Resistance by car manufacturers: ministry unlikely to succeed in rationalising prices

[Naveed Yaseen]

MUSHTAQ GHUMMAN
ISLAMABAD (November 07 2009): The Ministry of Industries and Production is unlikely to succeed in rationalising car prices due to resistance by the manufacturers to Minister Manzoor Wattoo's directives in response to a decision taken in the Economic Co-ordination Committee (ECC) of the Cabinet.

On October 21, Prime Minister Yousaf Raza Gilani took serious notice of non-compliance by different Ministries in respect of implementation on decisions taken by the ECC. Following the Prime Minister's instructions, Industries Minister Manzoor Ahmed Wattoo held a meeting with Pakistan Automotive Manufacturers Association (PAMA) and car vendors on November 4, 2008. He gave them 10 days to reduce car prices, ensure immediate availability of cars in the open market, stop 'on' on cars or black marketing, said an official announcement by the Ministry issued after the meeting.

The PAMA has categorically denied that the Minister had requested the industry to reduce the price of cars, which, it maintains, would not be possible in any case owing to sharp increase in the cost of production and due to the fact that car prices are determined by independent companies reacting to their individual cost structure and market requirements.

Sources said that the ECC in its meeting on October 27, 2009 directed the Minister for Industries and Production to look into the reasons for increase in the prices of locally manufactured cars and submit a report on measures taken to rationalise the prices. According to sources, the ECC re-emphasised that all sponsoring Ministries/Divisions should reinforce their efforts to implement outstanding decisions including rationalisation of car prices. Car manufacturers increased the prices of cars twice this year, which, according to the official, is unjustified.

Sources said that Industries Ministry rejected the 'cost working' submitted by the car manufacturers and requested that a realistic production cost be presented in the next meeting, as the prevalent prices are abnormal. "I am answerable to higher fora like the Cabinet and the ECC," sources quoted the Minister as telling car manufacturers.

The Competition Commission of Pakistan (CCP) has given a presentation to the ECC, according to which there are 9 units involved in the assembly/manufacture of cars in the country with the capacity of 275,000 units. In global terms, the domestic assembly of cars is small but is nevertheless a significant activity in the development of engineering skills within the manufacturing sector in Pakistan.

The overwhelming bulk of inputs used are imported vehicles are imported in CKD (completely knocked down) condition and are assembled by Pakistani labour. However, only marginal progress has been made in the last four or five years to enhance domestic value-addition through the involvement of local content suppliers. Compared to, say, East and South-East Asia, car assembly remains small scale with minimal technological innovation in the sector.

The CCP observed that it was not able to find any meaningful evidence of cartelisation in the automobile industry, even though there have been suspicions of restrictive practices going back some years. A large number of serious complaints were received by erstwhile Monopoly Control Authority (MCA) from time to time, on the basis of which a study was conducted in 2002-03, but it was not possible to establish any wrongdoing.

The main reason for this was that although high prices were prevalent in the industry and the manufacturers were extracting high price premiums, these could be attributed to market dynamics and the interaction of supply and demand. Neither conscious parallelism nor cartelisation was evident. More importantly, much of the market behaviour was the result of government tariff policy, making this an inappropriate case for intervention by the MCA.

The most significant policy measure was the government's ban on import of used cars in 1994, and the integration in 1995 of all taxes and duties into a single 30 percent duty slab on completely knocked down vehicles and 100 percent on completely built up ones, progressively rising with engine size. This resulted in a price spiral in domestically manufactured cars.

From 1994 to 2002, Honda, Suzuki and Toyota increased their prices at least six times, amounting to an average increase of 75 percent over 1994 prices. As a result, prices rose to levels that were more than double of those in Pakistan's immediate neighbours. Premiums became very high when manufacturers obliged the customers to pay full amount upfront but gave delivery several months later. The huge gap between demand and supply persisted for 12 years, from 1994 to 2006.

Rather inexplicably, capacity utilisation in the industry, on average, was 40 percent (60 percent capacity remaining idle). On the face of it, this was restriction of supply. However, the industry succeeded in negotiating highly favourable terms with the government, which continued to provide it protection based on the argument that the industry was in its infancy, even though many argued against it from the point of view of public welfare and long-term development.

The government went to the extent of seeking repeated exemptions from WTO in favour of domestic car makers, even though they did not abide by their commitment to progressively delete foreign components from imported vehicle assembly kits. The gap between demand and supply appeared to have been bridged to some extent in 2006 when the government allowed import of used cars, as had been recommended by MCA several years earlier.

The terms of these imports have been subsequently amended, as have some financial terms, but these policy changes are far from radical and their impact on the state of competition is unlikely to make a significant difference. The basic structure of the industry remains the same as it was 15 years back. Before imports were allowed, it was an oligopoly of six firms (Honda, Suzuki, Toyota, Nissan, KIA and Hyundai) with four (Honda, Suzuki, Toyota and Hyundai) assemblers catering to 97 percent of the domestic market.

With imports, the market share of domestic manufacturers substantially reduced, but their number and size distribution remains roughly the same. The industry appears to be a classic case of an oligopoly characterised by very high entry barriers in the form of minimum investment needed. Its structural features determine the price and conduct of the firms, as well as their performance.

http://www.brecorder.com/index.php?id=98...=&supDate=