New auto policy – missing great opportunity

By Dr. Manzoor Ahmad|

Published in The Express Tribune, April 25th,  2016|

The new auto policy seems to assume that two wrongs make a right.

For too long the government’s policy enforced through various statutory regulatory orders (SROs) ensured that the existing auto assemblers could form a cartel and apportion various slices of the car market among themselves, helped by the punitive duties on imports and the inability of any new investor to enter the field.

Instead of correcting the existing situation and adjusting its policies to be like those of other successful developing countries, the government is now trying an entirely new approach, through its new policy of favouring new investors to the detriment of the existing ones.

Under the policy, new investors will not only be allowed duty-free import of plant and machinery for setting up an assembly and manufacturing facility but also allowed to import auto parts at the reduced customs duty of 10% against the prevailing 32.5%.

However, it seems very odd that the playing field should remain tilted one way or the other. Instead of blaming the existing car assemblers, the government should have taken some responsibility for the wrong policies it has been following and now change them.

The easiest way would have been to do away with the special auto-related SROs and start treating the auto industry like any other industry and allowing competition in it on equal footings.

The policy should not create investment barriers for anyone, whether the existing assemblers or potential new entrants. It is obvious that as it is, the new policy will discourage the existing auto assemblers from making any new investment in Pakistan and consider moving to other, more welcoming, destinations.

The grievances listed by the cabinet ministers against the current auto assemblers are that they have failed to localise auto parts used in the car assembly, the car models used are out-dated and local cars are more expensive than those produced elsewhere.

Auto parts production

As far as localisation is concerned, it should be realised that nowhere in the world, all parts are localised, since it is not economical to do so. A typical car has about 30,000 parts. If the car industry is allowed to source them from the most economical sources, it can make the most modern and economical cars.

Pakistan government has preferred to let Suzuki shut its Alto plant rather than to allow it to use CKD kits from India which is now the only source for those cars.

Before placing all the blame on the car assemblers, the government should look at its own failings. For too long, the government had been an accomplice in allowing the assemblers to benefit from its non-transparent policies.

When the WTO rules on import substitution policies (Trade-related Investment Measures or TRIMS) became applicable in 2000, most other auto-producing countries adopted them while successive governments in Pakistan kept yielding to the lobbying of the local industry and continued with the old policies.

Out-dated policies

Through a new policy, the government should have moved towards an export-led strategy rather than to keep relying on the out-dated import substitution policies. If the policymakers had studied the policies being followed elsewhere before finalising the new policy, they would have noted that import substitution policies have failed everywhere and have been abolished.

For decades, India had been one of the biggest promoters of import substitution policies. In 2002, it ended such policies. As a result, the Indian car industry started flourishing. Not only the quality and environmental standards became world class, the number of cars produced increased substantially from 1.6 million in 2005 to 3.84 million in 2014.

It was not just India where the auto industry started thriving after abandoning deletion programmes, it happened in almost all the auto-producing countries.

Since Turkey got rid of import substitution policies and opened its industry to competition, its auto industry became competitive. Turkey is now a major exporter of cars and auto parts to the European Union. In 2015, Turkey produced 1.36 million vehicles or about ten times those in Pakistan.

It is time that Pakistan government realises the failings of its own policies and makes amends rather than blaming the assemblers. It needs to look at some other countries where auto industries have flourished and the factors that contributed to that success.

Rather than persisting with import substitution policies, it is time to move on to an export-led growth strategy. The government should encourage competition through lowering of tariffs rather than allowing import of old and used cars.

It is time that the government stops giving any special favours or putting up any barriers through new regulations. It should let the market forces prevail. This would be in the best interest of consumers, the assemblers, government revenue and the environment.

 

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