Protecting too much?: A directionless move towards growth
After CCP’s report, central bank takes swipe at local industry.
KARACHI:
It seems like tough times for the local automobile industry as criticism from one institution after another follows.
After a hard-hitting report of the Competition Commission of Pakistan (CCP), in which it supported a liberalised regime of car imports, the State Bank of Pakistan (SBP) is now also advocating foreign-made vehicles, while reducing the protections currently given to the local industry.
While the CCP’s criticism is something the industry may have gotten used to, the hard line taken from none other than SBP must be distressing for the industry.
“We endorse the assessment of CCP, which has advocated the need to reduce protection of the local market and allow the import of new cars,” SBP in its recently released annual report 2013-14 said.
Despite these developments, the main responsibility to set a clear line for the local auto industry lies with the government. Unfortunately, unlike market expectations, the government has failed in giving any new direction to the local auto industry. In fact, it is now making the situation worse.
The government has already presented two budgets in its current tenure but is still dragging its feet on the Auto Industry Development Programme (AIDP-II). The delay in AIDP-II is arguably the single most important problem as it breeds ambiguity and fear among all stakeholders of the industry.
Looking at the recommendations of both CCP and SBP, one wonders why the government is not taking even the smallest steps that can help provide a new direction to the industry.
For instance, the SBP report said that the local auto industry needs a policy that supports production of small cars of 1,000cc or below engine category. What can possibly stop the government in giving incentives on small cars?
Even a college-going student understands that economies of scale can reduce the cost of production – one of the most important hurdles in the growth of this industry.
The import of used cars has hit the sales of locally-assembled cars in the last few years. However, the biggest challenge has come from the import of small engine cars (1,000cc or below).
For instance, out of the five engine categories of imported used cars, the share of small cars (up to 1,000cc) in the total imported cars was 45% in fiscal year 2012. This share jumped to 59% in fiscal year 2013 and then crossed over 72% in fiscal year 2014 mainly because local car assemblers failed to introduce new models in the small engine categories. After 2012, two locally assembled small engine cars were even discontinued in Pakistan.
The fast growth in import of small cars proves that there is a huge demand of economical and fuel-efficient cars – a gap caused by the local industry’s failure to cater to the market segment.
This is due to the local industry failing in understanding the market potential of small engine cars and only focusing on 1,300cc or above engine capacity vehicles.
Apart from the auto industry’s mindset, the government is also part of the problem. The visionless and short-sighted policymakers have brought the industry to a place where it is unable to capitalise on its strengths.
Instead of providing long-term policies, governments have been busy handling the auto industry with frequent changes in the taxation system and import policy.
Pakistan can still make up for its losses that have been incurred by heavily protecting the local industry at the cost of consumers. It can help provide stable growth to the industry by helping the growing middle-classes switch from motorcycles to affordable small cars.
Maybe, this time the government can be part of the solution instead of being the problem.
tHE WRITER IS A STAFF CORRESPONDENT
Published in The Express Tribune, December 15th, 2014.
It seems like tough times for the local automobile industry as criticism from one institution after another follows.
After a hard-hitting report of the Competition Commission of Pakistan (CCP), in which it supported a liberalised regime of car imports, the State Bank of Pakistan (SBP) is now also advocating foreign-made vehicles, while reducing the protections currently given to the local industry.
While the CCP’s criticism is something the industry may have gotten used to, the hard line taken from none other than SBP must be distressing for the industry.
“We endorse the assessment of CCP, which has advocated the need to reduce protection of the local market and allow the import of new cars,” SBP in its recently released annual report 2013-14 said.
Despite these developments, the main responsibility to set a clear line for the local auto industry lies with the government. Unfortunately, unlike market expectations, the government has failed in giving any new direction to the local auto industry. In fact, it is now making the situation worse.
The government has already presented two budgets in its current tenure but is still dragging its feet on the Auto Industry Development Programme (AIDP-II). The delay in AIDP-II is arguably the single most important problem as it breeds ambiguity and fear among all stakeholders of the industry.
Looking at the recommendations of both CCP and SBP, one wonders why the government is not taking even the smallest steps that can help provide a new direction to the industry.
For instance, the SBP report said that the local auto industry needs a policy that supports production of small cars of 1,000cc or below engine category. What can possibly stop the government in giving incentives on small cars?
Even a college-going student understands that economies of scale can reduce the cost of production – one of the most important hurdles in the growth of this industry.
The import of used cars has hit the sales of locally-assembled cars in the last few years. However, the biggest challenge has come from the import of small engine cars (1,000cc or below).
For instance, out of the five engine categories of imported used cars, the share of small cars (up to 1,000cc) in the total imported cars was 45% in fiscal year 2012. This share jumped to 59% in fiscal year 2013 and then crossed over 72% in fiscal year 2014 mainly because local car assemblers failed to introduce new models in the small engine categories. After 2012, two locally assembled small engine cars were even discontinued in Pakistan.
The fast growth in import of small cars proves that there is a huge demand of economical and fuel-efficient cars – a gap caused by the local industry’s failure to cater to the market segment.
This is due to the local industry failing in understanding the market potential of small engine cars and only focusing on 1,300cc or above engine capacity vehicles.
Apart from the auto industry’s mindset, the government is also part of the problem. The visionless and short-sighted policymakers have brought the industry to a place where it is unable to capitalise on its strengths.
Instead of providing long-term policies, governments have been busy handling the auto industry with frequent changes in the taxation system and import policy.
Pakistan can still make up for its losses that have been incurred by heavily protecting the local industry at the cost of consumers. It can help provide stable growth to the industry by helping the growing middle-classes switch from motorcycles to affordable small cars.
Maybe, this time the government can be part of the solution instead of being the problem.
tHE WRITER IS A STAFF CORRESPONDENT
Published in The Express Tribune, December 15th, 2014.