Government to ‘rationalise’ prices of cars

Age of imported cars has been raised from three to five years.

ISLAMABAD: In a major policy decision, the government has decided to raise the age of imported used cars from three to five years, which in turn will have a dramatic impact on the local car market, putting local carmakers at a distinct disadvantage. The move comes after local car producers repeatedly ignored government directives to lower local car prices and give some relief to customers.

The new policy aims at making all car producers of the country, who have been earning profits ranging in billions of rupees, fall in line.

The policy would also cover motorcycles, trucks, buses and tractors.

According to official documents available with The Express Tribune, it was during the Economic Coordination Committee (ECC) meeting on November 4 that the federal government took this important decision.

This move is expected to send shockwaves through the local car manufacturing industry. The cabinet meeting was presided over by Finance Minister Dr Hafeez Sheikh.

The attitude of car manufacturers came under question who, for the past two years, had been defying government orders to bring down the prices of locally assembled cars.

The rise in prices of locally produced cars upset policymakers in Islamabad who  were embarrassed that their ‘recommendations’ did not carry weight in the eyes of the manufacturers. The defiance also meant that car manufacturers were free to formulate and follow their own rules of the game, without showing any respect for regulation from official quarters.

The federal government was informed that one car manufacturing unit had earned profits worth Rs3.4 billion in 2009. Despite this, the unit raised the prices of its cars instead of decreasing them.

Moreover, violation of the terms of agreement with car manufacturers regarding the ‘deletion programme’ was also said to be one of major reasons behind this major policy shift.

However, sources confirmed that the decision would not be announced by the government until an inter-ministerial committee, comprising federal secretaries of commerce, finance and industries and the chairman of the Federal Board of Revenue discuss the whole issue in detail and propose a tariff structure and suggest a workable mechanism.

Earlier, official documents revealed that a summary was submitted before the ECC by the ministry of industries and production on ‘Rationalising the prices of locally Manufactured Cars’. In this summary, the ECC was informed that the prices of locally assembled cars had been on a constant rise over the last few years. As a result, indigenous cars have become too expensive for consumers.

The members were reminded that in light of the decision by ECC in its meeting held on March 30, 2010, the minister for industries and production had held a series of meetings with manufacturers of automobiles and gave them a clear message to lower the prices of their products. Later, the members were informed that despite their orders, M/S Indus Motors had raised their prices, whereas Suzuki and Honda had raised their prices more than twice to date.

The members were further informed that in a later meeting held on July 1, 2010, the ECC had directed the ministry of industries and production to bring a summary in the next [ECC] meeting with complete information about the profit/loss incurred by the automobile sector, along with proposals for improving the personal baggage transfer of residence and gift schemes for the import of used cars after consultation with other stakeholders.

The ECC also directed for a presentation by the Engineering Development Board (EDB) on its role in the auto sector.

During the presentation to the ECC members, it was disclosed that M/S Indus Motors (Toyota) have attained sales volumes of over 50,000 cars during 2009-2010 and achieved a gross profit margin of 7.5 per cent, whereas Atlas Honda cars sustained losses worth Rs852 million. M/S Suzuki Motors worked with a gross profit margin of only 1.42 per cent.

However, the sales volume of M/S Atlas Honda cars rose from 11,144 units in 2009 to 14,120 units in 2010 and M/S Suzuki Motors from 83,350 units in 2009 to 124,100 units in 2010. The position of Indus Motors in the stock market has also improved with a net profit of Rs3.4 billion in 2010 compared to Rs1.3 billion in the fiscal year of 2009.

While reiterating the government’s commitment to follow the auto industry deletion programme in its true spirit, it was agreed by the ministries concerned that an effective way to ensure reduction in prices of locally assembled cars was to modify the schemes concerning import of used cars like transfer of residence, gift and personal baggage scheme so as to ensure a competitive market for the local car industry.

It was also noted with concern by ECC members that car manufacturers failed to honour the ‘deletion programme’ hence they should be persuaded to ensure its timely implementation. Failure to do so may lead authorities to take appropriate action as per their terms of agreement.

During the discussion in the ECC, members proposed that the age limit of imported used cars up to 1000cc may be enhanced from three to four years considering the narrow price gap between used imported cars of 1000cc and Pakistani used cars of similar capacity.

Since the price gap between a used 1300cc imported and local car is substantial, the age limit of imported used cars exceeding 1000cc may be increased from three to five years, it was recommended. Moreover, it was discussed that the ECC may reaffirm its earlier decision relating to the consistency of deletion program, besides endorsing the changes in transfer of residence, gift and personal baggage schemes for import of used/second hand cars. By amending the import policy, commercial import of three-year-old cars was also recommended in the ECC deliberations.

The ECC was further informed that the minister for industries and production held three meetings with car manufacturers, but those remained inconclusive as the mighty manufacturers were reluctant to decrease the prices of locally-manufactured cars on the grounds of “devaluation of the Pakistani rupee versus the Japanese yen as well as US dollars.”

They also demanded zero-rated tariff on imported CD-kits in return for a decrease in car prices. During the discussion, it was felt that the main reason for an increase in prices of the cars was the non-serious attitude of car manufacturers towards the Auto Industry Deletion Programme (AIDP) compliance, which was meant to achieve targeted deletion or otherwise face an increased tariff on import of such non-localised parts.

The ECC was told that car manufacturers were also working below capacity and producing fewer cars against local requirements. In this manner, they receive the full price of a car at last three months in advance in the name of “booking” while the delivery is actually made months later.

During the debate in ECC, the ministry of commerce bosses also pointed out that the subject of import falls under its domain under the rules of business of 1973. Therefore, said officials, the ministry of industries and production should not have initiated this summary.

Moreover, they had maintained a record of imported used cars from time to time under different schemes, ie, under transfer of residence scheme, gift scheme and personal baggage scheme.

In the light of this past experience, it can be recommended as to which method would be more effective for rationalising the prices of cars, they argued.

Published in The Express Tribune, November 21^st, 2010.