New auto policy draws lukewarm response

LAHORE: The Auto Policy 2016-2021 drew lukewarm response from the existing players and the prospective new entrants.

There is nothing new in the new auto policy, which brings into question the wisdom of delaying the policy for more than three years.

The auto industry managed to restart its upward journey without any policy for four years (2012-16) as the manufacturers were finally convinced that their salvation lies in the localisation of parts.  It is because of localisation that new entrants would be unable to challenge the existing manufacturers, even if they imported at reduced duty. The new auto policy allows new entrants to import at reduced duty for 100 units in the first two years.

Localisation of parts would also be the aim of the new entrants, but aligning vendors in this regard would be an uphill task. Developing local parts needs costly tooling by the vendors. They prefer making dyes for manufacturers who guarantee substantial yearly volumes, which could help them recover the cost of tooling in 2-3 years. They suffered heavy losses in the past when they developed local parts for Nissan, Hyundai and Adam all of which closed down after a brief stay.

Localisation in some models of Suzuki has exceeded 70 percent, Toyota has increased the use of local parts to around 65 percent and Honda is accelerating localisation, having attained over 50 percent in the last two years.

These three manufacturers realised their survival relied on localisation. All the imported parts are subjected to import duty. The local vendors have attained technologies to produce the same quality at 20-25 percent lower cost. This has provided the local car manufacturers advantage over the new imported cars of similar specifications. The used cars with full specs even at very low duties are expensive than these brand new cars certified in quality by the Japanese principals.

For the new entrants, localisation is the key; otherwise they would not be able to compete with the existing players. They can for sure import 100 CBUs at low duty but the cost will be higher than similar local models. The attraction of full specs is no more valid as local variants also add these specs at additional cost.

It seems none of the major car producers apart from the three already operating would come to Pakistan. Some briefcase manufacturers might lease out abandoned car plants to register as new entrants, while restricting to only importing finished units as allowed in the initial two years. This was done by numerous local companies by importing Chinese brands and then wrapping up the shop.

For some unknown reason, the new auto policy did not announce any facilitation for existing car manufacturers in introducing new variants. Since they have a solid vending base they were in a position to upgrade technologies even at 50 percent of the concessions offered to new entrants. It would have brought major investment in the country.

The car producers of the country are currently operating at almost full installed capacities. They needed to go for expansion, but after the announcement of the auto policy, they would see which way the tide turns as far as new entrants were concerned. This would increase the waiting time for brand new cars and the premium.

Besides cars, we have examples in motorcycles. No country in the world can sell a 70cc motorcycles at Rs45,000 which is the Chinese version produced by dozens of Pakistani assemblers. Pakistani auto rickshaws cost R125,000 which is better in quality and look than the Indian variant available at Rs250,000.