Automobile Industry and Industrial Relocation Under CPEC

Faryal Maaz and Sabha Munir

The automobile industry, being part of large-scale manufacturing sectors plays an important role by contributing to economic growth. Pakistan’s automobile sector is a rising sector which can flourish more in the upcoming years. Pakistan occupies an eminent place among the list of automobile producing countries. Pakistan’s automotive industry is one of the oldest in Asian countries. But the market structure of the automobile industry in Pakistan is dominated by a small number of suppliers that have created an oligopoly which is characterized by imperfect competition. The dominating companies of automobile assembling include AL-Ghazi Tractors, Atlas Honda Ltd, Dewan Motors, Gandhara Ind., Nissan, Hinopak Motor, Indus Motor Co, Millat Tractors, Pak Suzuki, and Sazgar Eng; though, the local car market is dominated by three Japanese brands, Honda, Toyota and Suzuki.

Sales figures in this industry triggered by the low level of inflation, interest rates, higher consumer lending and low oil prices. The automobile sector recorded a growth of 23.43% during July-March FY2016 compared to 17.06% in the same period last year. As per the latest data released by Pakistan Automotive Manufacturers Association (PAMA), auto sales accelerated in August 2017, up to 13% marking the highest ever monthly volumes in the last 10 years. Companies announced to enter in the market, while some past producers considered coming back in the industry due to higher profits as demand is on the rise for the vehicles.

Small and Medium Enterprises Development Authority (SMEDA) reported that demand for four-wheel vehicles will rise from 0.25 million to 0.5 million in Pakistan within the next 12 years. The new auto policy that was announced by the Economic Coordination Committee (ECC) of the Cabinet offers tax incentives to new entrants to help them establish manufacturing units and compete effectively with the international assemblers.

The report mentions that the China-Pakistan Economic Corridor (CPEC) will bring a lot of opportunities for the auto sector. The Sindh Government along with other provinces have recently approved new business enterprises under CPEC, out of which a few may be approved to the car industries. This, in turn, will benefit the transport warehousing and freight forwarding services by further expanding the auto and logistics sector. The new policy could attract new car producers especially from China, the European countries and other Asian nations as they can set up manufacturing units here with some tax incentives offered in the SEZs under CPEC.

According to two reports released in September this year, auto-sector can prove to be the major indicator of Pakistan’s economic strength under the CPEC projects. “Manageable inflation” owing to increasing domestic demands emanating from CPEC has been noted in a report released in September 2018 by a monetary committee. Meanwhile, state-run banks in Pakistan and China are showing interest in mutual projects.

After the oil and petroleum sector, auto-industry sector in Pakistan is the second largest taxpayer in the country which implies that this sector can significantly contribute to the GDP of the economy. It is also noted that the overall performance of Pakistan automotive sector has not met its genuine potential yet. In car manufacturing, local industry standards are not up to the mark, therefore, relocation of automobile industry by foreign companies can help the local industry to meet its potential. Moreover, relocation can also serve the purpose to the transfer of knowledge and technology. The car assemblers in the local market have soaring prices but they are not providing consumers features and make of the model as provided by the global market. One of the reasons might be the pressure of the rising costs and the other is the intended duty on steel. The raw material is imported, and producers bear costs of regularity duty. In this respect, SEZs in such a situation can provide a suitable environment for establishing the automobile industry in premises where there would be a tax exemption for producers and they may avail the incentive of duty-free shipments for production purposes. This, in turn, will ease the mounting pressure of taxation, regulatory duty on the producers which will reduce the prices to the consumers and upgradation in the car models and facilities will naturally be made possible.

With the inception of the new government, along with the rest, the working mechanism on Rashakai SEZ has been devised and started after the CPEC expansion by the recent visit of the PM Imran Khan to China. It is pertinent to mention that the automobile companies can truly populate the SEZ and is also feasible according to the current demand. Moreover, Allama Iqbal Industrial city in Faisalabad also carries a great potential for the automobile industry along with other industries. Furthermore, Balochistan and Faisalabad both have huge potential for light engineering as these areas have specific geographical competency to focus on heavy industry such as automobile and motorbike assembly industry.

A few companies from Germany and Sweden showed interest in setting up industry in SEZs. An example can be taken of Korangi Creek SEZ (notified by Board of Investment), where the international producers of auto parts and assemblers such as KIA, Hyundai, Renault are planning to install units in SEZs by taking initiative called as Mehran Commercial Enterprises. The plant is being set up in Korangi SEZ with an investment of Rs.200 million. Similarly, foreign companies can establish their production units in SEZs or can invest in the existing industries of Pakistan. With increased investment and international participation in the local market, the industry can be re-established to compete in the global market. Pakistan’s industry can become a house of innovation and a knowledge hub if the SEZs are focused while emulating the examples of success and risks of other SEZs in the loop.

However, for survival and growth in this industry, research and development must be narrowed down to address the loopholes and then rectifying them with the help of Chinese counterparts. By giving sales tax exemptions and new products, the government can encourage research and development and reduction in costs. Prosperity in this sector can only be sought by enhancing ease for the consumer and safety according to the global standards. While having these factors applied and achieved, the automobile industry will start contributing to the currently depleted economy of the country. Though, a more rational approach would be that before introducing and imposing any policy, the government must consider and consult the automobile manufacturers and stakeholders to take the maximum from this sector.

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