851 (167) 0 0 0 27,054 26,760 294 39,478

2009-10 5,648 5,908 (260) 7,852 8,212 (360) 0 0 0 900 1,025 (125) 2,578 2,353 225 43,382 43,510 (128) 60,360

2010-11 6,408 6,365 43 9,294 9,121 173 0 0 0 614 470 144 4,376 4,080 296 41,419 41,111 308 62,111

2011-12 5,396 4,977 419 7,089 7,142 (53) 0 0 0 334 450 (116) 7,128 7,040 88 46,352 46,207 145 66,299

Net difference Honda (City)

P-S P S

Net difference Suzuki (Baleno) Net difference Suzuki (Liana)

P-S P S P-S P S

Net difference Suzuki (Swift) Net difference Toyota (Corolla)

P-S P S P-S P S

Net difference Total 1300+CC cars produced

P-S P

17

18

Total 1300+CC cars sold Total Net difference in 1300+CC car category
Source: PAMA website

S

60,210

50,824

38,755

61,008

61,147

65,816

P-S

(3,139)

(514)

723

(648)

964

483

Table 10: Market Shares in the 1,300-1,600 (1,800) cc Car Market (%)

CAR (1300+CC) MS of Suzuki MS of Honda MS of Toyota
Source: PAMA website

2006-07 10% 30% 59%

2007-08 6% 28% 66%

2008-09 2% 29% 69%

2009-10 6% 23% 71%

2010-11 8% 25% 67%

2011-12 11% 18% 70%

Figure 5: Market share in the 1,300-1,600 cc categories

Source: PAMA website

3.4 DEMAND FOR CARS
The 2000s have been a turning point in the Pakistan automobile sector. In 1999-2000, the industry had a negative growth of 24% owing to lax demand. But since then, consumer demand surpassed available production capacities. Strong GDP growth, abundant financing, rising incomes, and a growing population were factors that caused

18

19
Pakistan’s automobile market to grow. In 2002/03-2006/07, annual growth in new passenger-car registrations averaged 33%. However, from 2007 onwards, sales declined and in 2007-08, registrations fell by 9%; the decline increased to almost 50% in 2008-09 as high consumer price inflation reduced disposable income and the worsening economic crisis took a toll on income growth. According to the data from the Pakistan Automobile Manufacturers Association (PAMA), passenger-car sales fell by 49.6% year on year in fiscal year 2008/09 (July-June) to 82,844. PAMA statistics, as quoted in the media,9 show that 1,000 cc cars sale decreased the most by 66%, to 14,683 units in 2009 as compared with 43,560 in 2008, while 1,300 cc and above dropped by 23% to 34,764 units as against 45,551 units in the same period. Sales of less than 1,000cc cars fell by 57% to 25,846 units as compared to 60,416 units last year. Data for November 2009 indicates a decline in demand of 19% from the previous month. 10 However the economy stabilised in 2009, helped by the government’s acceptance of emergency funding from the IMF in November 2008. This was reflected in increase in the sales of cars by 50% for the year 2009/10, and the number of cars sold rose to 123,957. In 2010/11, car sales grew by a small fraction to 127,944 units however sales growth of 23% was recorded for 2011/12, which proved wrong the speculation that the automobile industry would remain bleak due to weak economic growth.

3 . 5 T H E S U P P LY S I T U AT I O N
Production of cars in Pakistan takes place at 16 manufacturing plants. Consumers often have to wait for months before receiving new cars. Most carmakers have been announcing plans to increase production volumes over the next few years, such as Pak Suzuki, that initially had installed capacity of 50,000 units in 1994 that rose to 80,000 units and 120,000 units in 2005 and 2006 respectively. The current installed capacity of Pak Suzuki stands at 150,000 units in 2011. The increase in installed capacities of Suzuki (150,000), Toyota (50,000) and Honda (50,000) has not been utilized optimally by the three major producers that have production which currently stands at 65,340, 41,111 and 15,486 units for the year 2010/11 respectively. Toyota has the highest capacity utilization of 82% followed by Suzuki (43%) and Honda (31%).11 Even though the installed capacity of the manufacturers/assemblers can easily cater to the needs of the local market, yet the actual production of their units has not been up to the mark. Table 12 gives a comparison between the installed capacity and the actual production of the local car manufacturers. It also depicts that all the manufacturers/assemblers have excess installed capacities. The excess capacities maintained by the incumbent firms act as a barrier to entry for the potential new firms and helps in maintaining their respective market power. By not utilizing their excess capacities, the incumbent firms signal their inward looking approach towards domestic market.
Table 11: Installed Capacity of Car Manufacturers and Production Figures, 2007-2011

Company Suzuki Toyota Honda Others
Source: PAMA website

Installed Capacity 150,000 50,000 50,000 25,000 275,000

2007-08 102,378 33,640 14,201 14,491 164,710

2008-09 38,684 26,760 11,144 7,720 84,308

2009-10 60,782 43,510 14,120 3,235 121,647

2010-11 65,340 41,111 15,486 12,035 133,972

2011-12 88,148 46,352 12,485 3,635 154,255

Total

9

Car Sales Dip by 49% in 11 Months of FY09, Daily Times, 10 June 2009; http://www.dailytimes.com.pk/default.asp?page=2009\06\10\story_106-2009_pg5_3
10 11

Car Sales Fell 19pc in Nov, The News, 11 December 2009 http://www.thenews.com.pk/print1.asp?id=212652

Auto Makers Unveil Cautious Production Plans, Dawn, 22 October 2009, http://www.dawn.com/wps/wcm/connect/dawn-contentlibrary/dawn/news/business/19-auto-maidpakers-unveil-cautious-production-plans-hh-79

19

20
When one looks at the reasons of imbalance in demand and supply, the most important ones are the failure of manufacturers/assemblers to meet the production targets and change in their focus because of changing policies of the government. Starting from the year 2004-05, production of cars increased 27% as compared to the previous fiscal year because of unprecedented increase in demand of locally manufactured cars. This increase in supply was lagging behind the constant increase in demand and led to impediments and delays in deliveries. The gap between supply and demand led to premiums in the secondary market. The government hoped to address supply constraints through its Auto Industry Development Plan, which was approved in January 2007.12 The plan presented a five-year policy for the automobile sector. To this end, the plan permits new-vehicle assemblers to enter the market, allowing them to import completely knocked-down cars at the same duty rate, 32.5%, that is levied on imported parts. The new plan was expected to lead to a substantial increase in production and foreign investment in Pakistan’s vehicle-manufacturing sector but so far has not shown any tangible results in improving competition in the market, while production still stands way below potential. Data shows improvement for the first six months of financial year 2011-2012 (July-January), which showed total production up by 10.25% year-on-year, while sales were 17.13% higher than the same period of the previous year. However such improvement has not made it possible to meet the output targets set under the Automobile Industry Development Plan. 3.5.1

Imports

In 2004, the government permitted imports of reconditioned cars to meet demand. The import policy presented in October 2006 allowed the import of five year old used cars.13 Rules for importation of used cars were also formulated which provided that import of vehicles can be made under the gift, personal baggage and transfer of residence schemes. The Pakistani automobile industry went on the offensive about the import policy changes. PAMA and the PAAPAM said that it would be a massive setback for the countr y’s native manufacturing plants.14 However, the government of the time tackled the objections raised by the automobile industry on the grounds that there was a 30,000-40,000 gap in the supply of new cars in Pakistan which led to inflated prices and a long waiting period for delivery. Allowing imports would ease the burden on consumers. The government also increased the depreciation allowance on used car imports to two percent from one percent in the 2005-06 budget. Local industry was affected by the imports and the Federal Government constituted a committee in 2007 to assess the losses suffered by the local auto industry due to allowing the import of used cars, jeeps, light carriage vehicles, trucks and buses. The committee comprised of representative from the Engineering Development Board (EDB), Pakistan Association of Automobile Parts and Accessories Manufacturers (PAAPAM), and the four leading auto manufacturers - Pak Suzuki, Indus Motor, Honda and Dewan Farooq Motors. The committee was tasked to hear and compile the concerns of the stakeholders on the government’s import policy relating to used cars and analyse the import data of used cars. The committee was asked to review the import trends of used cars, taking into account the local production and demand and supply gap in the country. The terms of reference of the committee, however, did not include a single provision for safeguarding the interests of consumers. Based on its findings, the committee was to propose a future plan for the automobile industry.15 However, as yet, no tangible outcome or recommendation of this committee, assuming it still exists, has been seen. Imports shrank in 2009. The imposition of higher import duties as well as the steep depreciation of the Pakistani rupee against the US dollar made imports more expensive. Import duties have traditionally been prohibitively high, making imported cars (CBUs) expensive for all but the richest Pakistanis. In order to safeguard domestic manufacturers’ competitive advantage, customs duty on CBU’s remains at 50% for 800 cc cars, 55% for 1,000 cc cars, 60 % for 1,500 cc cars, 75% for 1,800 cc cars, and 100% for cars exceeding 1,800 cc. An additional regulatory
12

Auto Industry Development Programme (AIDP), Ministry of Industries, Production and Special Initiatives, Government of Pakistan, January 2008; http://www.engineeringpakistan.com/EngPak1/Auto%20Industry%20Development%20Programme%20(AIDP).pdf
13 14 15

http://www.commerce.gov.pk/SROs/0775-31072006-IPO.pdf http://www.usedcarspakistan.com/2006/11/06/pakistani-government-revises-policy-on-importing-cars-to-pakistan/ suffered by domestic auto industry; source

Allowing import of used cars, other vehicles: Body to assess losses http://www.dailytimes.com.pk/default.asp?page=2007\01\09\story_9-1-2007_pg5_1

20

21
duty of 50% for luxury cars that exceed 1,800 cc was imposed as an attempt to improve the current-account position by discouraging imports in the 2008/09 budget. The regulatory duty was, however, subsequently withdrawn. There is constant pressure from automobile manufacturing sector to ban the import of used cars completely, thereby restricting competition posed by foreign cars, albeit used. The automobile manufacturers have argued that a ban will help local manufacturers boost sales and when volumes grow, production cost will go down, thus benefiting the end user16. The automobile manufacturers have previously been successful in one way or another to restrict the import of used cars. Subsequently, the age limit for the import of cars was reduced from 5 to 3 years during 2007-08. The Federal Board of Revenue also reduced the depreciation rate from 2% to just 1%17 on the import of used cars in 2008, which further increased overall rates of duties and taxes on the import of used vehicles. On the other hand, assemblers have failed to bridge the gap between supply and demand, especially of cars of 800cc and 1,000cc engine size. The production of higher engine capacity cars remains the focus, which is apparent from the fact that in 2011, 1,300cc or greater capacity cars made up more than 83% of total production.

3.5.1.1 Regulatory Regime for Import of Used Cars
In 2009, the Prime Minister instructed the Ministry of Industries to bring down car prices, but the auto industry did not agree to tariff reductions, either on new cars, or on allowing the commercial import of second-hand cars. However, the prevalent import policy at that time for used cars under the Gift, Personal, and Baggage Scheme administered by the Ministry of Commerce was such that used cars up to 3 years old were importable, with a depreciation allowance of 1% per month subject to a maximum cap of 50%. In order to reduce the price of cars in the domestic market and increase consumer welfare, the Ministry of Commerce increased the allowable age limit for import of used cars from 3 to 5 years in December 2010, under the Gift, Personal and Baggage Scheme. Meanwhile, the Federal Board of Revenue (FBR) also increased the maximum cap of depreciation allowance to 60%18, while the depreciation allowance remained at 1 % per month. The cumulative effect of an increase in age limit for import of used cars from 3 to 5 years under the Gift, Personal and Baggage Scheme and maximum cap of depreciation allowance from 50% to 60% is that consumers may save a maximum of 12% of the assessable value in the form of specific tariff reduction, depending upon the timing of the export certificate in the country of origin.19 The domestic producers/manufacturers increased their production from 133,972 units in 2010-11 to 154, 255 units in 2011-12, and due to the lagged effect of policy relaxation in December 2010 and March 2011, imports increased from 9,486 units to 55,112 units during the same period. More affordable product variety became available to consumers; however, domestic manufacturers kept on increasing automobile prices during 2010-11 and 2011-12. On 31 August 2012, FBR issued a Custom General Order (CGO) 13/2012 which may have the effect of increasing the price of imported cars. Under the CGO 13/2012, the policy has been changed and contrary to the previous practice of ‘counting the depreciation month from the date of first registration’, depreciation will now be calculated from ‘the first day of January of the year subsequent to the year of manufacture till the date of shipment as per Bill of Lading (B/L)’. The differences between the two policies are as follows:

16 17 18 19

http://www.thenews.com.pk/print1.asp?id=210590 SRO.577 (I)/2005 through a notification S.R.O.25(I)/2009 dated 12.01.2009 CGO 02/2011 dated March 26, 2011

Under the 3 years allowable age limit for the import of used cars, and with maximum cap of depreciation allowance of 50%, the maximum depreciation allowance that could be availed is 48% (1% per month * 48 months; for example, in December 2010, vehicles of 2007 model would be importable, and if the export certificate is of January 2007, then from January 2007 to December 2010, 48 months depreciation allowance could be availed). Similarly, under the 5 years allowable age limit and with the maximum cap of depreciation allowance of 60 %, the maximum depreciation allowance that could be availed is 60 % ( 1% per month * 72 months - for example if we are in the December month of any year, then 5 years time period would be calculated as 72 months. Suppose, in December 2012, under the 5 years allowable age limit, the cars of 2007 model would be importable and if we calculate the period from January 2007 to December 2012, it would come to 72 months. But due to the maximum cap of 60 %, depreciation, the maximum depreciation allowance that could be claimed comes to 60% instead of 72%). The difference between maximum depreciation allowance under 5 years allowable age limit and 3 years allowable age limit with 1% depreciation rate comes to 12% (60%-48%= 12%).

21

22
a) Previously, registration book/export certificates issued by the competent authorities were used to avail depreciation in taxes/import assessable value at the time of clearance. After the recent change in policy, the Bill of Lading (B/L) issued by the shipping company in the exporting country would be used to avail depreciation allowances as stated above.

b) A more restrictive regime has been imposed. For example, if a person had imported a car manufactured in January 2007 (importable under 5 years age limit) under the previous policy that shipped to Pakistan in September 2012, then, the importer could claim a total cumulative allowance of 69 % (1% per month*69 months= 69 %; from Jan 2007 to Sep 2012) as depreciation allowance. But due to the cap of maximum depreciation allowance of 60 % on the import of used cars, the importer would have claimed the maximum benefit of 60 %. Under the current policy, due to insertion of words subsequent to the year of manufacture, the importer depreciation allowance would start from January 2008 and the importer would be able to claim a cumulative depreciation allowance of 57% (1% per month* 57 months; from Jan 2008 to September 2012). In a more restrictive scenario, if a 2008 model vehicle shipped from the exporting country in January 2013 (because in 2013, under the 5 years old policy, cars of 2008 model will be importable), the maximum depreciation allowance would be 48 % (1% per month * 48 months; from January 2009 to January 2013 ). The whole 2008 year of depreciation allowance has been denied to the importer due to insertion of the words subsequent to the year of manufacture, which will result in a price rise of roughly 12% of the assessable value in the domestic market (otherwise the importer could have availed a maximum depreciation allowance of 60 % under the previous policy that is from January 2008 to January 2013; 1 % per month * 60 months). For example, the assessable value of 1500 cc car is US$ 15,400. Then, due to the recent policy change, 12 % of US$ 15,400, which calculates to US $ 1,848, will be denied to the car importer, and this will increase the price of imported cars. The implications of this policy are such that the prices of imported used cars will increase in the domestic market depending upon the engine capacity of the car (due to different assessable values) because as time goes by, the importer will be able to claim more depreciation. The timing of increase in the price of the imported used cars will coincide with the launching of new locally assembled models and due to an oligopolistic market structure; domestic manufacturers may also increase prices of their new models instead of opting for an increase in production. As the prices of imported used cars would increase, the consumers may demand less imported car and may shift their demand towards domestic car manufacturers. Our domestic car manufacturers are not exporting their products; they are barely catering to the domestic market. Therefore, there would be a loss of consumer surplus, and producers would gain at the expense of consumers. In addition, an effective tariff protection of 12 % of the assessable value has been provided in the above example to domestic manufacturers through the policy change of 31 August 2012. It is noticed that the propensity to import is greater for the older vehicles under the current used cars import policy. The major reason for this is that the prevalent depreciation regime of 1 % per month, along with the allowable age limit of 5 years and maximum cap of depreciation allowance of 60 % tend to favour the import of older cars. Except for few cases, specific tariffs on new cars such as on 2012 models are so high 20 that these tariffs become prohibitive tariffs for the import of new cars. Consequently, the domestic automobile buyers have to rely

20

Buyers interested in purchase of new cars are most likely to rely on domestic manufacturers. This happens because if someone wants to buy 2012 model, due to less depreciation allowance available, it is not feasible for him/her to import a new model automobile. Depreciation allowance is a facility that brings down the high level of prohibitive tariffs into a feasible range, and the older the vehicle, the greater is the depreciation allowance. Therefore, there is an incentive to import older vehicles, and that is why there is so much debate on age limit and depreciation allowance for the import of used vehicles. There is a special tariff regime for Asian make vehicles with an engine capacity of up to 1,800 cc. For example, the tariff on up to 800cc is US$ 4,400, up to 1,000 cc is US$ 5,500, for cars between 1001-1300 cc is US $ 11,000, for cars between 1,301-1,500 cc is US $ 15,400, for cars between 1,501-1,600 cc is US $ 18,700 and for the cars between 1,601-1,800 cc is US $ 23,100. For vehicles from outside Asia and above 1,800 cc of any make, duty is calculated based on the Import Trade Price (ITP), and different methods for custom valuation are employed to determine the incidence of duty on imported vehicles. In addition, the import of vehicles is prohibited from India only while it is open from the rest of the world.

22

23
on domestic new models for their purchase of vehicles. This restrains consumers’ choice for better quality competitive products with advanced technology. Because of the policy change of 31 August, 2012, the consumer surplus of the consumers may decline due to the impact of denying the importers the benefit of depreciation up to a maximum of 12% of the assessable value. Due to this policy change, the consumers’ choice will be restricted. The policy for import of cars with an allowable age limit of 5 years remained in practice until 12 December, 2012. This policy was changed and the allowable age limit was again reduced to 3 years.21 If the cumulative effect of this policy change along with the earlier depreciation rules adjustment22 is worked out, the importers/consumers could claim a maximum depreciation allowance of 36% depending upon the timing of import. This move by the government is to further protect the domestic automobile industry. Trade openness is an important factor in fostering domestic competition as imports have a disciplinary impact on domestic firms. The imports not only impose a major constraint on the domestic firm’s market power (Price-Cost margins) but also both potential and actual competition induced by imports is effective in narrowing such margins. There is a vast theoretical and empirical literature that argues that import competition increases the perceived elasticity of demand for domestic firms, leading them to reduce their mark-up of price over marginal cost. The reduction of Price-Cost margins benefits consumers by increasing their welfare. In addition, import competition is expected to have the greatest impact on industries where domestic market conditions are such that competition would otherwise be weak. Furthermore, the imports have stronger effects for the less technologically advanced sectors and for small firms less capable of improving their product quality. The effect is also stronger for firms that sell their products mostly on the domestic market. The Pakistan auto industry is inward looking. Consequently, it tries to protect itself through the use of regulatory instruments. We need to develop the auto industry, instead of trying to protect it. For example, even imported cars with the present technology that are considered to be of better quality than domestic ones are going to be rendered obsolete in the near future. China has recently launched an energy saving scheme and the old technology vehicles are taken out of the encouraged sector in the Catalogue of Guidelines for Foreign Investment 2011 and the Promotional Catalogue of Energy Saving Automobiles 2011. In addition, sectors with excess capacities have also been taken out of the encouraged sectors. If our domestic industry needs to sustain itself, it should focus on advanced technology, instead of trying to protect old technology. Only through investment in technology, our domestic manufacturers can sustain themselves. The parts and components manufacturers need to be flexible in their approaches to handle the parts and components of high technology vehicles as well. Adapting to new technology and facing competition from the imported cars may force our producers to invest in the technology, prepare better quality internationally competitive products, and look outward to enjoy the benefits of economies of scale by serving larger markets.

3.5.2

New Entrant Policy

The first Auto Industry Development Programme was issued in 2008, and will conclude in 2012. The program contained the following salient features relevant to the new entrant policy: 1) In case of cars, the potential new entrant will have 500,000 units annual production in countries other than Pakistan. 2) The new entrant is also required to be manufacturing at least 25,000 units of trucks and buses separately, 40,000 LCVs and at least 50,000 Agriculture Tractors annually in countries other than Pakistan. 3) The new entrant will have serious and demonstrable intention to develop parts locally, either in-house or through the vendors, to achieve competitiveness. 4) Proof of land acquisition in the case of a green field project or an agreement with the owner, in the case of existing assembly facilities. 5) New Entrants will be allowed to import 100% of the CKD kit, at the leviable customs duty, for a period of three years from the start of assembly/manufacturing. The first condition of having 500,000 units of annual production elsewhere other than Pakistan is viewed as a barrier to entry, especially for small and medium producers that want to enter the domestic market. Thus, this
21 22

Ministry of Commerce SRO 1441 (I)/2012 Custom General Order (CGO) 31/2012 dated 31 August, 2012

23

24
policy attempts to attract only big players, whereas small and medium manufacturers are blocked. Similarly, the condition on the new entrant of manufacturing at least 25,000 units of trucks and buses separately, 40,000 LCVs and at least 50,000 units of agriculture tractors annually outside Pakistan is problematic for the following reasons: 1) It serves as a discriminatory entry barrier that puts the new entrant at a disadvantage as compared to the already established automobile manufacturers in the country. This is because no such requirement is imposed on Suzuki, Honda or Toyota that hold a dominant position in the passenger car manufacturing, whereas these companies have negligible presence in the truck, bus or tractor market. Such a condition would make it almost impossible for a new player that specializes solely in passenger car production to enter the market. 2) The relevance of truck and tractor manufacture to the eligibility of being permitted to set up a car manufacturing plant is questionable. A car manufacturer focusing solely on the car sector should be equally eligible to set up a plant in Pakistan as a manufacturer engaged in the manufacture of a broad range of vehicles. Hence this restriction serves as an unnecessary entry barrier and restricts competition. The AIDP did not reduce the Effective Rate of Protection (ERP) available to the local automobile manufacturers. The ERPs for the 800cc and 800-1000cc increased from 55% to 57% and 65% to 68% respectively during 2007-12 whereas the 1,000-1,500cc is the only category for which ERP fell from 73% to 68% in the same time period as shown in Table-14. The policy has not managed to improve the market dynamics in terms of competition, and since the inception of this policy up till now, no new entrant has managed to enter the automobile industry and market domination of the three major manufacturers in the local market has continuingly increased. The effective rate of protection is a commonly used measure for the net effect of trade policies on the incentives facing domestic producers. The Effective Rate of Protection in case of the automobile industry shows the benefit and added advantage that the domestic auto industry enjoys as compared to the imported Completely Built up Units (CBUs) in the form of high tariffs on CBUs. The measurement of effective protection in case of the automobile industry for various segments involves three inputs: % duty rate on CBU, % duty rate on CKD and the % import of CKD, termed as “a”. The formula is:

ERP23 = (% duty rate on CBU) – {(a* % duty rate on CKD)} (1-a) The Effective Rates of Protection for the 800cc, 800-1000cc and 1000-1500cc car segments are shown in the tables below along with the graphs showing the ERP trends across the first AIDP program (2007-12).

Table-14: ERP inputs and calculation for 800cc, 800-1000cc & 1000-1500cc car segments24

800cc 2007-08 2008-09 2009-10 2010-11 2011-12

CBU 50 50 50 50 50

CKD 35 32.5 32.5 30 30

a=% CKD import 0.28 0.28 0.28 0.28 0.28

ERP 55.83 56.81 56.81 57.78 57.78

23 24

Working Paper on Automobile Deletion Policy: An Analysis by Dr. Jaawaid A. Ghani. Inputs obtained from PAMA & AIDP report.

24

25

800-1000cc 2007-08 2008-09 2009-10 2010-11 2011-12

CBU 55 55 55 55 55

CKD 35 32.5 32.5 30 30

a=% CKD import 0.3464 0.3464 0.3464 0.3464 0.3464

ERP 65.60 66.92 66.92 68.25 68.25

1000-1500cc 2007-08 2008-09 2009-10 2010-11 2011-12

CBU 60 60 55 55 55

CKD 35 32.5 32.5 30 30

a=% CKD import 0.344 0.344 0.344 0.344 0.344

ERP 73.11 74.42 66.80 68.11 68.11

Figure-10: ERP of 800cc, 800-1000cc & 1000-1500cc segments under AIDP-1, 2007-12

25

26

By the end of 2010, the government noted that there is a need for a new program for the automobile industry considering that the five year term of Auto Industry Development Program (AIDP) would expire on 30 th June 2012. The Engineering Development Board (EDB) therefore formed a committee, in November 2010 of the stakeholders namely: Pakistan Automobile Manufacturers Association (PAMA) & Pakistan Association of Automobile Parts and Accessories Manufactures (PAAPAM) to discuss the tariff proposals. The new AIDP program is presently being finalized by the government. In a reply sent by PAMA to CCP regarding the performance of the previous AIDP (2007-12) and the projections of the next automobile program (2012-17), PAMA justifies the low target realization of the last AIDP 2007-12 as follows: “Unfortunately, from the latter half of 2007, the industry faced a decline in performance mainly due to general recession in the world, deterioration of the Pakistan Economy and increase in interest rate on Auto financing (20-22%). The Industry bottomed at 99,000 units in 2008-09 and is in the recovery phase, selling 147,000 units in 2010-11. During the last decade four OEMs had entered into the automobile market namely Hyundai, Kia, Nissan and Chevrolet with local collaborations to take their share from the growing market but due to market decline all the new OEMs had closed down, shaking the investor’s confidence in the industry very badly. Currently the industry is operating below their capacities (55% in case of passenger cars), which has dampened the interest of any new entrant.” PAMA states that the New Entrant policy is stipulated under Auto Industry Investment Policy (AIIP) of AIDP. According to PAMA: “As per AIIP a new entrant has the attraction on two counts: one the new entrant is n ot supposed to immediately localize the components for which the manufacturing facilities exist and which are importable at higher Tariff and, therefore, is allowed to import 100% CKD parts at 32.5% duty for a period of three years; and second the new entrant does not have to pay 50% duty on such parts which have been localized and which the new entrant is importing (as 100% CKD) whereas on import of such parts the existing OEMs have to pay penalty duty @50%.” PAMA is apprehensive of this new entrant policy and claims that: “Such a policy places the existing players at a disadvantage as compared to new entrants by usurping the level playing field, as the existing players, when they introduced new models, their investments are huge and still they have to follow the current Tariffs including 50% Custom Duty on Localized parts i.e. they don’t get any relief in tariff. Also when current OEMs had started their operations they were not given any incentives, instead they had to follow a strict deletion programme. Still the Local manufacturers have always welcomed new entrants in the industry as competition is always good for growth of the Industry. The industry believes that the tariff concessions available under the existing AIDP already give new entrants a cost advantage over existing OEMs in the case of introduction of new vehicles, creating an imbalance in the level playing field. Therefore there should not be any further tariff differential between the existing players and a New Entrant.” As far as the apprehensions of PAMA are concerned regarding duty rate reductions causing a non-level playing field, it is pertinent to mention here that the last AIDP 2007-12 did offer minor duty rate reductions on CBUs in

26

27
various car segments, however the duty rates on CKD had decreased as well, which resulted in even higher Effective Rates of Protection than before the inception and implementation of the AIDP program. Hence, the industry enjoyed substantial protection across the 5 years of the program. Granted that there was an economic downturn, but still it must be noted that the first AIDP program failed to meet the required production target by a large margin. Hence, measures that facilitate new entrants in the form of import tariff reductions and provision of favorable market conditions in their early years of entry should not be compromised on the premise that such measures would be detrimental for the already established industry. In reality, these steps would increase the efficiency of the automobile industry by raising the level of competition among the existing players and new entrants, the benefits of which would transfer to the consumers in the form of lower prices and more choices, and in the long run this would help the domestic automobile industry to compete at a global level through exports and generate revenue by adding value rather than remaining isolated to just the local market.

3.6 CAR PRICES
Car prices in Pakistan have been rising. The three leading manufacturers – Honda, Indus Motors and Pak Suzuki increased their prices thrice in 2008.25 Pak Suzuki raised its prices twice in the early months of 2008 and again in January 2009. It then lowered prices in April as well as in July 2009 to try to boost sales in the face of collapsing demand, but raised them again in September 2009 after the government’s imposition of 1% special excise duty in July 2009. In October 2009, both Indus Motor Company and Honda Atlas also announced price increases. In February 2010, Indus Motor Company once more announced price increases of PKR 10,000 on the basic model of the Corolla and of PKR 20,000 on the deluxe models. 26 According to a news item:
The Corolla prices have remained unchanged since October 2009, while during this period Pakistan rupee depreciated by 5% against the Yen, which translates to over Rs 30,000 per vehicle on imported CKD and over Rs10,000 in local vendor parts. In addition, there have been increases in labour wages and utility prices. All these factors have forced the local OEMs (Original Equipment Manufacturers) to marginally increase car prices, while absorbing most of the costs which has squeezed their margins and reduced profitability.27

Segment-wise price increases show that in the 800cc car segment, both Mehran VXR (Suzuki) and Cuore CX (Indus motors) experienced an initial fall and then a subsequent rise in prices from 2009 to 2011. For Suzuki Mehran VXR the price in January 2009 was Rs 539,000 which fell by 4.6% to Rs 514,000 in January 2010 followed by a rise in price to Rs 549,000 in January 2011. The price of the vehicle increased by 14% to Rs 625,000 in January 2012. In October 2012 this car was priced at Rs 632,000. On the other hand, Cuore CX in January 2009 started with a price of Rs 619,000, and rose by 7.4% to Rs 665,000 in January 2010. In January 2011 this price rose by another 7% to Rs 714,000. Price of this vehicle has recorded a significant increase in 2012 where the price rose by 18% to Rs 844,000 as compared to last year.

25 26

http://www.opfblog.com/2455/car-prices-in-pakistan-raised-third-time-in-3-months/

Indus Motor increases car prices, Dawn, 24 February 2010 (http://www.apnatime.com/4873/2010/02/24/general/costs-hit-indus-motorincrease-corolla-prices/)
27

Indus Motor increases car prices, Dawn, 24 February 2010 (http://www.apnatime.com/4873/2010/02/24/general/costs-hit-indus-motorincrease-corolla-prices/)

27

28
Figure 6: Price Comparison in the 800 cc Market Segment

Source: Price data received from Suzuki and Indus Motors

For the 1000cc segment the only player Suzuki experienced a price fall in both its models Alto VXR and Cultus VXRi in 2009. Price of Alto VXR fell by 8.2% in 2009 whereas price of Cultus VXRi fell by 8.4% in the same period. However, the price of both models increased again to their initial levels in 2010. After this period, the price increased substantially for both models in 2011 and 2012, where the price of Alto VXR rose by 9.3% to Rs 771,000 and Cultus VXRi recorded price increase of 8.3% to Rs 965, 000 in January 2012. The price of Cultus VXRi in October 2012 was Rs 985,000.

Figure 7: Price Comparison in the1000 cc Market Segment

Source: Price data received from Suzuki

28

29
The 1,300cc is the most competitive segment including Honda, Toyota and Suzuki. Suzuki Liana showed a continuous increase in price in this segment. Liana’s price rose by 10%, 4.5% and 11% across the 3 year period from 2009-12. In February 2012, the price of Liana was as high as Rs 1,282,000. Since then the price of Liana has increased by 7.8%% to Rs 1,382,000 in December 2012. In the same category, the price of Honda City fell by 5.6% in 2009, and rose again in 2010 and 2011 by 7.5% and 7% respectively. The 1,800cc recorded a continuous increase from January 2010 onwards after an initial price slump. The price of Civic VTI Oriel (Honda) rose by 12% from 2010-12 whereas the Civic i-Vtec model of Honda experienced a price increase of 9.8% in the same period. In October 2012 the price of VTI Oriel stood at Rs 20,000,000 whereas the price of Civic i-Vtec was Rs 18,380,000 recoding price increase of 1.5% and 3.3% respectively from February 2012 onwards. Toyota also depicted the same trend in prices as the Altis model cost Rs 1,754,000 in January 2010 followed by a price increase of 2.3% in 2011 and 4.7% in January 2012. The price of this model stood at Rs 1,899,000 in December 2012.
Figure 8: Price Comparison in 1,300-1800 cc Market Segment

Source: Price data received from Suzuki, Honda and Toyota

29

30
Table 13, shows the price affordability of various cars based on engine size, and attendant costs.28 Pakistan holds an affordability rank that ranges from 49-58 out of 59, which shows that for purchasing majority of the car types, Pakistan remains one of the most expensive and unaffordable country for an ordinary automobile purchaser. This analysis is done while taking into consideration the disposable income and the prices of different car categories and various costs involved in the purchase.
Table 12: Price Snapshot and Affordability Rank Item Low-priced car, 900-1,299 cc (low) Low-priced car, 900-1,299 cc (high) Compact car, 1,300-1,799 cc (low) Compact car, 1,300-1,799 cc (high) Family car, 1,800-2,499 cc (low) Family car, 1,800-2,499 cc (high) Deluxe car, 2,500 cc upwards (low) Yearly road tax or registration fee (low) Yearly road tax or registration fee (high) Cost of a tune-up but no major repairs (low) Cost of a tune-up but no major repairs (high) Annual premium for car insurance (low) Annual premium for car insurance (high) Price (US$) 7,412 7,971 13,562 18,834 14,904 49,521 51,118 160 192 95.85 128 719 1,597 % of Monthly Disposable Income Personal 19,416 20,880 35,526 49,334 39,041 129,717 133,901 418.4 502.1 251.1 334.8 1,883 4,184 Affordability Rank 55 out of 59 52 out of 59 57 out of 59 56 out of 59 53 out of 59 57 out of 59 52 out of 59 51 out of 54 49 out of 54 57 out of 59 57 out of 59 58 out of 59 57 out of 59

Source: The Automobile Industry Report Pakistan, October 2009, Economist Intelligence Unit

High tariffs on imports of cars had an impact on the price of the locally assembled cars, which rose. Given the lack of competition from imports, customer choices were limited. In the budget for Financial Year 2009, a 5% Federal Excise Duty was imposed on motor cars exceeding 850 cc. This duty was withdrawn, which benefited buyers of larger engine size cars, but the smaller engine-size segment (less than 850 cc), which has a higher demand in the market, will see no change in prices as the FED was not applicable. 29 Advance tax on the purchase of locally manufactured motor car/jeep has been extended to all types of motor vehicles and is collected by the registering authority of Excise and Taxation Department at the time of registration. While it may not be reflected in the vehicle price, it will still factor into the final cost of vehicle acquisition by the customer.30 3.6.1

Price Parallelism

A price comparison of similar models in various market segments of the industry based on engine size was done. For this purpose, historical price data was collected from various car manufacturers for the last four years 200912. The analysis has been conducted using common data points between competing models in each market segment. The price comparisons recorded in Figures 6 to 9 above show a clear trend of price parallelism in the industry. In every segment, each competing model follow the other as far as price goes. Their prices rise and fall in a synchronised manner. This blends in perfectly with the earlier observation that there are market leaders in every market segment in the industry which entails that the others are most likely followers. However, this data analysis on its own does not present any clear causality for the price parallelism. Some may construe this price parallelism as evidence of a cartel in our domestic industry, but a few words of caution (borrowed from the OECD) are necessary:

28

The Automobile Industry Report Pakistan, October 2009, Economist Intelligence Unit. Affordability rank: for each country the price of an item as a percentage of monthly personal disposable income is calculated. Countries are ranked according to these percentages and the most affordable country will have the lowest percentage and be ranked first.
29 30

Research by different sectors by BMA Capital Management Limited, 2009 Research by different sectors by BMA Capital Management Limited, 2009

30

31
…whether or not conscious parallel behaviour constitutes an illegal action which is restrictive of competition is a subject of controversy in both competition law and economics. Price uniformity may be a normal outcome of rational economic behaviour in markets with few sellers and homogenous products. Arguments have been advanced that the burden of proof must be higher than circumstantial evidence of concerted or parallel behaviour and uniform pricing and output policies. In other words, conscious parallelism in and of itself should not necessarily be construed as evidence of collusion. The problem arises more from the nature of the market or industry structure in which firms operate than from their respective behaviour.31

Thus, signs of similar prices or change of prices at the same time is not always an indicator of conscious price parallelism. And while it can be perceived that price parallelism is more prevalent in non-competitive markets, it can occur even in a highly competitive market, in which prices can be similar or move in tandem because of market forces. Such price parallelism is more likely if: (i) Products sold are homogeneous or very similar, which makes it difficult for businesses to charge different prices to customers; (ii) The products share similar sources of inputs, which means that competitors are subject to similar cost fluctuations in setting their product prices; and (iii) Prices are highly visible, which allows businesses to monitor each other’s prices closely and match competitors’ price movements. As far as the domestic automobile industry is concerned, the price parallelism does not necessarily imply collusion. In fact the price parallelism depicts the basic nature of the industry where products offered by the automobile manufacturers are more or less similar and they are faced with similar cost functions. However, the constant rise in the prices of automobiles does show lack of competition and immense power of domestic automobile manufacturers to shape the market.

3.6.2

Safety Standards, Quality & Emission Control Policy

It is imperative to benchmark the performance of the domestic automobile industry against the world practices by adopting globally accepted standards and regulations governing the production of quality products. There are certain laws and motor vehicle acts that ensure the roadworthiness of vehicles such as Section 39 of the Motor Vehicles Ordinance (MVO) 1965 and Section 35 of The Motor Vehicle Rules (MVR) 1969 that deal with the issue and renewal of certificate of fitness of vehicles, whereas Chapter 6 of MVR 1969 deals with details of body construction, essential equipment and requirements for the maintenance of a motor vehicle.32 It must be noted that the emphasis of these laws is clearly on the management aspects of the vehicles, whereas only a few sections deal with the environmental aspects, such as sections 154, 158 dealing with the horns and noise and section 163 related to the emission of smoke vapour of grease, without any specification of standards and testing procedures.33 In the year 2000 the government established Pakistan Standards and Quality Control Authority (PSQCA) for the development of Metallurgy, Standards, Testing and Quality infrastructure. However, the facilities and resources available with PSQCA are inadequate and so far PSQCA has developed standards for only 2 wheelers. 34 Due to the absence of regulation, the domestic automobile manufacturers do not offer safety features such as Anti-lock Breaking System (ABS), airbags and emission standards along with quality specifications such as alloy rims, power steering and windows in all their vehicles.
31

Definition of “Conscious Parallelism” taken from the OECD’s Glossary of Industrial Organisation Economics and Competition Law , pg 26. The glossary is available online at www.oecd.org/dataoecd/8/61/2376087.pdf. See also Conscious Parallelism and Price Fixing: Defining the Boundary by Michael K. Vaska, The University of Chicago Law Review, Vol. 52, No. 2 (Spring, 1985), pp. 508-535
32

Auto Industry Development Programme (AIDP), Ministry of Industries, Production and Special Initiatives, Government of Pakistan, January 2008; http://www.engineeringpakistan.com/EngPak1/Auto%20Industry%20Development%20Programme%20(AIDP).pdf
33 34

See Supra note 30. See Supra note 30.

31

32

The Table-14 shows safety and quality features offered by Suzuki, Honda, and Toyota in various models. As far as quality features are concerned, alloy rims for vehicles are only offered for Altis (Toyota), Swift (Suzuki) and Civic Vti Oriel (Honda). Suzuki does not offer power steering for Mehran and power windows are absent for the XLI model of Toyota and Mehran and Cultus model of Suzuki. An important point to note is that the Japanese imported car Vitz is available with ABS and air bags with almost all basic safety and quality features. At the same time, Swift is locally assembled and competes directly with Vitz; however it does not offer air bags and lacks many basic features such as a rear viper.35 Safety features such as ABS is absent in all models of Suzuki except for Swift, whereas all models of Honda have this feature and Toyota lacks ABS in its XLI. Airbags, another important feature required for safety purposes is absent in all models of Suzuki, whereas Toyota does not offer airbags for its XLI and GLI models. Similarly, emission standards are absent for all models of Suzuki and Toyota. It is pertinent to mention here that ABS systems are required on all new passenger cars sold in the EU since 2007, whereas all across the world, vehicle safety ratings encourage manufacturers to take a comprehensive approach to occupant safety and a good rating can only be achieved by combining airbags with other safety features. Thus, almost all new globally manufactured cars come with at least two airbags as standard.
Table-14: Safety and quality features offered for Suzuki, Honda and Toyota models

Safety features Car Type ABS Airbag Emission standard Suzuki Mehran Swift Cultus Liana X  X X X X X X X X X X Honda Civic VTI Oriel Civic VTI I-VTEC City     X X X   Toyota XLI GLI Altis X   X X  X X  X X   X X X  X X Alloy Rims

Quality features Power Steering Power Windows

X  X 

X  X 

  

  

  

X  

Source: Suzuki, Honda, Toyota website

Engine technology has improved significantly over time and modern engines are more responsive, fuel efficient and cleaner emission-wise than their counterparts from 15-20 years back. In most countries there are strict regulations on the emission, safety and road-worthiness of vehicles that ensures that cars new and old meet
35

"Toyota Honda Suzuki Chevrolet Nissan Pictures Reviews Pakistan." Which Is Best Option, Swift or Vitz. N.p., n.d. Web. 24 Aug. 2012. <http://www.pakautocar.com/blog/which-is-best-option-swift-or-vitz/>.

32

33
minimum criteria and older cars get off the road to keep the population of vehicles in check. Some would argue that the automobile manufacturers gain most from it but it is also important to see the impact o the environment and the consumers both of whom may gain due to these regulations. In developed countries cars are required to go through an annual emission test ensuring vehicle meets minimum emission standards. This is a pre-requisite for renewal of registration and vehicles which do not meet the emission requirements, have to get it fixed prior to renewal and a re-test is needed in this regard. The emission standards ensure vehicles pollute less and at the same time there is a direct link between low emission and better fuel efficiency. Likewise standards are also set for manufacturers both on emission and safety which automobile manufacturers adhere to. In European Union the emission standard defined as Euro 1 – 6 compliance is required and currently standard is 5 in force since September 2009 and moving towards the Euro 6 which may be implemented in September 2014. Pakistan has an aging automobile population which is an increasing burden to the economy and a growing safety hazard. Without legislation to control these aspects the industry cannot truly grow and flourish. Therefore, provinces need to develop and implement the vehicle emission standards. Keeping the above discussion in mind, it is apparent that the lack of standard safety and quality features in locally manufactured vehicles is making the domestic industry less competitive with respect to the global market, reducing the prospects for export. In the current environment, it is imperative that PSQCA builds up its capacity of inspection, audit and testing system and establishes links with international counterpart agencies to get accreditation of labs and standards.36 The Automobile Industry cannot compete globally without the establishment of strong standards and accreditation within the country; hence development of standards for all the vehicles produced locally is required. In order to achieve these goals, the government should announce clear time lines for the implementation of standard safety and emission policies and at the same time the automobile manufacturers should voluntarily comply with international safety and quality standards that would ultimately make them globally more competitive and offer consumers good value for money.

3 . 7 PA Y M E N T O F P R E M I U M B Y B U Y E R S
It is common for customers to pay additional money to ensure delivery of their vehicles within a short time period. These supplementary payments have come to be known as “on” or “premiums.” The forces of demand and supply determine the level of premium payments prevailing in the market. As certain models of cars – generally the newer ones at the time of their launch – have a much higher demand, dealers generally charge a premium on faster delivery of the vehicle. The government has termed this an “illegal practice.”37 The four major manufacturers were contacted to clarify their policy on charging of premiums. Honda Atlas, Indus Motor Company, and Pak Suzuki responded. The salient points of their replies are reproduced below: 3.7.1

Honda Atlas
“Honda Atlas Cars (Pakistan) Limited is principally against the premium on the cars. However, a reasonable time delay is unavoidable due to colour/model choice (We make 6 versions of Civic & City in 7 various colours. In order to cater to one customer right on the counter, we need to keep 6 x 7 = 42 units at only one dealership and we have a network of 20 dealers all over Pakistan. So practically we have to have at least 840 units available all over Pakistan to cater to one customer right on the counter. In this case if the 2nd customer wants the same colour/model from the same dealership, he has to wait for next available production or visit some other dealership. In case of the 2nd customer, the sales staff will ask the customer to please wait for some time. May we highlight that we as a company take a very serious view of premium if changed by our authorized dealers. We, however, have no control on cars purchased by investors & unauthorized car dealers for resale purposes. Legislation is the only solution to curb this practice for which we have already made requests to the Government through the Ministry of Industries and Production.”38

36

Auto Industry Development Programme (AIDP), Ministry of Industries, Production and Special Initiatives, Government of Pakistan, January 2008; http://www.engineeringpakistan.com/EngPak1/Auto%20Industry%20Development%20Programme%20(AIDP).pdf
37

Car Makers Asked to Explain Reasons http://www.aaj.tv/news/Business/152441_7detail.html
38

Behind

Low

Production,

Aaj

TV

Website,

17

November

2009;

Honda Atlas Cars Pakistan’s letter to the Commission, 9 December 2009

33

34
We would like to make the observation that the 840 units that Honda mentions in its argument do not cater to one customer, as Honda states. In fact, by having those 840 units in its 20 dealerships, Honda is ready for several customers to walk into its various dealerships, and purchase the car of their choice. In the unlikely event that two customers walk in one after the other looking for the same car, Honda can always provide it through a nearby dealership. Hence there is no strong case that can be made to justify delays in the provision of cars. 3.7.2

Indus Motor Company
“Unfortunately, despite our best efforts, investors, individuals, non-dealers taking advantage of our transparent and fair policies, book orders with us through dealers in large quantities on a regular basis. As the company is unable to distinguish these orders from regular orders from genuine customers, these vehicles are also produced, processed and delivered according to the First In First Out (FIFO) principle. When these investors receive these products, they are offered for resale on a spot basis to customers at the premises of non-dealers and even frequently advertised in the newspapers with a premium demanded. Naturally, when these investors book more vehicles, the delivery times may increase. Unfortunately, many customers refuse to book orders with the Company and prefer to pay premiums for ready delivery. This creates a vicious circle which rewards the investors, even though if customers exercised restraint and refused to pay premiums and booked orders with the Company, they could obtain those vehicles without any premium within a reasonably short period.”39

We would like to point out that we disagree with the suggestion of Indus Motors that customers, dealers and investors cannot be distinguished. Dealers are clearly identifiable as Indus Motors work directly with them. As has been pointed out by Indus Motors itself, investors usually order in bulk, while customers order individual or a small number of cars. Hence, investors and customers can be identified with a fair degree of accuracy. It is up to Indus Motors to address the issue of premiums that stems from the activities of investors. 3.7.3

Pak Suzuki
“Pak Suzuki as a progressive organization has a firm belief in fair and competitive market practices and fixes ex-factory prices of all its models/vehicles in different segments which can be placed on order and booked at the same ex-factory rates throughout a wide network of authorized dealerships. As Pak Suzuki is continuously delivering its products to all authorized dealers before getting orders/payments, sufficient stocks are available at these dealers. As such, our pricing structure has no relevance with any variations upwards or downwards, solely determined by market supply and demand forces, and customers receive value.40

Pak Suzuki has a different stance compared to Indus Motors and Atlas Honda; Indus Motors and Atlas Honda accepted that the problem of premiums existed whereas Pak Suzuki clearly stated that this is not the case and premium is not a concern as far as Pak Suzuki and its products are concerned. It is important to mention here that Pak Suzuki holds a dominant position in the 800cc and 1000cc car segments, and if the claim made by Pak Suzuki is true then the problem of premiums lies primarily in the 1300cc and above car segments. Pak Suzuki caters to an excessive demand from the middle income households, and it is unlikely that supply shortages and premiums do not occur at all in the car segments dominated by Pak Suzuki. The report on the automobile sector produced by the Monopoly Control Authority in 200541 identified where the problem existed at that time period when the demand for cars was at a high point:
81. The problem of premium did not exist at the level of car manufacturing companies, but it was at the level of investors who took the car as an investment property and managed to book hundreds of cars through fake identity cards and took delivery of the vehicles to hoard and create artificial shortage in the market and to sell at a premium price. It is learnt that the business community of Jodia Bazar, Karachi was prominently involved in this practice and a single investor of Jodia Bazar was holding not less than 700 cars at the moment. 82. The problem of artificial shortage of car in the market, causing delay in delivery of cars and charging of premium price lies in the secondary market and not at the end of car assemblers. As far as the issue of charging of 100% advance payment is concerned, the policy was, in fact, adopted to encourage the
39 40 41

Indus Motor Company’s letter to the Commission, 14 December 2009 Pak Suzuki Motor Company’s letter to the Commission, 3 December 2009 Enquiry Report on Car Industry, Monopoly Control Authority, 2005

34

35
genuine buyer to book a car. Had part payment been accepted as down payment of a car, it would have aggravated the problem manifold. Therefore charging of full price at the time of booking and payment of mark-up at market rate after 60/90 days of the booking was considered as more advisable proposition. However, the mark-up is to be paid to the customer at the short term lending rate of the Banks.

The three automobile manufacturers stated that they did not encourage the practice of charging premiums. In fact, Indus Motor Company has been actively running advertisements in early 2011 to encourage people to purchase cars from the company and not from the investor resellers. However, from a multitude of media reports, premiums are charged by the dealers to expedite delivery of vehicles. This may require a look at the dealership agreements and the booking system between the manufacturing companies and the dealers in order to check if there are indications of collusion between the two parties.

3 . 8 D E A L E R S H I P AG R E E M E N T S A N D B O O K I N G S YS T E M
3.8.1

Dealership Agreements

Analysis of the dealership agreement of one of the automobile manufacturer indicates that a dealer is given the non-exclusive right to undertake the sale and services of the products offered by the automobile manufacturer and in a sense the dealer is an agent or partner or representative of the manufacturing company. Cars delivered at the showroom of a dealer remain the property of the company and the transfer of ownership of the company products from the manufacturing company to the customer becomes effective upon making payment. A dealer is prohibited from acting as dealer or having interest in any business engaged in the manufacture, selling or servicing of any motor vehicles, spare parts, accessories, chemicals and tools other than the manufacturing company’s products. The automobile manufacturer determines the maximum/final suggested selling price which is inclusive of the dealer’s commission and conditions for sale of the company products. However, where the dealer himself is a customer, he will be entitled to a discount equivalent to commission. The Dealer is under obligation to pay due regard to such prices and terms and condition as determined by the automobile company. The dealer is also responsible for the sale of products in the quantity for each year as agreed between the dealer and the company, and if dealer fails to sell such annual planned quantity he will be answerable to the manufacturing company. The Dealer places orders with the automobile manufacturer semi-annually together with sales plan for this period, however, the manufacturing company has discretion to fulfil all or such part of the order as it deems appropriate. The automobile manufacturer reserves the right to directly sell company products to municipalities, government offices and state owned enterprises. The manufacturer also has the right to make retail sales to real persons or legal entities inside the main sales area. In order to promote the sales of new vehicles, the dealer accepts the handling of used cars in trade for new vehicles, excluding unregistered cars imported under used cars scheme. To promote timely delivery and service to customers, the dealer is obliged to keep at least a two week stock of the company vehicles, the number of which is be determined by the automobile company. Dealership agreement of another manufacturer indicates that under certain circumstances, the automobile manufacturer reserves the right to sell any of its products directly through channels other than the dealers. Each transaction for the automobile between the manufacturing company and a customer is carried on under an individual sales contract. The dealer forwards individual sales contracts for all such automobiles in the same month for affecting sales and commission. Upon receiving order placed, the manufacturing company notifies the dealer for the acceptance of the order. Depending on the market situation, the manufacturing company may on its discretion reduce the supply of automobiles to dealers irrespective of the past level or planned level of sales by a dealer. However, to promote timely delivery and service to the customers, the dealer has to display cars whose number is determined by the automobile manufacturer. The manufacturing company can change the price of automobiles and other products at any time at its sole discretion. Such price change shall apply to any order placed which has not yet been delivered. Suggested retail prices are fixed by the automobile company and dealers are prohibited from giving discounts to customers. Every year the manufacturing company and its dealers study the market situation prevailing in the automobile industry and derive a forecast of the projected demand for the automobiles. To promote timely delivery and service to the customer, the dealer has to display cars equal to a demand of roughly two weeks of the automobiles, and this

35

36
number is determined by the manufacturing company. Every dealer has to submit a business plan prior to commencement of each calendar year, which highlights the sales plan for the automobiles, spare parts and accessories, sales strategy for business expansion and increase in market share. 3.8.2

Booking System

Booking policy during the years of peak demand (2002-2005) was uniform for all manufacturers – all companies took the full payment in advance on the pretext of discouraging speculators, investors and fake customers, who used to book numerous cars on nominal down payment terms. Manufacturers maintain that this policy helped reduced the delivery backlog by almost 50%. Procedure of booking of cars for different automobile manufacturers varies with the type of vehicle. Physical deliveries of vehicles are made as per the month of delivery agreed between the customer and dealer. In case of delay beyond a prescribed period mark-up is paid where applicable. However, this policy does not seem to be currently in effect. The booking information is not readily available with the automobile manufacturers; however, they do have estimates of average delivery periods for various models. According to one automobile manufacturer, it had decided to discontinue the balloting procedure in response to customer feedback, and now the customers’ orders are served on first come first served basis. It was also claimed by the manufacturing company that their prices were uniform at all times, and it was not the company policy to demand or accept any extra payment for expediting deliveries. Front page advertisements in 2010 and early 2011 in local newspapers also confirm the company policy of not encouraging a policy of premium payments. 3.8.3

Observations

The relationship between manufacturers and dealers is interesting, where one automobile manufacturer defines the relationship with its dealers as that of principal and agent whereas another manufacturer categorically says that its relationship with its dealers is not a principal-agent relationship. However, the nature of duties performed by dealers in the case of both assemblers clearly falls under the category of an agent. Dealers are not the owner of the property. Cars delivered at the show room of a dealer remain the property of the assemblers and transfer of ownership of the cars from the assemblers to the customers become effective upon making payment. The assembler determines the final price of the cars to be sold and also the commission of the dealer. Assemblers make supplies to their dealers in the quantities as per their discretion. Assemblers determine the number of vehicles for two weeks stock, to make the cars available for delivery to customers. The relationship of dealers with their manufacturers/assemblers helps understand the market structure in the automobile industry. The automobile market is segmented according to the engine size of cars. These few market players do not face competition from each other in their respective sphere of market based on engine-size. They sell their cars through channels which are merely their extensions and there is absolutely no competition in the downstream market for a particular brand of a car. Dealers act on the advice of their respective manufacturer/assembler, who determines the terms and conditions of the availability and price of the cars in the market. This leads to a total lack of intra-brand competition. Absence of inter-brand competition among the assemblers and further lack of intra-brand competition at the level of dealers has manifested itself in late deliveries and charging of premiums. The current dealership/supply chain structure in the industry does not allow for meaningful competition. Dealerships are merely agents of the manufacturing companies and have no real incentive to compete in the market. It is the company that controls the quantity to be sold and the price to be charged. These dealership agreements go on to eliminate intra-brand competition by disallowing discounts. It must be noted here that the existing booking structure contributes to the lack of competitiveness. Customers, by paying the full price of the vehicles months in advance, are not just covering the product based variable costs for the companies, but are also losing interest they could have earned in the capital markets. On the other hand, the companies are enjoying a break on investment as well as reaping the interest that accrues on the advance payments made by the customers. For these reasons, it seems appropriate to revise the dealership and booking arrangements so as to solve the problems that have been highlighted.

36

37

4 Recommendations and the Way Forward
An important element of any competition assessment is to identify the beneficiaries and affectees of any lack of competition in the market. The Pakistani passenger car market only has three major players, each of which dominates a different segment of the market. Hence, the noticed vulnerability in our automobile industry is the lack of internal as well as foreign competition. Therefore, to improve the competitiveness of the industry, the following recommendations are put forward: 1) Commercial import of used cars should be allowed and open to all. The prevalent scheme of allowing used car imports under the Gift, Personal and Baggage Schemes adds to transaction costs in the form of extra legal formalities, in addition to high import duties. This practice should be replaced with open commercial import of used cars. 2) The recent reduction of age limit for import of cars from 5 to 3 years 42 will make the import of cars unfeasible owing to limited depreciation allowance and therefore will eliminate competition, posed so far to a limited extent, by foreign cars on local manufacturers. 3) On the other hand, the import of cars older than 5 years may be subject to strict road worthiness tests. The import of used cars older than 5 years may not provide effective competition to local new cars. For example, the import of 10 year old used cars may enable advanced countries to dump their discarded cars and there is high probability that these cars may have low road-worthiness. Experience shows that imports of extremely old cars often raise the issue of non-availability of spare parts as well, and these cars became unserviceable. 43 4) Significantly lower and relatively more uniform tariffs should be introduced across all categories of automobiles, and the tariff structure should be finalized in consultation with the National Tariff Commission (NTC).44 We understand that higher tariffs have historically been placed on bigger capacity luxury cars and lower tariffs on smaller capacity cars based on the idea that the wealthier buyers of the expensive cars can bear the burden of higher tariffs, while middle-income buyers of smaller cars struggle to be able to afford the smaller cars. However, extremely high tariffs on luxury cars suppress demand and create a significant entry barrier for foreign players. High tariffs must not become prohibitive tariffs, rendering import of new vehicles unfeasible.22 Since 2007, the auto tariffs have largely remained stagnant in Pakistan; therefore it is the need of the hour to end the excessive protection that has been provided to the domestic automobile manufacturers. This will provide relief across the spectrum, and also push the local car assemblers to become more competitive. Consequently, the Effective Rate of Protection (ERP) across all categories would be significantly lowered. In this way, the industry will be exposed to greater global competition and the internal distortions caused by varied rates will be reduced. Incentives should also be provided to the assemblers/manufacturers in the form of low tariffs on raw materials. 5) The reduction of depreciation allowance for used cars45 should be reconsidered. This measure is likely to reduce consumer welfare by increasing the prices of imported cars in the domestic market. Hence, in effect, it may restrict consumer choice and facilitate a protective rather than a competitive environment. 6) Mandatory testing for emission and road-worthiness are needed to be introduced as part of a regulatory regime which may not only determine the minimum criteria in line with EU or North
42 43

Ministry of Commerce SRO 1441(I)/2012 dated 12 December, 2012

In India, second hand/ used vehicles are required to have minimum road worthiness for a period of 5 years from the date of importation into India, with the assurance of service facilities within the country during the five year period.
44

Previously high duties have been reduced and we note that we are moving in this direction on high end cars. We need to keep moving in this direction, more vigorously.
45

Custom General Order (CGO) 13/2012 dated 31 August 2012

37

38
American standards but also keep abreast of international developments. Emission testing should be an annual requirement for any vehicle over 2 years old while road-worthiness test should be bi-annual (after two years) for vehicles over 3 years age and mandatory as part of resale or registration transfer. Renewal of registration would be dependent on the passing of these tests. 7) Legislation should be introduced to prohibit premiums charged by the manufacturers and the dealers and to restrict hoarding by unscrupulous investors or traders of cars. The existing booking structure negatively impacts competitiveness as well, imposing an additional burden on customers. By paying the full price of the vehicle months in advance, the customers are not just covering the product-based variable costs for the companies, but are also losing interest that they could have earned otherwise. The car manufacturers claim to oppose the charging of premiums, however, they seem to adopt a “look the other way” policy on the issue of premiums charged by the dealers to expedite delivery of vehicles. According to the dealership agreements studied by us, it is the manufacturing company that controls the quantity to be sold and the price to be charged. Hence, dealerships are merely agents of the manufacturing companies and have no real incentive to compete in the market. Strict laws that prohibit both parties (manufacturers and dealers) from charging premiums would be beneficial for the consumers as well as for the automanufacturers and dealers that apparently declare premiums to be a false practice. The way forward for the automobile industry in Pakistan lies in the removal of investment and regulatory barriers. It is time that the practice of giving excessive protection to the industry through high import tariffs and custom duties is discontinued, and tariffs and duties are significantly lowered and made relatively more uniform across different categories. In this way, the industry will be exposed to greater global competition and the internal distortions caused by varied rates will be reduced. At the same time doors for foreign investment and new players should be opened so that a more competitive environment can propagate in the automobile industry.

38

39

Annex 1: Methodology
1. SOURCES
OF THE

METHODOLOGY

For the purpose of this study, the OECD’s Competition Assessment Toolkit46 and the Department for International Development’s (DFID) Competition Assessment Framework47provided useful guidelines. According the Toolkit, Governments establish and enforce laws, rules and regulations to achieve desirable policy goals. Such regulations sometimes affect the nature and degree of competition. A competition assessment is thereby a process of evaluating government regulations, rules and/or laws to (1) identify those that may unnecessarily impede competition and (2) aid in their redesign so that competition is not unduly inhibited. A competition assessment is not only assessment of laws and their impact on competition but also the behaviour of market players and its effect on the competition. A competition assessment should analyse the strength of competition in the relevant market/s, and should identify any factors impeding more effective competition. Sectors selected for competition assessment should be both important to the economy or consumers, and have characteristics that suggest competition might be limited. Where competition is found to be limited, an estimate should be made of the likely extent of the harm that results from this. An assessment should conclude with a view on whether there are competition problems in the sector that require correction, and if so, what the most appropriate remedies are. The Framework lists several steps to assess the state of competition in a selected sector. We present only those steps that are most relevant for our study. These steps are:

2. IDENTIFY

THE

R E L E VA N T M A R K E T S

A ‘market’ is a group of products most buyers regard as being reasonably substitutable for each other, taking account of their respective prices and conditions of sale. Markets have geographic limits that depend on the product’s value, the cost and availability of transport, and other factors. For our purposes the automobile market in terms of product includes passenger cars only. The geographic boundaries/limits of the market consist of whole of Pakistan. For our product market, we divide it according to the engine size, particularly, for passenger cars market. This addresses the question of products being reasonably substitutable.

3. IDENTIFY

THE

C O M P E T I TO R S

Any competition assessment must begin by identifying the market suppliers. Identifying existing competitors means taking a look at who supplies the market as well as who are the main buyers and what are their purchases from these suppliers. If there is a discernible pattern, it could mean that the market is less competitive that preferable.

4. EXAMINE

THE

MARKET STRUCTURE

Market shares are an important indicator of market structure and market power. Market shares are usually measured by the value of sales, but the quantity of goods sold or the capacity of the suppliers may also be relevant. For our analysis of the market shares see our section below on market shares. DFID competition assessment framework also outlines the following question as important for determining and examining market structure. These are: a. b. c. d. e.
46 47

Have the market shares of the major suppliers (or buyers) been stable over a long period? Has there been much market entry in the past and how successful has it been? Does a single buyer, or a small number of large buyers, account for a substantial part of the market? If the concern is with the market behaviour of the buyers, rather than the sellers, does a single seller or a small number of large sellers account for a substantial part of the trade? Does the market structure suggest that competition might be limited?

OECD Competition Assessment Toolkit 2007, available online at http://www.oecd.org/dataoecd/15/59/39679833.pdf Competition Assessment Framework, DFID, 2008, available at http://www.dfid.gov.uk/Documents/publications/comp-assess-fwork-2008.pdf

39

40
We address these questions in our sections below on investment policies and market shares in the automobile sector. The framework particularly points out that in this context issues of interest are how long the new firms stayed in the market, how successful they were in winning market share and how long it took them to get to a significant size.

5. LOOK
a. b. c.

FOR

BARRIERS

TO

E N T RY

There are three types of main barriers that can restrict competition in market. These are Natural Barriers Strategic Barriers Regulatory and Policy Barriers

Natural barriers result from resources or technology needed to become a supplier in the market. They could include the existence of large economies of scale, such as with network industries. Other natural barriers include problems that new entrants would have in obtaining access to technology, raw materials, or distribution channels. Another example is where entry into a market would require large ‘sunk costs’. Strategic barriers resul t from actions by existing suppliers that are intended to discourage new entry. They could include:   creating excess capacity (If significant excess capacity exists, this could reduce the interest of new firms in entering the market); ‘bundling and tying’ (to force new entrants either to compete for the grouped products or to compete on one product; However, there might be good reasons for this pattern if it is cheaper to produce the bundled products together than separately); arranging long term exclusive contracts and exclusive supply and distribution agreements; Individually or collectively acting in ways that indicate the incumbent firm or firms would act in a predatory or aggressive way if new entry took place, such as through price responses.

 

The third type of barriers may exist because of government regulations and policies specific to certain economics sectors. The rationale for restrictions that limit competition requires objective justification. Firms in the sector might be hindered by factors such as licensing restrictions, foreign direct investment (FDI) restrictions or trade barriers. If there are any regulatory barriers that restrict competition, the harm likely to result from the loss of competition should be compared with the benefits claimed for the existence of the barriers. However, other possibilities for limited market entry must be considered. For example, there might be a natural monopoly, or there might have been no significant growth in the size of the market, or the government might not have granted licences required for entry).

6. LOOK

FOR

ANTICOMPETITIVE CONDUCT

Ascertain if government policies or institutions limit competition.

i) State-Owned Enterprises
The issue of whether competition in a market is distorted by the existence of a state-owned enterprise requires examination. A related issue is whether privatised state-owned enterprises were given a preferential position when the new owners acquired the business, such as monopoly rights to provide certain goods or services.

ii) Public Procurement
Public procurement can represent a significant part of trade in an economy, and the way in which procurement is undertaken can raise substantial competition issues. Where a government is a major buyer of the product/s, the way in which it organises its procurement might limit the scope for new competitors to enter the market. There could be a negative impact on competition if there is no requirement for a minimum number of tenders, or there is a short time period for responding to tender notices, or if the criteria for tenders favour existing or larger suppliers.

40

41

iii) Regulated Sectors
Sector regulation may be needed when the market structure makes it difficult or impossible for competitive markets to develop, such as with natural monopolies, or where the sector’s operations may affect public welfare. Other reasons for sector regulation include providing a mechanism for maintaining necessary technical standards to ensure quality or safety, ensuring access to essential facilities, and to provide processes to encourage efficiency and cost-related pricing. Regulation may be justified where competition cannot be achieved by market forces (as with natural monopolies, where one firm can supply more efficiently than two or more), where competitive markets would not result in an outcome that is considered socially desirable, including where there are ‘externalities’, that is, costs or benefits to people other than the parties to transactions in the market.

iv) Trade Policy and Industrial Policy
Are there any trade or industrial policies that appreciably restrict competition in the market/s? For example, do non-tariff barriers impose quantitative restrictions on, or otherwise limit, the importation of particular categories of products? Are the tariff rates on some products very high, or is extensive and possibly unjustified recourse had to anti-dumping remedies, or do some suppliers benefit from tax concessions while other competitors do not? If so, do these policies appear to have adequate justification, taking account of their effects on competition?

v) Unequal Enforcement of Laws and Regulations
Do any firms in the market suffer from the unequal application of laws or regulations? Examples of where this might occur include the unequal enforcement of taxes, labour regulations, health and safety regulations, access to land, access to key infrastructure, standards and intellectual property rights. Significant anti-competitive behaviour is that arising from collusion among competitors, from the abuse of dominance by firms with market power, and from some mergers and acquisitions. Factors that might limit the level of competition in markets include:   Entry barriers such as high duties and tariffs resulting in high protection levels for incumbent players. High prices resulting from collusive behaviour translating into predatory pricing which forces new entrants to exit the market.

41

42

Annex 2: GoP’s Auto Industry Development Programme (AIDP)
Productive Investment (PAII) Asset Incentive Objectives i) To expand and modernize capacities in auto parts manufacturing. ii) To encourage localization of auto parts for the local production of vehicles and for export. iii) To encourage development of critical components and achieve competitiveness. iv) To promote interdependence between assemblers and auto parts manufacturers. Incentives i) PAII will be in the form of customs duty credit equal to a certain percentage of the value of productive assets installed by the eligible auto parts manufacturers. The duty credit so acquired will be spread equally over a period of 5 years to offset duty on eligible imports. ii) The duty credit will be transferable to vehicle assemblers and will remain nontrade-able in the open market. iii) Duty credits so earned would be allowed to offset import of inputs and further productive assets by a parts manufacturer or by assemblers against import of CKD kits and tooling. Technology Acquisition Support Scheme (TASS) Objective: i)Technology upgradation to improve performance, efficiency and quality. ii) Matching grants to enhance the technology levels of automobile manufacturers and encourage localisation. Eligibility criteria: i) The auto part manufacturers must be supplying or contracted to supply to the vehicle assemblers or export market. ii) Must be registered with the sales tax department. iii) Having suitable in-house facilities to manufacture auto parts. iv) Must be a limited liability company. v) The company offering itself for full disclosure and detailed scrutiny at any time during the currency of the scheme. Auto Cluster Development (ACD) Objective: i) Detailed working and requirements of envisaged automobile clusters to achieve the production target of 0.5 million cars by 2011-12. ii) Acquisition of land for auto clusters with enabling infrastructure to provide for establishment of auto units. iii) Resolution of crucial issues relating to land acquisitions, exorbitantly high prices and other issues being the potential bottleneck for the new units to establish or for the existing ones to expand. Benefit of policy: New Entrants will be allowed to import 100% CKD kit, at the leviable customs duty, for a period of three years from the start of assembly/manufacturing.

Auto Industry Investment Policy (AIIP)

42

43
Eligibility Criteria i) In case of cars, the potential new entrant will have 500,000 units annual production in countries other than Pakistan. ii) The new entrant will have significant global presence by way of manufacturing at least 25,000 units of trucks and buses separately, 40,000 LCVs and at least 50,000 units in the case of Agriculture Tractors annually in countries other than Pakistan. iii) New entrant will have the plan for the progressive manufacturing of vehicles. iv) New entrant will have serious and demonstrable intention to develop parts locally either in house or through the vendors to achieve competitiveness. v) New entrant will clearly identify the destinations in his plan or in agreement with its partners for export of vehicles and parts manufactured in Pakistan under this policy. vi) Registration to produce road worthy vehicles complying to environment standards, with the EDB, M/o IP&SI for the entitlement of benefits under

43

Sponsor Documents

Or use your account on DocShare.tips

Hide

Forgot your password?

Or register your new account on DocShare.tips

Hide

Lost your password? Please enter your email address. You will receive a link to create a new password.

Back to log-in

Close