Will the new automotive policy deliver?

Pakistan’s automobile industry has waited for over three years for a new automotive policy, during which time car manufacturers, vendors and buyers lobbied with the government to give their views of a policy best suited to the needs of the country.

When the policy was finally announced recently, customers seemed elated; the industry much less so.

The last few years have been good ones for local automakers thanks to high profit margins, while the government’s decision to allow the import of used three-year-old vehicles barely seemed to affect the major players. In the first nine months of the fiscal year 2015-16, sales rose to 166,898 units, a jump of 35% compared to the previous year when 123,638 were sold. This growth can be attributed to a number of factors, including government incentives, such as special allowances on taxes and import duties, taxi incentive schemes, low fuel prices and a slash in interest rates, which triggered cheaper car financing. Presently, an estimated 2.5 million jobs are associated with the industry, which has an annual potential of 250,000 sold units.

The highlights of the new policy fall into four areas.

1) Incentives to encourage new entrants
The new policy will allow the one-time duty-free import of a plant and the machinery required to set up a manufacturing facility. It will allow the import of 100 vehicles of the proposed model variant in the form of completely built units (CBUs) at 50% of the prevailing duty after the groundbreaking of the project. Substantial tax incentives have also been offered. New entrants will only pay 10% customs duty for five years on the import of non-localised parts and 25% for localised ones. The current players, however, will continue to be charged at the rate of 32.5% for local (which will be reduced to 30% from 2016-17) and 50% for imported parts. These reductions have come into play in order to attract new or even smaller players and increase competitiveness, thereby enhancing buyer choice with safe, modern and cost-effective vehicles. Furthermore, to cut down on the red tape, a one-stop shop is to be designated at the Engineering Development Board (EDB) where business plans and documentation can be presented for assessment by investors. According to analysts these incentives may result in Foreign Direct Investment in excess of five billion dollars within the next five years.

2) Improved safety regulations and implementation
The policy ordains the mandatory development and enforcement of safety regulations in vehicles during the manufacturing process. This includes compulsory installation of immobilisers (electronic security devices that prevent the engine from running unless the correct key is used) in cars as well as more effective manufacturer product recall systems in case of safety snares, in line with global practices. This part of the policy is especially relevant if one keeps in mind that the three Japanese car brands in Pakistan (Honda, Suzuki and Toyota) have been persistently berated for ‘dumping’ obsolete technology into the local industry. Buyers have accused manufacturers of looking the other way as far as passenger safety is concerned, and employing bullying tactics by forcing them to accept defective deliveries – and this at exorbitant price tags and in addition to the fact that engines used in locally-assembled models are at Euro-2 technology while the world standard has moved to Euro-6. In case a defect was found post-delivery, it was only fixed within the warranty period without a full replacement of the defective model as is done in other countries. Loose-ended quality finish, poor inside trim, lagging brake technology, and missing anti-theft mechanism added to the buyers’ complaints.

3) Reduced vehicle delivery time
Under the current scenario buyers have to book vehicles by paying a substantial sum in advance, which can sometimes amount to 100% of the total cost, despite the fact that the vehicles are delivered after an extended waiting time. If prices go up during this time, buyers are required to pay the extra amount on the date of delivery. This has led to the practice whereby buyers looking for hasty deliveries are forced to pay ‘own’ money. In the new policy, cars can be booked at no more than 50% advance payment and delivery must be made within the approved timeline and not exceed two months. In cases of delay, buyers will receive interest payments – Kibor (Karachi Inter Bank Offer Rate) plus two percent on their advance for the time the vehicle is not delivered.

4) Penalties if targets for localised parts are not met
The policy will prepare and direct penalties to all manufacturers for missing deletion standards, hoping to encourage vendors and manufacturers to increase the localisation of parts to overcome failing targets.

As a result of these directives the industry is unhappy, the sense being that the major players are being penalised rather than commended for their multibillion investments in the local industry. They complain of an uneven playing field in favour of new entrants. Pak Suzuki termed the policy ‘a disaster’ even pledging to invest billions of rupees in the industry if the new incentives do not come into force. However, the industry numbers mentioned above tell a different story. With sales growth at a five-year high in 2015 and profits booming, local car assemblers have never had it better, so no wonder the government is both unconvinced and adamant to go ahead with the policy to incentivise the entry of one or two European manufacturers, in the hope that others will follow. Perhaps in a balancing act, the government turned down the popular public demand to extend the three-year old used car import limit to five years – the only positive outcome for the three local manufacturers.

Industry analysts are of the view that the current forecasted demand supply gap of 90,000-100,000 units in a projected annual market size of 260,000 units is more than attractive to induce new entrants to narrow down the gap. Not many experts disagree that current market demand is at the 2006-07 levels when 254,000 units were sold in a year.

The China-Pakistan Economic Corridor (CPEC) is likely to further boost automobile demand, including heavy trucks and prime movers – which are likely to be of huge interest to heavy commercial vehicle manufacturers from around the world.

Although buyers may be elated by the breadth of choice and technology that the policy seems to offer, it is too early to take this at face value. Analysts believe the policy is limited in scope, in the sense that it is not designed to hold the current players accountable for quality lapses and unregulated price rises. Furthermore, the policy will only be successful if it is backed by attractive incentives, deliverables and lean process flows. Red tape, unethical positioning and playing hard to get has let Pakistani car buyers down in the past and this time, in spite of a consumer-friendly policy, the result may not be any different.

Mazhar M. Chinoy has led the marketing services function for a leading multinational automobile company and is currently a Director at LUMS. mazharmchinoy@yahoo.com