With local policy aimed at making Pakistan a favourable trading country, rather than a manufacturing one, the significant inflow of used cars into Pakistan has, in the past, constricted the local automotive industry. This may be about to change, however, following a decision by the country’s Economic Coordination Committee (ECC).
The ECC has decided to reduce the age limit of used car imports into Pakistan to three years, from the previous limit of five years, according to The News International. This directive will come into effect on 15 December 2012.
The Economic Coordination Committee is a cabinet-level body responsible for final decisions pertaining to Pakistan’s economy. Set up under the Chairmanship of the country’s Central Finance Minister, the committee comprises ministers in charge of the country’s economic ministries.
This decision has drawn mixed reactions from the various automotive industry bodies in Pakistan. The Pakistan Automotive Manufacturers Association (PAMA) has welcomed this decision, as it favours local vehicle manufacturers. The association’s Chairman, Parvez Ghias, feels that this move is in the greater national interest.
The All Pakistan Motor Dealers Association (APMDA), on the other hand, has called this move unfair and unjust, as it is a setback to the import of used cars. Chairman HM Shahzad says this cut in age limit, along with the depreciation policy in force at present, will push the prices of cars significantly.
Earlier, Daily Times, citing industry experts, said the government lost nearly Pakistani Rs16.5bn (US$171.79m) due to the import of 55,000 vehicles. Around US$371m were reportedly spent on the import of used cars last year. According to Shahzad, though, this move to restrict import of used cars into Pakistan will result in a Pakistani Rs32bn loss to national exchequers.
Imports of used cars into Pakistan are permitted for Pakistani citizens who work or stay overseas. Imports are allowed under the specific schemes, including the transfer of residency scheme, personal baggage scheme, and gift scheme. Used cars cannot be imported for commercial purposes. This, however, is only on paper, as agencies buy the right to import a used car from overseas-based Pakistanis, and import cars for commercial purposes.
According to a report published last January by the Engineering Development Board, under the Ministry of Industries and Production, there are two key issues involved in restricting the import of used cars into Pakistan. The first is the age of used cars, or the year of manufacture, and the second, the depreciation allowance, or discount rate, for import tariff.
In 2005-06, the government relaxed import restrictions to three years after production, from the two years it had suggested earlier. The Depreciation allowance, or discount rate for import tariff, was also eased from 1% to 2%. The following financial year (2006-07), the government further relaxed the age limit for used car imports to five years after manufacture, from three the previous year.
In 2008-09, owing to a drop in demand for locally-built cars, the government tightened its policy, cutting the limit down to three years, with a depreciation allowance back at 1%. This lack of consistency continued, when in fiscal year 2010, the government pushed the limit back to five years, in a move aimed at forcing local assemblers of cars to cut their prices.
Following this relaxation in the age of used car imports, a total of 56,000 used cars were imported in fiscal year 2012, compared with just 20,000 units in the previous financial year. The easing of the limit flooded the market with cheap imports, and consequently, sales of locally assembled vehicles fell sharply by 31% in the first four months of the current financial year, down to 40,000 units. This figure compared with 59,000 units sold in the corresponding four-month period a year earlier.
However, the used car segment is not the only factor hampering the industry. The market size is still small, and this is a fundamental problem for the development of the country’s automotive industry. The low demand for cars has led to overcapacity in Pakistan.
The report stated that there were more than 100 vehicle assemblers in the country. These companies assemble cars, buses, trucks, two- and three-wheelers and tractors. The number of automotive parts manufacturers, however, totals approximately 1,700.
Japanese companies lead the list of vehicle assemblers in Pakistan, while local companies form the bulk of the country’s parts manufacturers. This is compounded by a weakness in terms of manufacturing systems and technology in the supply industry, which the report attributes to a lack of competition brought on by localisation requirements.