Political:

Political unstability
Government imposes limit on the number of parts to be imported
Legislations require locally made parts to be international standards
compliant
Fluctuation of exchange rates and oil prices
Foreign ownership regulations and technological co operations with the
government.
Trade and tariffs policy related motor vehicles
Motor vehicle insurance policy

Economic:
Rise in inflation car manufacturers to increase their prices
As parts are imported, exchange rates should affect
High rates of oil and gas
Increase in income level
Interest rates also affect car prices
Increase in imports

Economic factors:

The price increases because of increase in costs. Since the deletion

level is low in our country, most of the input material is imported from Japan.
Hence any devaluation of Rupee, which is quite frequent, against yen
would increase the costs of the auto assemblers in Pakistan.
Moreover, inflation would increase the cost of local inputs.Import
duties and taxes also influence the costs. The structure of the automobile

market is such that it allows the manufacturers to have greater power to

influence the prices. Any cost increase as such is passed right on to the
consumers, thereby reducing the demand growth for cars. The last few
months are marked by price increases by the car manufacturers, due to a
number of economic reasons.
Moreover, due to the economic problems like devaluation and inflation, and
other problems like higher income taxes, the disposable income of the
consumers is shrinking, having a negative effect on the demand of cars,
especially the high-priced, larger cars segment.
The price increases and reduction in disposable incomes have resulted in an
increased demand for smaller cars that are also more fuel-efficient. The
demand for larger cars has though no declined drastically, some effect on their
sale can be observed.
The economic issues related to the auto industry will be discussed in detail
later in the discussion.

2. FUEL PRICES:
Automobiles run on fuelpetrol. The increase in fuel prices depress the
demand for cars, especially larger cars because they tend to become more
and more expensive to run. Hence the operational efficiency is greatly
reduced. As a result of increase in fuel prices of about 25%, the demand for
diesel run cars and smaller, economy size cars is on the rise.
3. CAR LEASING, FINACING:
The growth for car leasing and financing implies a positive demand for cars in
the market. The local car producers are benefit from different leasing schemes
offered. Due to reduced economic activity in the industrial sector, the leasing
companies are offering good incentives to the consumer market in order to

have their idle funds utilized. This has had a positive effect on the cars
demand. People who do not want to tie up their funds or the salaried class
people, who cannot afford to pay a lump sum amount for a car, find this a
good option. Car financing through banks is also a viable option for such
people. However, leasing sector is catering mostly to the consumers for car
financing with only Citibank as a major player in financing car purchases.

4. INSTITUTIONAL DEMAND
The government and the corporate sector as a whole are supposed to be the
wealthy parties in any country. Demand for various products come from these
institutions and as such they serve as important customers for many
industries. Car industry is also such a sector which benefits from institutional
sales. However, the slower economic activity, high deficits of the budget and
other such factors have lowered the demand for cars coming from these
institutions.
THE DUTY STRUCTURE

DUTY ON CBUs

Import duty on CBUs ranges from 110-265%[8] depending upon the make
and engine capacity of the car. Such a high duty protects the local industry
from foreign competition. New cars can be imported under the gift scheme as
well. In the 1999-2000 budget however, these rates were replaced with a lump
sum amount depending on the engine size of the imported car. The new duty
structure was as follows. However, the % duty on CBU is said to have been
re-imposed in the same year again ranging from 110-256%.

There is a ban on the import of reconditioned cars:

In order to provide protection to the local industry the import of used cars
stands banned since 1994. The import of second hand cars was allowed

under the Personal Baggage Scheme. However, in 1994, on a summary

submitted by the Ministry of Industries, Economic Coordination Committee
(ECC) of the cabinet decided to impose a ban on the import of more than 2
years old cars under the Personal Baggage Scheme. The import of such cars
was restricted to only import under the Transfer of Residence Scheme
(explained in detail later). The Transfer of Residence Scheme allows
overseas Pakistanis to import cars to Pakistan by producing at least one year
old driving license of the country of the export of the car. But nevertheless,
tariff protection will continue to be provided to the local manufacturers against
the import of Completely Built Units (CBU)[9].
CUSTOMERS ARE THE SUFFERERS
Discouraging imports has benefited the local auto industry at the cost of
buyers. The absence of competition and choice forces have created a
monopoly of the local producers to control the prices and market anyway they
like. This fact has manifested itself in prices increases especially in the small
car segment in which Suzuki had a virtual monopoly (prices discussed in
detail in the later parts of the discussion). In addition, this situation has led the
car assemblers to fall back on their commitments to the government about two
thingsincreasing their production volumes by 20% annually and to follow a
deletion program by cutting the annual imports of parts by 30% per year.
Moreover, the lesser imports of used cars have increased the prices in the
local used car market. Here again, the customers are the sufferers.

INCREASE IN SMUGGLING
The smuggling of motor vehicles across the Pak-Afghan border received a
boost when the ban was imposed by the government on the import of used
cars of over two years.

(Facts discussed later in the major issues presented later).

LOST REVENUE TO THE GOVERNMENT

The import of used automobiles can result in generating revenue of Rs.16
billion[11] in two years for the government. Moreover, the lost revenue due to
smuggling will also be discouraged.

DUTY ON CKDs

Import duty of 35%[12] on CKDs: Completely knocked down (CKD) Kits are
the main input item for the auto industry and constitute major portion of the
total cost. CKD kits are imported while few of their components are procured
from the local vending industry for assembling in the country. The cost of
completely-knocked down (CKD) kits account for 65% of the total
manufacturing cost for a car.
In order to boost auto production and sales, in the first week of January 98 the
government reduced the import duty on CKD from 40% to 35%.
2. INCONSISTENT GOVERNMENT POLICIES[16]
The performance of the automotive industry in Pakistan is greatly affected by
the inconsistent Government policies and regulations. So far 36 changes have
occurred during the last six years in policies relating to auto industry. Such
frequent fluctuations greatly affect the forecasting ability of the manufacturers,
thus, restricting the smooth functioning and growth of the industry. A few
examples of this irregularity are:

The Yellow Cab scheme:

The Yellow Cab Scheme of the government adversely affected the automobile
sector. As it depressed the demand in the automobile retail market of Pakistan
for the next four years bringing the local sales growth much below the target.
The aim of the yellow cab scheme of the Prime minister was the induction of
an efficient and modern transport fleet to existing facilities. Under the scheme
the Government allowed the duty free import of cars of mass distribution as
Taxis in the local market. The prospective buyers had to make a down
payment of 10% of the car price while the local nationalized banks guaranteed
the rest. The local assemblers were made unwilling partners of this scheme.
They had to stop the regular assembling and diverted the facilities towards
producing Taxis. Nissan Sunny, Hyundai and Daewoo were imported while
Suzuki, Mehran and Khyber were produced by the local automobile sector.
The last Transport Revamping Scheme proved to be disastrous and depleted
the countrys liquid foreign currency reserves by about a billion dollars.

A noteworthy example of killing a plant in its infancy was

observed in 1993 when the import duty on CBUs (completely
build units) of higher cc cars was drastically reduced. It
threatened the closure of Indus Motor Company. In the period of
the revival of the free market this loss of efficiency was
absolutely disastrous.

Another case was the import of 678 luxury cars in1998. The
controversial reduction in import duty on luxury cars from 400 to
125 percent in the federal budget 1998-99 was nothing more
than a one-time concession. Interestingly enough, the federal
government slapped on a 100 percent regulatory customs duty
on luxury cars above 1800cc on July 21,just a week after the 678
luxury cars had been imported into Pakistan. The dealers who

imported the cars automatically made a 100% profit in just seven

days.

3. SMUGGLING[17]
Smuggling is a common trait in the automobile industry. Though the exact
number of smuggled cars is not available but sources in the car industry put it
at 50,000. Of these 30,000 are already in use while the rest will eventually find
there way on the roads through legalization. These smuggled cars include
those on roads with fake registration numbers or without any registration at all
and those piled up in and around Pakistans border, especially with
Afghanistan, in Balochistan and NWFP.
Seventy per cent of these cars comprise of Toyota Corollas and 12-15 seater
commercial Hi Aces. They also include Pajeros. Dubai is dubbed as the sole
outlet of the smuggled vehicles into Pakistan. While the import of used cars
was banned under personnel baggage scheme in 1994 return if Pakistanis
were allowed to bring in a car under TR scheme provided they had lived
abroad for more than two years and has a valid driving license of the foreign
country.
The government proposed a scheme to legalize these 50,000 smuggled
vehicles through tax rebates and waiver scheme by the CBR expiring on May
1998. Every car smuggled before May 31, 1998 was proposed to be legalized.
Under the scheme, the smuggled cars will be allowed to be registered on
payments of the normal duty and the Capital Value Tax (CVT), each of which
will depend on the power of a vehicle. The 100% fine had been totally waived.
This one-time legalisation of the smuggled cars was as damaging to the car
industry as the Yellow Cab Scheme which brought on to the roads some
24,000 vehicles virtually duty free.

According to eye-witnesses the only major city where the smuggled cars ply
freely is Quetta. Fake registration for the smuggled cars by the rich is not a
problem in Pakistan.
The smuggled cars that are seized and confiscated are disposed of through
1.

Release to the owners on payment of duties and taxes and

redemption fine.

2.

Sale to the government department through Cabinet Division

on pre-determined prices.
Through open auction.

When the first option fails, the third one remains the most commonly used by
far.
The escalating tariffs on imported auto-parts also encourage smuggling of
these components that has been damaging to the car industry.

6. EXCHANGE RATE POLICIESRUPPEE/YEN DISPARITY:

Profits in the auto industry are determined to a large extent by the movement
in the rupee/yen parity. This is because all the local assemblers import their
completely Knocked down (CKD) kits from Japan; after paying duties and
taxes. Any adverse movement over here basically has a direct impact on
costs, which move in the same direction as the Yen. It is quite obvious that
any change in the costs over here has a substantial effect on the operating
profits.
This means that the Pakistani manufacturers are paying much higher prices
for the Japanese goods. This has led to increases in selling prices of
Japanese origin products, automobile being one of them.

From Rs.0.33 per Yen in July 1998, the Rupee has fallen to currently around
Rs.0.4868[29] (on Friday, March 10, 2000). This has added to the costs as a
large part of the components are imported, with the CKDs accounting for 65%
of the total cost of production.

Sales of locally manufactured cars

The year 2013 saw the combined sales of local car assemblers decline by around 22% in 2013. This
can be attributed to a number of factors. Firstly, sales are responsive to consumers purchasing
power. In Pakistan, the high inflationary pressure on each individual makes them hesitant when they
have to buy a new car. In addition, running, maintenance and fuel expenses also drive up the cost of
owning a vehicle and result in a fall in demand.
Another reason for the negligible growth of local car sales is the overall slow economic activity in the
country. Frequent disruptions in power supplies, constant increase in electricity tariff, stiff competition
from an influx of imported cars and tax structure of the country which places additional burden on the
end consumer. The restructuring in vehicle registration fees, vehicle tokens and other road taxes
increase the cost of purchasing a new car. In addition, the finance bill of June 2013 placed a one
percent additional sales tax on original equipment manufacturers which resulted in further increase
in cost of production which translated into increase in selling price.

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