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Competition Impact Assessment Report of the Automobile Industry of Pakistan January 2013 COMPETITION COMMISSION OF PAKISTAN This study assesses the level of competition in the Automobile Industry of Pakistan.

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Automobiles and competitive advantage for automobile producers in Pakistan.

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Page 1: Automobile Sector Study 2013

Competition Impact Assessment Report

of the

Automobile Industry of Pakistan

January 2013

COMPETITION COMMISSION OF PAKISTAN

This study assesses the level of competition in the Automobile Industry of Pakistan.

Page 2: Automobile Sector Study 2013

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DISCLAIMER

The views expressed in this Report do not necessarily reflect the Commission's

views or position arising out of, or impacting upon, any inquiry, investigation or

other proceedings carried out by the Commission. Neither the Commission, nor

its Members, employees and any of its consultants, assume any legal liability or

responsibility for the accuracy, completeness or any third party use or the result of

such use of any information contained in this Report. Publication of this Report is

designed to assist public understanding of competition issues.

Page 3: Automobile Sector Study 2013

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Contents

DISCLAIMER 1

1 EXECUTIVE SUMMARY 4

2 THE AUTOMOBILE SECTOR: A GENERAL OVERVIEW 6

2.1 The Steps of Production 6

2.2 A Focus on the Core Competence 7

2.3 From Producers to Buyers 8

3 THE AUTOMOBILE SECTOR IN PAKISTAN 9

3.1 Introduction 9

3.2 Brief History and Key Players 9

3.3 Marques and Market Shares 10 3.3.1 The 800 cc Segment 14 3.3.2 The 1,000 cc Segment 15 3.3.3 The 1,300-1,800 cc Segment 16

3.4 Demand for Cars Error! Bookmark not defined.

3.5 The Supply Situation 19 3.5.1 Imports 20 3.5.2 New Entrant Policy 23

3.6 Car Prices 27 3.6.1 Price Parallelism 30 3.6.2 Safety Standards, Quality & Emission Control Policy 31

3.7 Payment of Premium by Buyers 33 3.7.1 Honda Atlas 33 3.7.2 Indus Motor Company 34 3.7.3 Pak Suzuki 34

3.8 Dealership Agreements and Booking System 35 3.8.1 Dealership Agreements 35 3.8.2 Booking System 36 3.8.3 Observations 36

4 RECOMMENDATIONS AND THE WAY FORWARD 37

ANNEX 1: METHODOLOGY 39

1. Sources of the Methodology 39

2. Identify the Relevant Markets 39

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3. Identify the Competitors 39

4. Examine the Market Structure 39

5. Look for Barriers to Entry 40

6. Look for Anticompetitive ConductI 40 i) State-Owned Enterprises 40 ii) Public Procurement 40 iii) Regulated Sectors 41 iv) Trade Policy and Industrial Policy 41 v) Unequal Enforcement of Laws and Regulations 41

ANNEX 2: GOP’S AUTO INDUSTRY DEVELOPMENT PROGRAMME (AIDP) 42

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1 Executive Summary A competition assessment is the assessment of laws and their impact on the sector; concentration levels of the

players in the sector; and the behaviour of market players and their effect on competition. A competition

assessment analyses the strength of competition in the sector and identifies any factors impeding efficient

competition.

The automobile industry was established in Pakistan in 1950 and since then has fluctuated through different phases

of remaining in private and public controls. From 1980s onward, the control of the automobile industry remained

in private hands. For the purpose of this report, the competition assessment of the passenger cars in the

automobile sector in Pakistan has been analyzed. Presently, there are three major car manufacturers/assemblers in

the car industry in Pakistan namely; Pak Suzuki Motor Company Limited, Indus Motor Company Limited (Toyota)

and Honda Atlas Cars Limited. Between 2001 and 2011, car sales in Pakistan increased by 217% and the sales of

the above mentioned three players mainly contributed towards this growth. Indus Motors, Pak Suzuki Motors and

Honda Atlas have increased their sales by almost 322%, 241% and 217% respectively in this time period.1

Currently, in the 800 cc and 1000cc market segment, Pak Suzuki is the sole local manufacturer/assembler while in

the 1,300-1,800 cc, the state of competition is slightly better with Honda, Suzuki and Toyota competing amongst

each other for market share. Parallel fall in prices in 2009/10 along with rise in prices by manufacturers in the last 3

years from 2010-12 may be a cause of concern from a competition perspective. In all the three market segments,

the manufacturers/assemblers have excess installed capacities which act as barrier to the entry of potential new

firms. By not utilizing their excess capacities, the incumbent firms signal their inward looking approach towards

domestic industry. In addition, the first Auto Industry Development Programme (AIDP) has failed to meet its

production targets and has not changed market dynamics.

Pakistan automobile industry is inward looking and it tries to protect itself through the use of regulatory

instruments. Pakistan needs to develop automobile industry instead of protecting it and in this regard, imports

have a disciplinary impact on domestic firms. Currently, the import of cars is allowed only under the Gift, personal

and Baggage Schemes with restriction on allowable age limits. The policy for import of cars with an allowable age

limit of 5 years remained in practice until 12 December, 2012. This policy was changed and the allowable age limit

was again reduced to 3 years in December, 2012. Furthermore, on 31 August, 2012, the depreciation rules were

also changed. If the cumulative effect of both these policy changes is taken into account, the government has

further tried to protect the domestic automobile industry at the expense of consumers. For safety and quality

standards, government established in 2000, Pakistan Standards and Quality Control Authority (PSQCA) which has

so far developed standards for only 2 wheelers. Due to the absence of regulation, the domestic automobile

manufacturers do not offer safety features such as Anti-lock Breaking System (ABS), airbags and emission standards

along with quality specifications such as alloy rims, power steering and windows in all their vehicles. In addition,

Pakistan has aging automobile population which is an increasing burden to the economy due to increased emission

levels and a growing safety hazard. The current dealership/supply chain structure in the industry does not allow for

meaningful competition as Dealerships are behaving merely as agents of the manufacturing companies and have no

real incentive to compete in the market. Due to delay in deliveries, premiums are charged in the secondary

markets.

Major recommendations of the report to improve competition, both in the short run and long term are:

1. Opening up of domestic market to the import of new cars at reasonable tariffs and reducing protection of

local industry to allow foreign competition for the benefit of consumers will bring in new technology and

offer more choice to the consumers. This increased competition will reflect in better pricing and

improved quality, as well as availability of cars on demand.

2. The recent reduction of allowable age limit for import of cars from 5 to 3 years in December, 2012 will

further protect the domestic automobile industry which is already inward looking. Import of 5 year old

vehicles provides a better competitive environment in the local automobile industry; however the idea of

1 PAMA website, http://www.pama.org.pk/

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increasing the age limit from 5 years to older than 5 years on the import of used cars may be subject to

strict road worthiness tests. It is preferable for the import of used cars to be open, rather than allowed

under the Gift, Personal and Baggage Schemes that add transaction costs. It is also necessary to have

stringent evaluation measures to assess the depreciation and actual values of the used imported vehicles.

3. Removing the entry barriers imposed by higher tariffs for imports by significantly lowering the tariffs and

making them relatively more uniform across all automobile categories. This will make cars more

affordable, push the local assemblers to be more competitive, and incentivize the automobile industry to

strive towards international standards and pricing. The tariff structure needs to be finalized in consultation

with the National Tariff Commission (NTC).

4. The recent measure of lowering the depreciation allowance needs to be reconsidered as it may reduce

consumer welfare by increasing the price of imported used cars.2

5. Mandatory testing for emission and road-worthiness are needed to be introduced as part of a regulatory

regime and renewal of registration of vehicles may be contingent on passing of requisite tests in line with

developed countries.

6. Dealerships are merely agents of the manufacturing companies and have no real incentive to compete in

the market. It is proposed that strict laws should be implemented that prohibit both parties

(manufacturers and dealers) from charging any premiums from the customer. Increased competition

would also eliminate the premium problem, as cars will be readily available and customers will not have to

wait for 6 months before receiving their car after having paid the full price in advance.

2 FBR Custom General Order (CGO) 13/2012

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2 The Automobile Sector: A General Overview The global automobile industry of 2012 has come a long way from the “horseless carriage” of the 1890s, emerging

as a market leader in the manufacturing activity, providing employment to one in seven people in the world, either

directly or indirectly.

Termed as the ‘industry of industries’ by the renowned Peter Drucker, the automobile industry in the USA set

standards in manufacturing activity by innovating mass production techniques during the early 1910s. The Japanese

soon followed by offering lean production techniques in the 1970s. Riding high on economical revival in many

developing countries in Asia and Europe, the industry’s global output touched 64.6 million vehicles in 2005.

Recently, China and India have attracted the attention of global auto-makers, vying for setting up a cost-effective

export-base for meeting the demand from Asian markets. Despite government controls, the Chinese market

witnessed car sales of around 14.5 million in 2011.3

A booming economy and a low interest regime also helped India in crossing the one million unit sales figure in

2004 for the first time. The sale of commercial vehicles showed a record growth of 29% over 2003. Foreign auto-

makers such as Mercedes Benz, Volkswagen, General Motors (prior to bankruptcy), Honda, Toyota, Ford, Fiat and

Mitsubishi endeavoured to set up their manufacturing units in India to tap the growing demand. However, the

recent global automobile industry crisis in 2008-2010 saw the auto industry pass through a difficult period, mainly

due to substantial increase in the prices of automobiles. This discouraged purchases of SUVs (Special Utility

Vehicles) and pickup trucks that were the primary focus of the American "Big Three" automakers namely General

Motors, Ford, and Chrysler. As a reaction to this crisis, major manufacturers including the Big Three and Toyota

implemented creative marketing strategies and offered substantial discounts to improve sales. In China, the

government reduced taxes on automobiles in order to spur flagging sales. In Europe, the European Commission

offered a common rescue package to all the EU member states.4

2 . 1 T H E S T E P S O F P R O D U C T I O N

From the design of a car to getting it to a customer, a number of steps are

involved.

Design (High Value Addition) - After researching consumer wants and

needs, automakers begin designing models, which are tailored to the public

demand. In the past, this design process has taken up to five years. Today,

however, through the extensive use of computers, it is possible to develop

prototypes, or “concept cars,” from scratch in less than a year.

Raw Materials (Low Value Addition) - These include rubber, glass, steel,

plastic, and aluminium. Over the past few years, the cost of raw materials has

increased significantly, mostly due to the price increase of oil and natural

rubber. Also, companies are now using aluminium and plastic in place of steel

whenever possible in order to reduce the weight of the automobiles, which in

turn improves fuel efficiency, but more prone to roll-over

Parts (Medium Value Addition) - Tires, windshields, and air bags are

examples of car parts. Parts may be manufactured by third parties based on

the specifications provided by the car manufacturer.

Assembly (Medium Value Addition) - Due to the combination of rising raw materials’ costs and consumers’

eternal search for the lowest price, companies are looking for ways to cut costs out of the manufacturing process.

Recent trends to reduce costs include using fewer parts in each vehicle component or common parts between

3 http://www.reuters.com/article/2012/01/12/china-auto-idUSL3E8CC2C720120112

4 "Germany's Steinmeier Calls for EU to Rescue Ailing Car Industry." TOP STORIES. N.p., n.d. Web. 09 Oct. 2012.

<http://www.dw.de/dw/article/0,,3801809,00.html>

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different models, minimising industrial waste and pollution, and having parts delivered to assembly plants on a just-

in-time basis.

Marketing (High Value Addition) - Marketing is an integral part of the value chain, since it is the primary basis

for consumers’ perceived values. Automakers and individual dealers work together to create national, regional, and

local marketing strategies that include television and radio advertising or special incentives offered to customers.

Distribution and Sales (High Value Addition) - After production is complete, automobiles are shipped to

dealerships around the world to be sold. Dealers also often offer incentives to increase sales.

2 . 2 A F O C U S O N T H E C O R E C O M P E T E N C E

In the 1890s, the automobile industry in the US was horizontally de-integrated. Manufacturing units evolved in

regions with skilled labour. By the middle of the 20th Century, however, Ford and GM brought about consolidation

in the industry. The companies themselves were vertically integrated. The market was oligopolistic in nature. Huge

production costs deterred new firms from entering the market. GM emerged as the market leader, wielding high

influence over market prices. By 1920s, Ford perfected mass production techniques. The company also took

initiatives for a high degree of vertical integration by owning its own steel mill and forging factory. Other players

followed suit to achieve substantial cost savings e.g., the take-over of Fisher Body by GM.

Quite contrary to the vertical integration in the US auto-makers, Japanese auto-makers practiced ‘relational

contracting.’ The practice of ‘Just-In-Time’ delivery as part of the lean production techniques gave rise to a healthy

relation between the assemblers and the suppliers of automobile components.

By the 1980s, however, the industry showed renewed signs of vertical de-integration. Chrysler formed strategic

tie-ups with suppliers for major components, and in turn concentrated only on designing, assembling and

marketing. These initiatives helped Chrysler to realise the highest average profit per vehicle amongst the Big

Three. All the components of a car were outsourced to suppliers who offered lowest prices. This trend has

become prevalent to the extent that numerous part suppliers cater to the needs of a particular manufacturer, as

shown in (Figure 1). The same is the case with auto part suppliers and manufacturers in Canada, China, Japan and

India, where the automobile industry is highly fragmented and is facing increased consolidation.

Figure 1: Consolidation in the Parts Industry (Source: Autonews.com)

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2 . 3 F R O M P R O D U C E R S T O B U Y E R S

Once a quintessential example of a producer driven industry, the automobile industry has in recent years become

less producer and more buyer-driven. Ever since the inception of the Japanese lean model of production and the

“just in time” era, automobile makers have slowly made a transition towards designing and manufacturing

automobiles that increasingly match customers’ wants. This determines the designing and modelling of new

vehicles. The industry’s move toward a buyer-driven market is also apparent in how cars are becoming more

customisable from the factory, rather than through aftermarket parts.

Also, the characteristics that signal a move toward the buyer-driven model are more apparent in countries that

have a longer use of passenger vehicles, such as the US. The market has become saturated and has become more

of a replacement market, where choice matters.

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3 The Automobile Sector in Pakistan

3 . 1 I N T R O D U C T I O N

The automobile industry plays an important role in the development of the national economy in terms of revenue

generation, foreign exchange, human resource development and technology transfer. Statistics show that as of

January 2010, the auto sector in Pakistan employed 215,000 individuals, directly represented US $ 1.09 billion in

investments and contributed US$ 3.6 billion to the GDP of the country. It is also an important source of revenue

to the Government of Pakistan and contributed US $ 0.82 billion annually to government’s exchequer through

taxes (Table 1).5

Table 1: Pakistan Automobile industry key statistics6

Employment (direct) 215,000

Investment US $ 1.09 billion

Contribution to GDP $3.6 billion

Contribution to Revenue Indirect Taxes US $ 0.82 billion

Foreign Exchange Saving US $ 1500 million

3 . 2 B R I E F H I S T O RY A N D K E Y P L AY E R S

The automobile industry in Pakistan came into being with the establishment of a public limited company called

National Motors Limited (NML) in 1950. The NML was established by General Motors, USA, to make both

passenger cars and commercial vehicles.7 From that point onwards, the industry has undergone different phases. It

remained in the private sector until 1960 and during that period, an indigenisation level of 20% was achieved. The

1970s saw a period of nationalisation and a public sector company was formed with the name of Pakistan

Automobile Corporation (PACO). From 1980s onward, the process of privatisation started and the private sector

re-entered the industry. Different vehicles e.g. Suzuki, Toyota, Honda, Hyundai, Santro, Kia, Cuore, Revo, Proton,

and Chevrolet cars were introduced by PACO, Pak Suzuki Motors, Indus Motors, Honda Atlas Cars, Dewan

Farooq Motors, Adam Motors, Proton, Geely and Nexus Auto.

Currently, the automobile industry in Pakistan has three major car manufacturers/assemblers. Pak Suzuki Motors

(Pak Suzuki) is a joint venture formed in 1983 between the Pakistani government and Suzuki of Japan. Pak Suzuki is

in the business of assembling, progressively manufacturing, marketing and distributing Suzuki brand vehicles in

Pakistan. Both parties have entered into a Technical Assistance Agreement. Pak Suzuki manufactures cars for the

middle-income group in Pakistan.

Indus Motor Company Limited (IMC) is a joint venture company set up by Toyota Motor Corporation, Toyota

Tsusho Corporation, and members of the House of Habib. All three parties have entered into a Technical

Assistance Agreement in which IMC has been granted a license to manufacture Toyota cars in Pakistan. In late

2010, it began domestic production of the Toyota Hi-Lux, a utility vehicle. Similarly, Diahatsu Motor Co. Limited

(Daihatsu) has signed a Technical Assistance Agreement with IMC, granting IMC a license to manufacture Daihatsu

motor vehicles in Pakistan.

The third important player in the automobile market is Honda Atlas Cars (Pakistan) Limited (HACPL), which is

also a joint venture between the Atlas Group and Honda Motor Co. Ltd., Japan. The company was created by the

merger of Panjdarya Limited and Atlas Autos Ltd. in 1988. HACPL has signed a Technical Assistance Agreement

with Honda to assemble, manufacture, market and distribute the Honda Civic and City cars in Pakistan.

5 Exchange rate used for currency conversion: 1 USD= 84.5 PKR

6 Information received from Engineering Development Board (EDB) in April 2012. 7 Asif, Muhammed “Diagnostic Study: Auto parts Cluster in Lahore” United Nations Industrial Development Organization (UNIDO) and Small

and Medium Enterprise Development Authority (SMEDA), June 2006

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Other manufacturers/assemblers with a smaller presence in the country include Gandhara Nissan Limited (GNL)

and Dewan Farooque Motors Limited. GNL was incorporated in 1981 and has a Technical Assistance Agreement

with Nissan Motor Co. Japan and a Joint Venture Agreement with Nissan Diesel Co. Japan for the progressive

assembly of passenger cars and other commercial and heavy duty vehicles. In 1998, Dewan Farooque Motors

Limited signed Technical License Agreements with Hyundai Motor Company and KIA Motors Corporation as the

manufacturer and distributor of Hyundai and Kia vehicles in Pakistan. Nissan and KIA have stopped operations in

Pakistan since 2005, whereas Hyundai has stopped producing cars since 2010, largely due to financial difficulties

being faced by the Dewan Group.

3 . 3 M A R Q U E S A N D M A R K E T S H A R E S

According to Pakistan Automobile Manufacturers Association (PAMA), in 2011, eleven models by four

manufacturers account for all automobile sales in Pakistan. Japanese marques have the largest share of automobile

sales, followed by those of South Korea. The market for passenger cars is highly concentrated as measured by the

Herfindahl-Hirschman Index (HHI) and shown in Table 2 below.8

Table 2: Concentration Indices of the Automobile Sector, Pakistan

Passenger Car Manufacturer Market Share (s) s^2

Honda 8.62 % 74.30

Suzuki 62.18 % 3866.35

Toyota 27.84 % 775.07

Others 1.35 %

HHI > 4715.72

Three companies, namely Pak Suzuki Motors, Indus Motors (Toyota), and Honda Atlas dominate the market. In

2010/11, the top-selling car with an engine capacity of 1,300cc or above was the Toyota Corolla, followed by two

Honda models, the City and the Civic. Among smaller cars, the models most in demand were the Cultus, the

Bolan and the Mehran, all made by Suzuki.

Between 2001 and 2011, car sales in Pakistan increased by 217%. The market shares of the three main car

producers also show significant changes. These changes, however, are not uniform and uni-directional. Table 4

shows the changes in the market shares of the three main car producers in Pakistan since year 2006. One can

clearly see that the Pak Suzuki’s market share was 59% in 2006, which has risen slightly to 60% in 2012. Indus

Motors, the producers of Toyota cars in Pakistan, has registered significant growth by increasing its market share

from 19% in 2006, to 29% in 2012. Honda Atlas, on the other hand, has seen a decline of around 2% in market its

share since 2006. Similarly, other car producers have also seen their market share decline by a little over 7% in

these six years. Figure 2 shows the same trend.

Table 3: Car Production & Sales from 2006-2012

CAR 800CC 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12

Daihutsu (Cuore) P 12,786 12,406 5,803 5,145 6,280 3,635

S 12,776 12,204 5,852 5,301 6,007 3,857

Net difference P-S 10 202 (49) (156) 273 (222)

Suzuki (Mehran) P 36,988 36,249 13,239 22,271 25,935 33,839

8 The Herfindahl-Hirschman Index (HHI) is an index that measures market concentration, a function of the number of firms in a market and their respective market shares. The HHI is calculated by summing the squares of individual market shares of all the participants. The higher the

HHI, the less competitive the market is. For example, an HHI>1800 is the indication that market is highly concentrated.

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S 37,007 35,526 13,421 22,513 24,119 35,131

Net difference P-S (19) 723 (182) (242) 1,816 (1,292)

Suzuki (Bolan) P 15,520 17,250 9,639 10,541 14,359 21,594

S 15,566 17,209 8,664 11,439 13,311 22,540

Net difference P-S (46) 41 975 (898) 1,048 (946)

Suzuki (Margalla) P 0 0 0 0 0 0

S 0 0 0 0 0 0

Net difference P-S 0 0 0 0 0 0

Total 800CC

cars produced P 65,294 65,905 28,681 37,957 46,574 59,068

Total 800CC

cars sold S 65,349 64,939 27,937 39,253 43,437 61,528

Total Net difference in

800CC category P-S (55) 966 744 (1,296) 3,137 (2,460)

CAR 1000CC 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12

Suzuki (Cultus) P 29,880 27,662 9,181 12,453 12,414 13,600

S 29,837 27,563 9,198 12,658 11,428 13,693

Net difference P-S

43

99

(17)

(205)

986

(93)

Suzuki (Alto) P 21,546 18,805 6,641 10,665 12,873 15,288

S 21,988 19,097 6,550 10,794 11,932 16,288

Net difference P-S

(442)

(292)

91

(129)

941

(1,000)

Hyundai P 2,225 2,028 327 212 0 0

S 3,470 2,227 404 244 0 0

Net difference P-S

(1,245)

(199)

(77)

(32) 0 0

Total 1000CC

cars produced P 53,651 48,495 16,149 23,330 25,287 28,888

Total 1000CC

cars sold S 55,295 48,887 16,152 23,696 23,360 29,981

Total Net difference in

1000CC category P-S (1,644) (392) (3) (366) 1,927

(1,093)

CAR 1300+CC 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12

Honda (Civic) P 5,610 5,813 4,985 5,648 6,408 5,396

S 6,513 5,762 4,662 5,908 6,365 4,977

Net difference P-S

(903)

51

323

(260)

43

419

Honda (City) P 10,461 8,220 6,755 7,852 9,294 7,089

S 11,848 8,439 6,482 8,212 9,121 7,142

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Net difference P-S

(1,387)

(219)

273

(360)

173

(53)

Suzuki (Baleno) P 0 0 0 0 0 0

S 0 0 0 0 0 0

Net difference P-S 0 0 0 0 0 0

Suzuki (Liana) P 5,964 2,605 684 900 614 334

S 6,067 2,983 851 1,025 470 450

Net difference P-S

(103)

(378)

(167)

(125)

144

(116)

Suzuki (Swift) P 0 0 0 2,578 4,376 7,128

S 0 0 0 2,353 4,080 7,040

Net difference P-S 0 0 0 225 296 88

Toyota (Corolla) P 35,036 33,672 27,054 43,382 41,419 46,352

S 35,782 33,640 26,760 43,510 41,111 46,207

Net difference P-S

(746)

32

294

(128)

308

145

Nissan (Sunny) P 0 0 0 0 0 0

S 0 0 0 0 0 0

Net difference P-S 0 0 0 0 0 0

Kia (Classic NGV) P 0 0 0 0 0 0

S 0 0 0 0 0 0

Net difference P-S 0 0 0 0 0 0

Kia (Spectra) P 0 0 0 0 0 0

S 0 0 0 0 0 0

Net difference P-S 0 0 0 0 0 0

Total 1300+CC

cars produced

P 57,071 50,310 39,478 60,360 62,111 66,299

Total 1300+CC

cars sold

S 60,210 50,824 38,755 61,008 61,147 65,816

Total Net difference in

1300+CC car category

P-S

(3,139)

(514) 723

(648) 964 483

CAR 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12

Total cars produced

including all

categories P 176,016 164,710 84,308 121,647 133,972 154,255

Total cars sold

including all

categories S 180,854 164,650 82,844 123,957 127,944 157,325

Total Net difference

including all

categories P-S (4,838) 60 1,464 (2,310) 6,028 (3,070)

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Source: PAMA website

Table 4: Market shares of the Three Major Companies (%)

Source: PAMA website

Figure 2: Market Share of the Three Major Car Producers in Pakistan

Source: PAMA website

A better picture of market share is revealed if one divides the car market in Pakistan into relevant product

markets according to the engine sizes. From the consumer’s perspective, while the cars of different engine sizes

are substitutes with respect to products characteristics and intended use but they are not substitutes with respect

to price and affordability. This way one can also see market share as an indicator of market power. For this

purpose, let us divide the car market into the following three different categories based on the size of the car

engine:

1. 800 cc

2. 1,000 cc

3. 1,300cc-1,800 cc

Company 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12

MS of Suzuki 61% 62% 47% 49% 51% 60%

MS of Toyota 20% 20% 32% 35% 32% 29%

MS of Honda 10% 9% 13% 11% 12% 8%

Others 9% 9% 8% 4% 5% 2%

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3.3.1 The 800 cc Segment

The 800 cc car market has only one producer, Pak Suzuki, with Indus Motors (Daihatsu Cuore) discontinuing

production in 2012 making Pak Suzuki, the only player operating in this market segment. Although the Suzuki

Mehran and Bolan are just under 800 cc and Daihatsu Cuore is a little less than 850 cc, for our study we have

classed them in the same engine size category. Also, though the characteristics of the Bolan are different from the

other two cars (passenger carry configuration vs. a sedan), nevertheless, we consider it practical to include it in the

comparison.

Table 5 shows the number of cars produced and sold in the first category from 2006 to 2012. The production and

sales data does not portray a consistent behaviour by the incumbent firms in this market segment. In some years,

production exceeds sales while in others, it’s vice versa. Different reasons may be ascribed to this phenomenon

such as risk averse behaviour by the incumbent firms, supply chain and planning decisions. One can see that when

the car market is subdivided according to engine sizes, a better picture is revealed. One can clearly see that this

market is dominated by Pak Suzuki Motors. Table 6 shows the actual market shares of the two companies in this

category. Pak Suzuki holds much of the market share of more than 85% in 2011, which has risen to 94% in 2012

with market share of Indus Motors (Daihatsu Cuore) falling from 14% in 2011 to 6% in 2012. Figure 3 shows the

same information graphically.

Table 5: Number of Cars Produced and Sold in the 800 cc Category

CAR 800CC 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12

Daihutsu (Cuore) P 12,786 12,406 5,803 5,145 6,280 3,635

S 12,776 12,204 5,852 5,301 6,007 3,857

Net difference P-S 10 202 (49) (156) 273 (222)

Suzuki (Mehran) P 36,988 36,249 13,239 22,271 25,935 33,839

S 37,007 35,526 13,421 22,513 24,119 35,131

Net difference P-S (19) 723 (182) (242) 1,816 (1,292)

Suzuki (Bolan) P 15,520 17,250 9,639 10,541 14,359 21,594

S 15,566 17,209 8,664 11,439 13,311 22,540

Net difference P-S (46) 41 975 (898) 1,048 (946)

Suzuki (Margalla) P 0 0 0 0 0 0

S 0 0 0 0 0 0

Net difference P-S 0 0 0 0 0 0

Total 800CC

cars produced P 65,294 65,905 28,681 37,957 46,574 59,068

Total 800CC

cars sold S 65,349 64,939 27,937 39,253 43,437 61,528

Total Net difference in

800CC category P-S (55) 966 744 (1,296) 3,137 (2,460)

Source: PAMA website

Table 6: Market Shares in the 800 cc Car Market (%)

CAR (800CC) 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12

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MS of Suzuki 80% 81% 79% 86% 86% 94%

MS of Daihutsu 20% 19% 21% 14% 14% 6% Source: PAMA website

Figure 3: Market Share in the 800 cc Category

Source: PAMA website

3.3.2 The 1,000 cc Segment

The 1,000 cc car market is dominated by Pak Suzuki, with Hyundai showing no production and sales since 2010.

Table 7 and 8 show the numbers of cars produced and sold and market shares in the 1,000 cc category. The

production and sales data in Table 7 present a similar behaviour by the incumbent firms as is observed in 800 cc

segment. Figure 4 shows the market shares graphically.

Table 7: Number of Cars Produced and Sold in 1,000 cc Car Category

CAR 1000CC 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12

Suzuki (Cultus) P 29,880 27,662 9,181 12,453 12,414 13,600

S 29,837 27,563 9,198 12,658 11,428 13,693

Net difference P-S

43

99

(17)

(205)

986 (93)

Suzuki (Alto) P 21,546 18,805 6,641 10,665 12,873 15,288

S 21,988 19,097 6,550 10,794 11,932 16,288

Net difference P-S

(442)

(292)

91

(129)

941 (1,000)

Hyundai P 2,225 2,028 327 212 0 0

S 3,470 2,227 404 244 0 0

Net difference P-S 0 0

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(1,245) (199) (77) (32)

Total 1000CC

cars produced P 53,651 48,495 16,149 23,330 25,287 28,888

Total 1000CC

cars sold S 55,295 48,887 16,152 23,696 23,360 29,981

Total Net difference in

1000CC category P-S (1,644) (392) (3) (366) 1,927

(1,093)

Source: PAMA website

Table 8: Market Shares in the 1,000 cc Car Market (%)

CAR (1000CC) 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12

MS of Suzuki 96% 95% 97% 99% 100% 100%

MS of Hyundai 4% 5% 3% 1% 0% 0% Source: PAMA website

Figure 4: Market share in the 1,000 cc category

Source: PAMA website

3.3.3 The 1,300-1,800 cc Segment

Tables 9 and 10 show the numbers of cars produced and sold and the market share of different companies in the

1,300-1,800cc category, respectively. One can see here that the state of competition is slightly better than the

other two categories. Honda Atlas, Pak Suzuki and Indus Motors (Toyota) compete amongst each other for

market share. The competition was more direct in this segment until 2011. When Honda launched the latest

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variant of the Civic in early 2006, the engine size was standardised at 1,800 cc for all four models. The previous

variants had engine sizes of 1,500 cc (the EXi) and 1,600 cc (the VTi). When Toyota launched its latest variant of

the Corolla in 2008, it discontinued its popular 1,600 cc SE Saloon and pushed the 1,800 cc Altis as a replacement

which in 2011 dropped to 1,600cc engine capacity. One also does not observe a wide variation in production and

sales data as is the case in 800cc and 1000cc market segment. A more pronounced competition in this market

segment may be a reason in limiting market power of the incumbents.

Looking at Table 10, one finds that this category is essentially dominated by Honda and Toyota with the latter

having the greater share of the market. Figure 5 shows this market share information graphically and reveals an

interesting trend between Honda Atlas and Indus Motors. The graph for the two companies almost indicates an

exactly opposing trend. The market shares for this category seem to be too neatly divided between the companies.

This trend requires careful examination.

Table 9: Number of Cars Produced and Sold in 1,300-1,600 cc Car Category

CAR 1300+CC 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12

Honda (Civic) P 5,610 5,813 4,985 5,648 6,408 5,396

S 6,513 5,762 4,662 5,908 6,365 4,977

Net difference P-S

(903)

51

323

(260)

43 419

Honda (City) P 10,461 8,220 6,755 7,852 9,294 7,089

S 11,848 8,439 6,482 8,212 9,121 7,142

Net difference P-S

(1,387)

(219)

273

(360)

173 (53)

Suzuki (Baleno) P 0 0 0 0 0 0

S 0 0 0 0 0 0

Net difference P-S 0 0 0 0 0 0

Suzuki (Liana) P 5,964 2,605 684 900 614 334

S 6,067 2,983 851 1,025 470 450

Net difference P-S

(103)

(378)

(167)

(125)

144 (116)

Suzuki (Swift) P 0 0 0 2,578 4,376 7,128

S 0 0 0 2,353 4,080 7,040

Net difference P-S 0 0 0 225 296 88

Toyota (Corolla) P 35,036 33,672 27,054 43,382 41,419 46,352

S 35,782 33,640 26,760 43,510 41,111 46,207

Net difference P-S

(746)

32

294

(128)

308 145

Total 1300+CC

cars produced

P 57,071 50,310 39,478 60,360 62,111 66,299

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Total 1300+CC

cars sold

S 60,210 50,824 38,755 61,008 61,147 65,816

Total Net difference in

1300+CC car category

P-S

(3,139)

(514) 723

(648) 964 483 Source: PAMA website

Table 10: Market Shares in the 1,300-1,600 (1,800) cc Car Market (%)

CAR (1300+CC) 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12

MS of Suzuki 10% 6% 2% 6% 8% 11%

MS of Honda 30% 28% 29% 23% 25% 18%

MS of Toyota 59% 66% 69% 71% 67% 70% Source: PAMA website

Figure 5: Market share in the 1,300-1,600 cc categories

Source: PAMA website

3 . 4 D E M A N D F O R C A R S

The 2000s have been a turning point in the Pakistan automobile sector. In 1999-2000, the industry had a negative

growth of 24% owing to lax demand. But since then, consumer demand surpassed available production capacities.

Strong GDP growth, abundant financing, rising incomes, and a growing population were factors that caused

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Pakistan’s automobile market to grow. In 2002/03-2006/07, annual growth in new passenger-car registrations

averaged 33%.

However, from 2007 onwards, sales declined and in 2007-08, registrations fell by 9%; the decline increased to

almost 50% in 2008-09 as high consumer price inflation reduced disposable income and the worsening economic

crisis took a toll on income growth. According to the data from the Pakistan Automobile Manufacturers

Association (PAMA), passenger-car sales fell by 49.6% year on year in fiscal year 2008/09 (July-June) to 82,844.

PAMA statistics, as quoted in the media,9 show that 1,000 cc cars sale decreased the most by 66%, to 14,683 units

in 2009 as compared with 43,560 in 2008, while 1,300 cc and above dropped by 23% to 34,764 units as against

45,551 units in the same period. Sales of less than 1,000cc cars fell by 57% to 25,846 units as compared to 60,416

units last year. Data for November 2009 indicates a decline in demand of 19% from the previous month.10

However the economy stabilised in 2009, helped by the government’s acceptance of emergency funding from the

IMF in November 2008. This was reflected in increase in the sales of cars by 50% for the year 2009/10, and the

number of cars sold rose to 123,957. In 2010/11, car sales grew by a small fraction to 127,944 units however sales

growth of 23% was recorded for 2011/12, which proved wrong the speculation that the automobile industry would

remain bleak due to weak economic growth.

3 . 5 T H E S U P P LY S I T U AT I O N

Production of cars in Pakistan takes place at 16 manufacturing plants. Consumers often have to wait for months

before receiving new cars. Most carmakers have been announcing plans to increase production volumes over the

next few years, such as Pak Suzuki, that initially had installed capacity of 50,000 units in 1994 that rose to 80,000

units and 120,000 units in 2005 and 2006 respectively. The current installed capacity of Pak Suzuki stands at

150,000 units in 2011. The increase in installed capacities of Suzuki (150,000), Toyota (50,000) and Honda (50,000)

has not been utilized optimally by the three major producers that have production which currently stands at

65,340, 41,111 and 15,486 units for the year 2010/11 respectively. Toyota has the highest capacity utilization of

82% followed by Suzuki (43%) and Honda (31%).11

Even though the installed capacity of the manufacturers/assemblers can easily cater to the needs of the local

market, yet the actual production of their units has not been up to the mark. Table 12 gives a comparison between

the installed capacity and the actual production of the local car manufacturers. It also depicts that all the

manufacturers/assemblers have excess installed capacities. The excess capacities maintained by the incumbent firms

act as a barrier to entry for the potential new firms and helps in maintaining their respective market power. By not

utilizing their excess capacities, the incumbent firms signal their inward looking approach towards domestic

market.

Table 11: Installed Capacity of Car Manufacturers and Production Figures, 2007-2011

Company Installed Capacity 2007-08 2008-09 2009-10 2010-11 2011-12

Suzuki 150,000 102,378 38,684 60,782 65,340 88,148

Toyota 50,000 33,640 26,760 43,510 41,111 46,352

Honda 50,000 14,201 11,144 14,120 15,486 12,485

Others 25,000 14,491 7,720 3,235 12,035 3,635

Total 275,000 164,710 84,308 121,647 133,972

154,255 Source: PAMA website

9 Car Sales Dip by 49% in 11 Months of FY09, Daily Times, 10 June 2009; http://www.dailytimes.com.pk/default.asp?page=2009\06\10\story_10-

6-2009_pg5_3 10 Car Sales Fell 19pc in Nov, The News, 11 December 2009 http://www.thenews.com.pk/print1.asp?id=212652 11 Auto Makers Unveil Cautious Production Plans, Dawn, 22 October 2009, http://www.dawn.com/wps/wcm/connect/dawn-content-

library/dawn/news/business/19-auto-maidpakers-unveil-cautious-production-plans-hh-79

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When one looks at the reasons of imbalance in demand and supply, the most important ones are the failure of

manufacturers/assemblers to meet the production targets and change in their focus because of changing policies of

the government. Starting from the year 2004-05, production of cars increased 27% as compared to the previous

fiscal year because of unprecedented increase in demand of locally manufactured cars. This increase in supply was

lagging behind the constant increase in demand and led to impediments and delays in deliveries. The gap between

supply and demand led to premiums in the secondary market.

The government hoped to address supply constraints through its Auto Industry Development Plan, which was

approved in January 2007.12 The plan presented a five-year policy for the automobile sector. To this end, the plan

permits new-vehicle assemblers to enter the market, allowing them to import completely knocked-down cars at

the same duty rate, 32.5%, that is levied on imported parts. The new plan was expected to lead to a substantial

increase in production and foreign investment in Pakistan’s vehicle-manufacturing sector but so far has not shown

any tangible results in improving competition in the market, while production still stands way below potential. Data

shows improvement for the first six months of financial year 2011-2012 (July-January), which showed total

production up by 10.25% year-on-year, while sales were 17.13% higher than the same period of the previous year.

However such improvement has not made it possible to meet the output targets set under the Automobile

Industry Development Plan.

3.5.1 Imports

In 2004, the government permitted imports of reconditioned cars to meet demand. The import policy presented in

October 2006 allowed the import of five year old used cars.13 Rules for importation of used cars were also

formulated which provided that import of vehicles can be made under the gift, personal baggage and transfer of

residence schemes. The Pakistani automobile industry went on the offensive about the import policy changes.

PAMA and the PAAPAM said that it would be a massive setback for the country’s native manufacturing plants.14

However, the government of the time tackled the objections raised by the automobile industry on the grounds

that there was a 30,000-40,000 gap in the supply of new cars in Pakistan which led to inflated prices and a long

waiting period for delivery. Allowing imports would ease the burden on consumers. The government also

increased the depreciation allowance on used car imports to two percent from one percent in the 2005-06

budget.

Local industry was affected by the imports and the Federal Government constituted a committee in 2007 to assess

the losses suffered by the local auto industry due to allowing the import of used cars, jeeps, light carriage vehicles,

trucks and buses. The committee comprised of representative from the Engineering Development Board (EDB),

Pakistan Association of Automobile Parts and Accessories Manufacturers (PAAPAM), and the four leading auto

manufacturers - Pak Suzuki, Indus Motor, Honda and Dewan Farooq Motors.

The committee was tasked to hear and compile the concerns of the stakeholders on the government’s import

policy relating to used cars and analyse the import data of used cars. The committee was asked to review the

import trends of used cars, taking into account the local production and demand and supply gap in the country.

The terms of reference of the committee, however, did not include a single provision for safeguarding the interests

of consumers. Based on its findings, the committee was to propose a future plan for the automobile industry.15

However, as yet, no tangible outcome or recommendation of this committee, assuming it still exists, has been

seen.

Imports shrank in 2009. The imposition of higher import duties as well as the steep depreciation of the Pakistani

rupee against the US dollar made imports more expensive. Import duties have traditionally been prohibitively high,

making imported cars (CBUs) expensive for all but the richest Pakistanis. In order to safeguard domestic

manufacturers’ competitive advantage, customs duty on CBU’s remains at 50% for 800 cc cars, 55% for 1,000 cc

cars, 60 % for 1,500 cc cars, 75% for 1,800 cc cars, and 100% for cars exceeding 1,800 cc. An additional regulatory

12 Auto Industry Development Programme (AIDP), Ministry of Industries, Production and Special Initiatives, Government of Pakistan, January 2008; http://www.engineeringpakistan.com/EngPak1/Auto%20Industry%20Development%20Programme%20(AIDP).pdf

13 http://www.commerce.gov.pk/SROs/0775-31072006-IPO.pdf

14 http://www.usedcarspakistan.com/2006/11/06/pakistani-government-revises-policy-on-importing-cars-to-pakistan/ 15 Allowing import of used cars, other vehicles: Body to assess losses suffered by domestic auto industry; source

http://www.dailytimes.com.pk/default.asp?page=2007\01\09\story_9-1-2007_pg5_1

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duty of 50% for luxury cars that exceed 1,800 cc was imposed as an attempt to improve the current-account

position by discouraging imports in the 2008/09 budget. The regulatory duty was, however, subsequently

withdrawn.

There is constant pressure from automobile manufacturing sector to ban the import of used cars completely,

thereby restricting competition posed by foreign cars, albeit used. The automobile manufacturers have argued that

a ban will help local manufacturers boost sales and when volumes grow, production cost will go down, thus

benefiting the end user16. The automobile manufacturers have previously been successful in one way or another to

restrict the import of used cars. Subsequently, the age limit for the import of cars was reduced from 5 to 3 years

during 2007-08. The Federal Board of Revenue also reduced the depreciation rate from 2% to just 1%17 on the

import of used cars in 2008, which further increased overall rates of duties and taxes on the import of used

vehicles. On the other hand, assemblers have failed to bridge the gap between supply and demand, especially of

cars of 800cc and 1,000cc engine size. The production of higher engine capacity cars remains the focus, which is

apparent from the fact that in 2011, 1,300cc or greater capacity cars made up more than 83% of total production.

3.5.1.1 Regulatory Regime for Import of Used Cars

In 2009, the Prime Minister instructed the Ministry of Industries to bring down car prices, but the auto industry did

not agree to tariff reductions, either on new cars, or on allowing the commercial import of second-hand cars.

However, the prevalent import policy at that time for used cars under the Gift, Personal, and Baggage Scheme

administered by the Ministry of Commerce was such that used cars up to 3 years old were importable, with a

depreciation allowance of 1% per month subject to a maximum cap of 50%. In order to reduce the price of cars in

the domestic market and increase consumer welfare, the Ministry of Commerce increased the allowable age limit

for import of used cars from 3 to 5 years in December 2010, under the Gift, Personal and Baggage Scheme.

Meanwhile, the Federal Board of Revenue (FBR) also increased the maximum cap of depreciation allowance to

60%18, while the depreciation allowance remained at 1 % per month.

The cumulative effect of an increase in age limit for import of used cars from 3 to 5 years under the Gift, Personal

and Baggage Scheme and maximum cap of depreciation allowance from 50% to 60% is that consumers may save a

maximum of 12% of the assessable value in the form of specific tariff reduction, depending upon the timing of the

export certificate in the country of origin.19 The domestic producers/manufacturers increased their production

from 133,972 units in 2010-11 to 154, 255 units in 2011-12, and due to the lagged effect of policy relaxation in

December 2010 and March 2011, imports increased from 9,486 units to 55,112 units during the same period.

More affordable product variety became available to consumers; however, domestic manufacturers kept on

increasing automobile prices during 2010-11 and 2011-12.

On 31 August 2012, FBR issued a Custom General Order (CGO) 13/2012 which may have the effect of increasing

the price of imported cars. Under the CGO 13/2012, the policy has been changed and contrary to the previous

practice of ‘counting the depreciation month from the date of first registration’, depreciation will now be

calculated from ‘the first day of January of the year subsequent to the year of manufacture till the date of shipment as per

Bill of Lading (B/L)’. The differences between the two policies are as follows:

16 http://www.thenews.com.pk/print1.asp?id=210590 17 SRO.577 (I)/2005 through a notification S.R.O.25(I)/2009 dated 12.01.2009

18 CGO 02/2011 dated March 26, 2011

19 Under the 3 years allowable age limit for the import of used cars, and with maximum cap of depreciation allowance of 50%, the maximum depreciation allowance that could be availed is 48% (1% per month * 48 months; for example, in December 2010, vehicles of 2007 model would

be importable, and if the export certificate is of January 2007, then from January 2007 to December 2010, 48 months depreciation allowance could be availed). Similarly, under the 5 years allowable age limit and with the maximum cap of depreciation allowance of 60 %, the maximum depreciation allowance that could be availed is 60 % ( 1% per month * 72 months - for example if we are in the December month of any year, then 5 years time period would be calculated as 72 months. Suppose, in December 2012, under the 5 years allowable age limit, the cars of

2007 model would be importable and if we calculate the period from January 2007 to December 2012, it would come to 72 months. But due to the maximum cap of 60 %, depreciation, the maximum depreciation allowance that could be claimed comes to 60% instead of 72%). The difference between maximum depreciation allowance under 5 years allowable age limit and 3 years allowable age limit with 1% depreciation

rate comes to 12% (60%-48%= 12%).

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a) Previously, registration book/export certificates issued by the competent authorities were used to avail

depreciation in taxes/import assessable value at the time of clearance. After the recent change in policy,

the Bill of Lading (B/L) issued by the shipping company in the exporting country would be used to avail

depreciation allowances as stated above.

b) A more restrictive regime has been imposed. For example, if a person had imported a car manufactured

in January 2007 (importable under 5 years age limit) under the previous policy that shipped to Pakistan in

September 2012, then, the importer could claim a total cumulative allowance of 69 % (1% per month*69

months= 69 %; from Jan 2007 to Sep 2012) as depreciation allowance. But due to the cap of maximum

depreciation allowance of 60 % on the import of used cars, the importer would have claimed the

maximum benefit of 60 %.

Under the current policy, due to insertion of words subsequent to the year of manufacture, the importer

depreciation allowance would start from January 2008 and the importer would be able to claim a cumulative

depreciation allowance of 57% (1% per month* 57 months; from Jan 2008 to September 2012).

In a more restrictive scenario, if a 2008 model vehicle shipped from the exporting country in January 2013

(because in 2013, under the 5 years old policy, cars of 2008 model will be importable), the maximum depreciation

allowance would be 48 % (1% per month * 48 months; from January 2009 to January 2013 ). The whole 2008 year

of depreciation allowance has been denied to the importer due to insertion of the words subsequent to the year of

manufacture, which will result in a price rise of roughly 12% of the assessable value in the domestic market

(otherwise the importer could have availed a maximum depreciation allowance of 60 % under the previous policy

that is from January 2008 to January 2013; 1 % per month * 60 months). For example, the assessable value of 1500

cc car is US$ 15,400. Then, due to the recent policy change, 12 % of US$ 15,400, which calculates to US $ 1,848,

will be denied to the car importer, and this will increase the price of imported cars.

The implications of this policy are such that the prices of imported used cars will increase in the domestic market

depending upon the engine capacity of the car (due to different assessable values) because as time goes by, the

importer will be able to claim more depreciation. The timing of increase in the price of the imported used cars will

coincide with the launching of new locally assembled models and due to an oligopolistic market structure;

domestic manufacturers may also increase prices of their new models instead of opting for an increase in

production.

As the prices of imported used cars would increase, the consumers may demand less imported car and may shift

their demand towards domestic car manufacturers. Our domestic car manufacturers are not exporting their

products; they are barely catering to the domestic market. Therefore, there would be a loss of consumer surplus,

and producers would gain at the expense of consumers. In addition, an effective tariff protection of 12 % of the

assessable value has been provided in the above example to domestic manufacturers through the policy change of

31 August 2012.

It is noticed that the propensity to import is greater for the older vehicles under the current used cars import

policy. The major reason for this is that the prevalent depreciation regime of 1 % per month, along with the

allowable age limit of 5 years and maximum cap of depreciation allowance of 60 % tend to favour the import of

older cars. Except for few cases, specific tariffs on new cars such as on 2012 models are so high20 that these tariffs

become prohibitive tariffs for the import of new cars. Consequently, the domestic automobile buyers have to rely

20 Buyers interested in purchase of new cars are most likely to rely on domestic manufacturers. This happens because if someone wants to buy 2012 model, due to less depreciation allowance available, it is not feasible for him/her to import a new model automobile. Depreciation

allowance is a facility that brings down the high level of prohibitive tariffs into a feasible range, and the older the vehicle, the greater is the depreciation allowance. Therefore, there is an incentive to import older vehicles, and that is why there is so much debate on age limit and depreciation allowance for the import of used vehicles. There is a special tariff regime for Asian make vehicles with an engine capacity of up to 1,800 cc. For example, the tariff on up to 800cc is US$ 4,400, up to 1,000 cc is US$ 5,500, for cars between 1001-1300 cc is US $ 11,000, for

cars between 1,301-1,500 cc is US $ 15,400, for cars between 1,501-1,600 cc is US $ 18,700 and for the cars between 1,601-1,800 cc is US $ 23,100. For vehicles from outside Asia and above 1,800 cc of any make, duty is calculated based on the Import Trade Price (ITP), and different methods for custom valuation are employed to determine the incidence of duty on imported vehicles. In addition, the import of vehicles is

prohibited from India only while it is open from the rest of the world.

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on domestic new models for their purchase of vehicles. This restrains consumers’ choice for better quality

competitive products with advanced technology.

Because of the policy change of 31 August, 2012, the consumer surplus of the consumers may decline due to the

impact of denying the importers the benefit of depreciation up to a maximum of 12% of the assessable value. Due

to this policy change, the consumers’ choice will be restricted.

The policy for import of cars with an allowable age limit of 5 years remained in practice until 12 December, 2012.

This policy was changed and the allowable age limit was again reduced to 3 years.21 If the cumulative effect of this

policy change along with the earlier depreciation rules adjustment22 is worked out, the importers/consumers could

claim a maximum depreciation allowance of 36% depending upon the timing of import. This move by the

government is to further protect the domestic automobile industry.

Trade openness is an important factor in fostering domestic competition as imports have a disciplinary impact on

domestic firms. The imports not only impose a major constraint on the domestic firm’s market power (Price-Cost

margins) but also both potential and actual competition induced by imports is effective in narrowing such margins.

There is a vast theoretical and empirical literature that argues that import competition increases the perceived

elasticity of demand for domestic firms, leading them to reduce their mark-up of price over marginal cost. The

reduction of Price-Cost margins benefits consumers by increasing their welfare. In addition, import competition is

expected to have the greatest impact on industries where domestic market conditions are such that competition

would otherwise be weak. Furthermore, the imports have stronger effects for the less technologically advanced

sectors and for small firms less capable of improving their product quality. The effect is also stronger for firms that

sell their products mostly on the domestic market.

The Pakistan auto industry is inward looking. Consequently, it tries to protect itself through the use of regulatory

instruments. We need to develop the auto industry, instead of trying to protect it. For example, even imported

cars with the present technology that are considered to be of better quality than domestic ones are going to be

rendered obsolete in the near future. China has recently launched an energy saving scheme and the old technology

vehicles are taken out of the encouraged sector in the Catalogue of Guidelines for Foreign Investment 2011 and the

Promotional Catalogue of Energy Saving Automobiles 2011. In addition, sectors with excess capacities have also been

taken out of the encouraged sectors.

If our domestic industry needs to sustain itself, it should focus on advanced technology, instead of trying to protect

old technology. Only through investment in technology, our domestic manufacturers can sustain themselves. The

parts and components manufacturers need to be flexible in their approaches to handle the parts and components

of high technology vehicles as well. Adapting to new technology and facing competition from the imported cars

may force our producers to invest in the technology, prepare better quality internationally competitive products,

and look outward to enjoy the benefits of economies of scale by serving larger markets.

3.5.2 New Entrant Policy

The first Auto Industry Development Programme was issued in 2008, and will conclude in 2012. The program

contained the following salient features relevant to the new entrant policy: 1) In case of cars, the potential new

entrant will have 500,000 units annual production in countries other than Pakistan. 2) The new entrant is also

required to be manufacturing at least 25,000 units of trucks and buses separately, 40,000 LCVs and at least 50,000

Agriculture Tractors annually in countries other than Pakistan. 3) The new entrant will have serious and

demonstrable intention to develop parts locally, either in-house or through the vendors, to achieve

competitiveness. 4) Proof of land acquisition in the case of a green field project or an agreement with the owner,

in the case of existing assembly facilities. 5) New Entrants will be allowed to import 100% of the CKD kit, at the

leviable customs duty, for a period of three years from the start of assembly/manufacturing.

The first condition of having 500,000 units of annual production elsewhere other than Pakistan is viewed as a

barrier to entry, especially for small and medium producers that want to enter the domestic market. Thus, this

21 Ministry of Commerce SRO 1441 (I)/2012

22 Custom General Order (CGO) 31/2012 dated 31 August, 2012

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policy attempts to attract only big players, whereas small and medium manufacturers are blocked. Similarly, the

condition on the new entrant of manufacturing at least 25,000 units of trucks and buses separately, 40,000 LCVs

and at least 50,000 units of agriculture tractors annually outside Pakistan is problematic for the following reasons:

1) It serves as a discriminatory entry barrier that puts the new entrant at a disadvantage as compared to the

already established automobile manufacturers in the country. This is because no such requirement is imposed on

Suzuki, Honda or Toyota that hold a dominant position in the passenger car manufacturing, whereas these

companies have negligible presence in the truck, bus or tractor market. Such a condition would make it almost

impossible for a new player that specializes solely in passenger car production to enter the market. 2) The

relevance of truck and tractor manufacture to the eligibility of being permitted to set up a car manufacturing plant

is questionable. A car manufacturer focusing solely on the car sector should be equally eligible to set up a plant in

Pakistan as a manufacturer engaged in the manufacture of a broad range of vehicles. Hence this restriction serves

as an unnecessary entry barrier and restricts competition.

The AIDP did not reduce the Effective Rate of Protection (ERP) available to the local automobile manufacturers.

The ERPs for the 800cc and 800-1000cc increased from 55% to 57% and 65% to 68% respectively during 2007-12

whereas the 1,000-1,500cc is the only category for which ERP fell from 73% to 68% in the same time period as

shown in Table-14. The policy has not managed to improve the market dynamics in terms of competition, and

since the inception of this policy up till now, no new entrant has managed to enter the automobile industry and

market domination of the three major manufacturers in the local market has continuingly increased.

The effective rate of protection is a commonly used measure for the net effect of trade policies on the incentives

facing domestic producers. The Effective Rate of Protection in case of the automobile industry shows the benefit

and added advantage that the domestic auto industry enjoys as compared to the imported Completely Built up

Units (CBUs) in the form of high tariffs on CBUs. The measurement of effective protection in case of the

automobile industry for various segments involves three inputs: % duty rate on CBU, % duty rate on CKD and the

% import of CKD, termed as “a”. The formula is:

ERP23 = (% duty rate on CBU) – {(a* % duty rate on CKD)}

(1-a)

The Effective Rates of Protection for the 800cc, 800-1000cc and 1000-1500cc car segments are shown in the

tables below along with the graphs showing the ERP trends across the first AIDP program (2007-12).

Table-14: ERP inputs and calculation for 800cc, 800-1000cc & 1000-1500cc car segments24

800cc CBU CKD a=% CKD import ERP

2007-08 50 35 0.28 55.83

2008-09 50 32.5 0.28 56.81

2009-10 50 32.5 0.28 56.81

2010-11 50 30 0.28 57.78

2011-12 50 30 0.28 57.78

23 Working Paper on Automobile Deletion Policy: An Analysis by Dr. Jaawaid A. Ghani.

24 Inputs obtained from PAMA & AIDP report.

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800-1000cc CBU CKD a=% CKD import ERP

2007-08 55 35 0.3464 65.60

2008-09 55 32.5 0.3464 66.92

2009-10 55 32.5 0.3464 66.92

2010-11 55 30 0.3464 68.25

2011-12 55 30 0.3464 68.25

1000-1500cc CBU CKD a=% CKD import ERP

2007-08 60 35 0.344 73.11

2008-09 60 32.5 0.344 74.42

2009-10 55 32.5 0.344 66.80

2010-11 55 30 0.344 68.11

2011-12 55 30 0.344 68.11

Figure-10: ERP of 800cc, 800-1000cc & 1000-1500cc segments under AIDP-1, 2007-12

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By the end of 2010, the government noted that there is a need for a new program for the automobile industry

considering that the five year term of Auto Industry Development Program (AIDP) would expire on 30th June

2012. The Engineering Development Board (EDB) therefore formed a committee, in November 2010 of the

stakeholders namely: Pakistan Automobile Manufacturers Association (PAMA) & Pakistan Association of

Automobile Parts and Accessories Manufactures (PAAPAM) to discuss the tariff proposals. The new AIDP

program is presently being finalized by the government.

In a reply sent by PAMA to CCP regarding the performance of the previous AIDP (2007-12) and the projections of

the next automobile program (2012-17), PAMA justifies the low target realization of the last AIDP 2007-12 as

follows:

“Unfortunately, from the latter half of 2007, the industry faced a decline in performance mainly due to

general recession in the world, deterioration of the Pakistan Economy and increase in interest rate on

Auto financing (20-22%). The Industry bottomed at 99,000 units in 2008-09 and is in the recovery

phase, selling 147,000 units in 2010-11. During the last decade four OEMs had entered into the

automobile market namely Hyundai, Kia, Nissan and Chevrolet with local collaborations to take their

share from the growing market but due to market decline all the new OEMs had closed down, shaking

the investor’s confidence in the industry very badly. Currently the industry is operating below their

capacities (55% in case of passenger cars), which has dampened the interest of any new entrant.”

PAMA states that the New Entrant policy is stipulated under Auto Industry Investment Policy (AIIP) of AIDP.

According to PAMA:

“As per AIIP a new entrant has the attraction on two counts: one the new entrant is not supposed to

immediately localize the components for which the manufacturing facilities exist and which are

importable at higher Tariff and, therefore, is allowed to import 100% CKD parts at 32.5% duty for a

period of three years; and second the new entrant does not have to pay 50% duty on such parts which

have been localized and which the new entrant is importing (as 100% CKD) whereas on import of such

parts the existing OEMs have to pay penalty duty @50%.”

PAMA is apprehensive of this new entrant policy and claims that:

“Such a policy places the existing players at a disadvantage as compared to new entrants by usurping the

level playing field, as the existing players, when they introduced new models, their investments are huge

and still they have to follow the current Tariffs including 50% Custom Duty on Localized parts i.e. they

don’t get any relief in tariff. Also when current OEMs had started their operations they were not given

any incentives, instead they had to follow a strict deletion programme. Still the Local manufacturers have

always welcomed new entrants in the industry as competition is always good for growth of the Industry. The industry believes that the tariff concessions available under the existing AIDP already give new

entrants a cost advantage over existing OEMs in the case of introduction of new vehicles, creating an

imbalance in the level playing field. Therefore there should not be any further tariff differential between

the existing players and a New Entrant.”

As far as the apprehensions of PAMA are concerned regarding duty rate reductions causing a non-level playing

field, it is pertinent to mention here that the last AIDP 2007-12 did offer minor duty rate reductions on CBUs in

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various car segments, however the duty rates on CKD had decreased as well, which resulted in even higher

Effective Rates of Protection than before the inception and implementation of the AIDP program. Hence, the

industry enjoyed substantial protection across the 5 years of the program. Granted that there was an economic

downturn, but still it must be noted that the first AIDP program failed to meet the required production target by a

large margin. Hence, measures that facilitate new entrants in the form of import tariff reductions and provision of

favorable market conditions in their early years of entry should not be compromised on the premise that such

measures would be detrimental for the already established industry. In reality, these steps would increase the

efficiency of the automobile industry by raising the level of competition among the existing players and new

entrants, the benefits of which would transfer to the consumers in the form of lower prices and more choices, and

in the long run this would help the domestic automobile industry to compete at a global level through exports and

generate revenue by adding value rather than remaining isolated to just the local market.

3 . 6 C A R P R I C E S

Car prices in Pakistan have been rising. The three leading manufacturers – Honda, Indus Motors and Pak Suzuki -

increased their prices thrice in 2008.25 Pak Suzuki raised its prices twice in the early months of 2008 and again in

January 2009. It then lowered prices in April as well as in July 2009 to try to boost sales in the face of collapsing

demand, but raised them again in September 2009 after the government’s imposition of 1% special excise duty in

July 2009. In October 2009, both Indus Motor Company and Honda Atlas also announced price increases.

In February 2010, Indus Motor Company once more announced price increases of PKR 10,000 on the basic model

of the Corolla and of PKR 20,000 on the deluxe models.26 According to a news item:

The Corolla prices have remained unchanged since October 2009, while during this period Pakistan rupee

depreciated by 5% against the Yen, which translates to over Rs 30,000 per vehicle on imported CKD and

over Rs10,000 in local vendor parts. In addition, there have been increases in labour wages and utility

prices. All these factors have forced the local OEMs (Original Equipment Manufacturers) to marginally

increase car prices, while absorbing most of the costs which has squeezed their margins and reduced

profitability.27

Segment-wise price increases show that in the 800cc car segment, both Mehran VXR (Suzuki) and Cuore CX

(Indus motors) experienced an initial fall and then a subsequent rise in prices from 2009 to 2011. For Suzuki

Mehran VXR the price in January 2009 was Rs 539,000 which fell by 4.6% to Rs 514,000 in January 2010 followed

by a rise in price to Rs 549,000 in January 2011. The price of the vehicle increased by 14% to Rs 625,000 in January

2012. In October 2012 this car was priced at Rs 632,000. On the other hand, Cuore CX in January 2009 started

with a price of Rs 619,000, and rose by 7.4% to Rs 665,000 in January 2010. In January 2011 this price rose by

another 7% to Rs 714,000. Price of this vehicle has recorded a significant increase in 2012 where the price rose by

18% to Rs 844,000 as compared to last year.

25 http://www.opfblog.com/2455/car-prices-in-pakistan-raised-third-time-in-3-months/

26 Indus Motor increases car prices, Dawn, 24 February 2010 (http://www.apnatime.com/4873/2010/02/24/general/costs-hit-indus-motor-increase-corolla-prices/) 27 Indus Motor increases car prices, Dawn, 24 February 2010 (http://www.apnatime.com/4873/2010/02/24/general/costs-hit-indus-motor-

increase-corolla-prices/)

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Figure 6: Price Comparison in the 800 cc Market Segment

Source: Price data received from Suzuki and Indus Motors

For the 1000cc segment the only player Suzuki experienced a price fall in both its models Alto VXR and Cultus

VXRi in 2009. Price of Alto VXR fell by 8.2% in 2009 whereas price of Cultus VXRi fell by 8.4% in the same period.

However, the price of both models increased again to their initial levels in 2010. After this period, the price

increased substantially for both models in 2011 and 2012, where the price of Alto VXR rose by 9.3% to Rs 771,000

and Cultus VXRi recorded price increase of 8.3% to Rs 965, 000 in January 2012. The price of Cultus VXRi in

October 2012 was Rs 985,000.

Figure 7: Price Comparison in the1000 cc Market Segment

Source: Price data received from Suzuki

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The 1,300cc is the most competitive segment including Honda, Toyota and Suzuki. Suzuki Liana showed a

continuous increase in price in this segment. Liana’s price rose by 10%, 4.5% and 11% across the 3 year period

from 2009-12. In February 2012, the price of Liana was as high as Rs 1,282,000. Since then the price of Liana has

increased by 7.8%% to Rs 1,382,000 in December 2012. In the same category, the price of Honda City fell by 5.6%

in 2009, and rose again in 2010 and 2011 by 7.5% and 7% respectively. The 1,800cc recorded a continuous increase

from January 2010 onwards after an initial price slump. The price of Civic VTI Oriel (Honda) rose by 12% from

2010-12 whereas the Civic i-Vtec model of Honda experienced a price increase of 9.8% in the same period. In

October 2012 the price of VTI Oriel stood at Rs 20,000,000 whereas the price of Civic i-Vtec was Rs 18,380,000

recoding price increase of 1.5% and 3.3% respectively from February 2012 onwards. Toyota also depicted the

same trend in prices as the Altis model cost Rs 1,754,000 in January 2010 followed by a price increase of 2.3% in

2011 and 4.7% in January 2012. The price of this model stood at Rs 1,899,000 in December 2012.

Figure 8: Price Comparison in 1,300-1800 cc Market Segment

Source: Price data received from Suzuki, Honda and Toyota

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Table 13, shows the price affordability of various cars based on engine size, and attendant costs.28 Pakistan holds an

affordability rank that ranges from 49-58 out of 59, which shows that for purchasing majority of the car types,

Pakistan remains one of the most expensive and unaffordable country for an ordinary automobile purchaser. This

analysis is done while taking into consideration the disposable income and the prices of different car categories and

various costs involved in the purchase.

Table 12: Price Snapshot and Affordability Rank

Item Price (US$) % of Monthly Personal Disposable Income

Affordability Rank

Low-priced car, 900-1,299 cc (low) 7,412 19,416 55 out of 59

Low-priced car, 900-1,299 cc (high) 7,971 20,880 52 out of 59

Compact car, 1,300-1,799 cc (low) 13,562 35,526 57 out of 59

Compact car, 1,300-1,799 cc (high) 18,834 49,334 56 out of 59

Family car, 1,800-2,499 cc (low) 14,904 39,041 53 out of 59

Family car, 1,800-2,499 cc (high) 49,521 129,717 57 out of 59

Deluxe car, 2,500 cc upwards (low) 51,118 133,901 52 out of 59

Yearly road tax or registration fee (low) 160 418.4 51 out of 54

Yearly road tax or registration fee (high) 192 502.1 49 out of 54

Cost of a tune-up but no major repairs (low) 95.85 251.1 57 out of 59

Cost of a tune-up but no major repairs (high) 128 334.8 57 out of 59

Annual premium for car insurance (low) 719 1,883 58 out of 59

Annual premium for car insurance (high) 1,597 4,184 57 out of 59

Source: The Automobile Industry Report Pakistan, October 2009, Economist Intelligence Unit

High tariffs on imports of cars had an impact on the price of the locally assembled cars, which rose. Given the lack

of competition from imports, customer choices were limited. In the budget for Financial Year 2009, a 5% Federal

Excise Duty was imposed on motor cars exceeding 850 cc. This duty was withdrawn, which benefited buyers of

larger engine size cars, but the smaller engine-size segment (less than 850 cc), which has a higher demand in the

market, will see no change in prices as the FED was not applicable.29 Advance tax on the purchase of locally

manufactured motor car/jeep has been extended to all types of motor vehicles and is collected by the registering

authority of Excise and Taxation Department at the time of registration. While it may not be reflected in the

vehicle price, it will still factor into the final cost of vehicle acquisition by the customer.30

3.6.1 Price Parallelism

A price comparison of similar models in various market segments of the industry based on engine size was done.

For this purpose, historical price data was collected from various car manufacturers for the last four years 2009-

12. The analysis has been conducted using common data points between competing models in each market

segment. The price comparisons recorded in Figures 6 to 9 above show a clear trend of price parallelism in the

industry. In every segment, each competing model follow the other as far as price goes. Their prices rise and fall in

a synchronised manner. This blends in perfectly with the earlier observation that there are market leaders in every

market segment in the industry which entails that the others are most likely followers. However, this data analysis

on its own does not present any clear causality for the price parallelism.

Some may construe this price parallelism as evidence of a cartel in our domestic industry, but a few words of

caution (borrowed from the OECD) are necessary:

28 The Automobile Industry Report Pakistan, October 2009, Economist Intelligence Unit. Affordability rank: for each country the price of an

item as a percentage of monthly personal disposable income is calculated. Countries are ranked according to these percentages and the most affordable country will have the lowest percentage and be ranked first. 29 Research by different sectors by BMA Capital Management Limited, 2009

30 Research by different sectors by BMA Capital Management Limited, 2009

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…whether or not conscious parallel behaviour constitutes an illegal action which is restrictive of

competition is a subject of controversy in both competition law and economics. Price uniformity may be a

normal outcome of rational economic behaviour in markets with few sellers and homogenous products.

Arguments have been advanced that the burden of proof must be higher than circumstantial evidence of

concerted or parallel behaviour and uniform pricing and output policies. In other words, conscious

parallelism in and of itself should not necessarily be construed as evidence of collusion. The problem arises

more from the nature of the market or industry structure in which firms operate than from their respective

behaviour.31

Thus, signs of similar prices or change of prices at the same time is not always an indicator of conscious price

parallelism. And while it can be perceived that price parallelism is more prevalent in non-competitive markets, it

can occur even in a highly competitive market, in which prices can be similar or move in tandem because of market

forces. Such price parallelism is more likely if:

(i) Products sold are homogeneous or very similar, which makes it difficult for businesses to charge

different prices to customers;

(ii) The products share similar sources of inputs, which means that competitors are subject to similar cost

fluctuations in setting their product prices; and

(iii) Prices are highly visible, which allows businesses to monitor each other’s prices closely and match

competitors’ price movements.

As far as the domestic automobile industry is concerned, the price parallelism does not necessarily imply collusion.

In fact the price parallelism depicts the basic nature of the industry where products offered by the automobile

manufacturers are more or less similar and they are faced with similar cost functions. However, the constant rise

in the prices of automobiles does show lack of competition and immense power of domestic automobile

manufacturers to shape the market.

3.6.2 Safety Standards, Quality & Emission Control Policy

It is imperative to benchmark the performance of the domestic automobile industry against the world practices by

adopting globally accepted standards and regulations governing the production of quality products. There are

certain laws and motor vehicle acts that ensure the roadworthiness of vehicles such as Section 39 of the Motor

Vehicles Ordinance (MVO) 1965 and Section 35 of The Motor Vehicle Rules (MVR) 1969 that deal with the issue

and renewal of certificate of fitness of vehicles, whereas Chapter 6 of MVR 1969 deals with details of body

construction, essential equipment and requirements for the maintenance of a motor vehicle.32 It must be noted

that the emphasis of these laws is clearly on the management aspects of the vehicles, whereas only a few sections

deal with the environmental aspects, such as sections 154, 158 dealing with the horns and noise and section 163

related to the emission of smoke vapour of grease, without any specification of standards and testing procedures.33

In the year 2000 the government established Pakistan Standards and Quality Control Authority (PSQCA) for the

development of Metallurgy, Standards, Testing and Quality infrastructure. However, the facilities and resources

available with PSQCA are inadequate and so far PSQCA has developed standards for only 2 wheelers.34 Due to the

absence of regulation, the domestic automobile manufacturers do not offer safety features such as Anti-lock

Breaking System (ABS), airbags and emission standards along with quality specifications such as alloy rims, power

steering and windows in all their vehicles.

31 Definition of “Conscious Parallelism” taken from the OECD’s Glossary of Industrial Organisation Economics and Competition Law , pg 26. The glossary is available online at www.oecd.org/dataoecd/8/61/2376087.pdf. See also Conscious Parallelism and Price Fixing: Defining the Boundary by Michael K. Vaska, The University of Chicago Law Review, Vol. 52, No. 2 (Spring, 1985), pp. 508-535

32 Auto Industry Development Programme (AIDP), Ministry of Industries, Production and Special Initiatives, Government of Pakistan, January 2008; http://www.engineeringpakistan.com/EngPak1/Auto%20Industry%20Development%20Programme%20(AIDP).pdf

33 See Supra note 30.

34 See Supra note 30.

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The Table-14 shows safety and quality features offered by Suzuki, Honda, and Toyota in various models. As far as

quality features are concerned, alloy rims for vehicles are only offered for Altis (Toyota), Swift (Suzuki) and Civic

Vti Oriel (Honda). Suzuki does not offer power steering for Mehran and power windows are absent for the XLI

model of Toyota and Mehran and Cultus model of Suzuki. An important point to note is that the Japanese

imported car Vitz is available with ABS and air bags with almost all basic safety and quality features. At the same

time, Swift is locally assembled and competes directly with Vitz; however it does not offer air bags and lacks many

basic features such as a rear viper.35

Safety features such as ABS is absent in all models of Suzuki except for Swift, whereas all models of Honda have

this feature and Toyota lacks ABS in its XLI. Airbags, another important feature required for safety purposes is

absent in all models of Suzuki, whereas Toyota does not offer airbags for its XLI and GLI models. Similarly,

emission standards are absent for all models of Suzuki and Toyota. It is pertinent to mention here that ABS

systems are required on all new passenger cars sold in the EU since 2007, whereas all across the world,

vehicle safety ratings encourage manufacturers to take a comprehensive approach to occupant safety and a good

rating can only be achieved by combining airbags with other safety features. Thus, almost all new globally

manufactured cars come with at least two airbags as standard. Table-14: Safety and quality features offered for Suzuki, Honda and Toyota models

Safety features Quality features

Car Type ABS Airbag Emission

standard

Alloy Rims Power

Steering

Power

Windows

Suzuki

Mehran X X X X X X

Swift X X

Cultus X X X X X X

Liana X X X X

Honda

Civic VTI Oriel X

Civic VTI I-VTEC X X

City X X

Toyota

XLI X X X X X

GLI X X X

Altis

Source: Suzuki, Honda, Toyota website

Engine technology has improved significantly over time and modern engines are more responsive, fuel efficient and

cleaner emission-wise than their counterparts from 15-20 years back. In most countries there are strict

regulations on the emission, safety and road-worthiness of vehicles that ensures that cars new and old meet

35

"Toyota Honda Suzuki Chevrolet Nissan Pictures Reviews Pakistan." Which Is Best Option, Swift or Vitz. N.p., n.d. Web. 24 Aug. 2012.

<http://www.pakautocar.com/blog/which-is-best-option-swift-or-vitz/>.

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minimum criteria and older cars get off the road to keep the population of vehicles in check. Some would argue

that the automobile manufacturers gain most from it but it is also important to see the impact o the environment

and the consumers both of whom may gain due to these regulations. In developed countries cars are required to

go through an annual emission test ensuring vehicle meets minimum emission standards. This is a pre-requisite for

renewal of registration and vehicles which do not meet the emission requirements, have to get it fixed prior to

renewal and a re-test is needed in this regard. The emission standards ensure vehicles pollute less and at the same

time there is a direct link between low emission and better fuel efficiency. Likewise standards are also set for

manufacturers both on emission and safety which automobile manufacturers adhere to. In European Union the

emission standard defined as Euro 1 – 6 compliance is required and currently standard is 5 in force since

September 2009 and moving towards the Euro 6 which may be implemented in September 2014. Pakistan has an

aging automobile population which is an increasing burden to the economy and a growing safety hazard. Without

legislation to control these aspects the industry cannot truly grow and flourish. Therefore, provinces need to

develop and implement the vehicle emission standards.

Keeping the above discussion in mind, it is apparent that the lack of standard safety and quality features in locally

manufactured vehicles is making the domestic industry less competitive with respect to the global market, reducing

the prospects for export. In the current environment, it is imperative that PSQCA builds up its capacity of

inspection, audit and testing system and establishes links with international counterpart agencies to get

accreditation of labs and standards.36 The Automobile Industry cannot compete globally without the establishment

of strong standards and accreditation within the country; hence development of standards for all the vehicles

produced locally is required. In order to achieve these goals, the government should announce clear time lines for

the implementation of standard safety and emission policies and at the same time the automobile manufacturers

should voluntarily comply with international safety and quality standards that would ultimately make them globally

more competitive and offer consumers good value for money.

3 . 7 PAY M E N T O F P R E M I U M B Y B U Y E R S

It is common for customers to pay additional money to ensure delivery of their vehicles within a short time

period. These supplementary payments have come to be known as “on” or “premiums.” The forces of demand and

supply determine the level of premium payments prevailing in the market. As certain models of cars – generally the

newer ones at the time of their launch – have a much higher demand, dealers generally charge a premium on faster

delivery of the vehicle.

The government has termed this an “illegal practice.”37

The four major manufacturers were contacted to clarify their policy on charging of premiums. Honda Atlas, Indus

Motor Company, and Pak Suzuki responded. The salient points of their replies are reproduced below:

3.7.1 Honda Atlas

“Honda Atlas Cars (Pakistan) Limited is principally against the premium on the cars. However, a reasonable time delay is unavoidable due to colour/model choice (We make 6 versions of Civic & City in 7 various

colours. In order to cater to one customer right on the counter, we need to keep 6 x 7 = 42 units at only

one dealership and we have a network of 20 dealers all over Pakistan. So practically we have to have at least

840 units available all over Pakistan to cater to one customer right on the counter. In this case if the 2nd

customer wants the same colour/model from the same dealership, he has to wait for next available

production or visit some other dealership. In case of the 2nd customer, the sales staff will ask the customer

to please wait for some time. May we highlight that we as a company take a very serious view of premium if

changed by our authorized dealers. We, however, have no control on cars purchased by investors &

unauthorized car dealers for resale purposes. Legislation is the only solution to curb this practice for which

we have already made requests to the Government through the Ministry of Industries and Production.”38

36 Auto Industry Development Programme (AIDP), Ministry of Industries, Production and Special Initiatives, Government of Pakistan, January

2008; http://www.engineeringpakistan.com/EngPak1/Auto%20Industry%20Development%20Programme%20(AIDP).pdf

37 Car Makers Asked to Explain Reasons Behind Low Production, Aaj TV Website, 17 November 2009; http://www.aaj.tv/news/Business/152441_7detail.html

38 Honda Atlas Cars Pakistan’s letter to the Commission, 9 December 2009

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We would like to make the observation that the 840 units that Honda mentions in its argument do not cater to

one customer, as Honda states. In fact, by having those 840 units in its 20 dealerships, Honda is ready for several

customers to walk into its various dealerships, and purchase the car of their choice. In the unlikely event that two

customers walk in one after the other looking for the same car, Honda can always provide it through a nearby

dealership. Hence there is no strong case that can be made to justify delays in the provision of cars.

3.7.2 Indus Motor Company

“Unfortunately, despite our best efforts, investors, individuals, non-dealers taking advantage of our

transparent and fair policies, book orders with us through dealers in large quantities on a regular basis. As

the company is unable to distinguish these orders from regular orders from genuine customers, these

vehicles are also produced, processed and delivered according to the First In First Out (FIFO) principle.

When these investors receive these products, they are offered for resale on a spot basis to customers at

the premises of non-dealers and even frequently advertised in the newspapers with a premium demanded.

Naturally, when these investors book more vehicles, the delivery times may increase. Unfortunately, many

customers refuse to book orders with the Company and prefer to pay premiums for ready delivery. This

creates a vicious circle which rewards the investors, even though if customers exercised restraint and

refused to pay premiums and booked orders with the Company, they could obtain those vehicles without

any premium within a reasonably short period.”39

We would like to point out that we disagree with the suggestion of Indus Motors that customers, dealers and

investors cannot be distinguished. Dealers are clearly identifiable as Indus Motors work directly with them. As has

been pointed out by Indus Motors itself, investors usually order in bulk, while customers order individual or a

small number of cars. Hence, investors and customers can be identified with a fair degree of accuracy. It is up to

Indus Motors to address the issue of premiums that stems from the activities of investors.

3.7.3 Pak Suzuki

“Pak Suzuki as a progressive organization has a firm belief in fair and competitive market practices and fixes

ex-factory prices of all its models/vehicles in different segments which can be placed on order and booked

at the same ex-factory rates throughout a wide network of authorized dealerships. As Pak Suzuki is

continuously delivering its products to all authorized dealers before getting orders/payments, sufficient

stocks are available at these dealers. As such, our pricing structure has no relevance with any variations

upwards or downwards, solely determined by market supply and demand forces, and customers receive

value.40

Pak Suzuki has a different stance compared to Indus Motors and Atlas Honda; Indus Motors and Atlas Honda

accepted that the problem of premiums existed whereas Pak Suzuki clearly stated that this is not the case and

premium is not a concern as far as Pak Suzuki and its products are concerned. It is important to mention here that

Pak Suzuki holds a dominant position in the 800cc and 1000cc car segments, and if the claim made by Pak Suzuki is

true then the problem of premiums lies primarily in the 1300cc and above car segments. Pak Suzuki caters to an

excessive demand from the middle income households, and it is unlikely that supply shortages and premiums do

not occur at all in the car segments dominated by Pak Suzuki.

The report on the automobile sector produced by the Monopoly Control Authority in 200541 identified where the

problem existed at that time period when the demand for cars was at a high point:

81. The problem of premium did not exist at the level of car manufacturing companies, but it was at

the level of investors who took the car as an investment property and managed to book hundreds of cars

through fake identity cards and took delivery of the vehicles to hoard and create artificial shortage in the

market and to sell at a premium price. It is learnt that the business community of Jodia Bazar, Karachi was

prominently involved in this practice and a single investor of Jodia Bazar was holding not less than 700 cars

at the moment.

82. The problem of artificial shortage of car in the market, causing delay in delivery of cars and

charging of premium price lies in the secondary market and not at the end of car assemblers. As far as the

issue of charging of 100% advance payment is concerned, the policy was, in fact, adopted to encourage the

39 Indus Motor Company’s letter to the Commission, 14 December 2009 40 Pak Suzuki Motor Company’s letter to the Commission, 3 December 2009

41 Enquiry Report on Car Industry, Monopoly Control Authority, 2005

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genuine buyer to book a car. Had part payment been accepted as down payment of a car, it would have

aggravated the problem manifold. Therefore charging of full price at the time of booking and payment of

mark-up at market rate after 60/90 days of the booking was considered as more advisable proposition.

However, the mark-up is to be paid to the customer at the short term lending rate of the Banks.

The three automobile manufacturers stated that they did not encourage the practice of charging premiums. In fact,

Indus Motor Company has been actively running advertisements in early 2011 to encourage people to purchase

cars from the company and not from the investor resellers. However, from a multitude of media reports,

premiums are charged by the dealers to expedite delivery of vehicles. This may require a look at the dealership

agreements and the booking system between the manufacturing companies and the dealers in order to check if

there are indications of collusion between the two parties.

3 . 8 D E A L E R S H I P A G R E E M E N T S A N D B O O K I N G S Y S T E M

3.8.1 Dealership Agreements

Analysis of the dealership agreement of one of the automobile manufacturer indicates that a dealer is given the

non-exclusive right to undertake the sale and services of the products offered by the automobile manufacturer and

in a sense the dealer is an agent or partner or representative of the manufacturing company. Cars delivered at the

showroom of a dealer remain the property of the company and the transfer of ownership of the company

products from the manufacturing company to the customer becomes effective upon making payment. A dealer is

prohibited from acting as dealer or having interest in any business engaged in the manufacture, selling or servicing

of any motor vehicles, spare parts, accessories, chemicals and tools other than the manufacturing company’s

products. The automobile manufacturer determines the maximum/final suggested selling price which is inclusive of

the dealer’s commission and conditions for sale of the company products. However, where the dealer himself is a

customer, he will be entitled to a discount equivalent to commission. The Dealer is under obligation to pay due

regard to such prices and terms and condition as determined by the automobile company.

The dealer is also responsible for the sale of products in the quantity for each year as agreed between the dealer

and the company, and if dealer fails to sell such annual planned quantity he will be answerable to the manufacturing

company. The Dealer places orders with the automobile manufacturer semi-annually together with sales plan for

this period, however, the manufacturing company has discretion to fulfil all or such part of the order as it deems

appropriate.

The automobile manufacturer reserves the right to directly sell company products to municipalities, government

offices and state owned enterprises. The manufacturer also has the right to make retail sales to real persons or

legal entities inside the main sales area. In order to promote the sales of new vehicles, the dealer accepts the

handling of used cars in trade for new vehicles, excluding unregistered cars imported under used cars scheme. To

promote timely delivery and service to customers, the dealer is obliged to keep at least a two week stock of the

company vehicles, the number of which is be determined by the automobile company.

Dealership agreement of another manufacturer indicates that under certain circumstances, the automobile

manufacturer reserves the right to sell any of its products directly through channels other than the dealers. Each

transaction for the automobile between the manufacturing company and a customer is carried on under an

individual sales contract. The dealer forwards individual sales contracts for all such automobiles in the same month

for affecting sales and commission. Upon receiving order placed, the manufacturing company notifies the dealer for

the acceptance of the order. Depending on the market situation, the manufacturing company may on its discretion

reduce the supply of automobiles to dealers irrespective of the past level or planned level of sales by a dealer.

However, to promote timely delivery and service to the customers, the dealer has to display cars whose number is

determined by the automobile manufacturer.

The manufacturing company can change the price of automobiles and other products at any time at its sole

discretion. Such price change shall apply to any order placed which has not yet been delivered. Suggested retail

prices are fixed by the automobile company and dealers are prohibited from giving discounts to customers. Every

year the manufacturing company and its dealers study the market situation prevailing in the automobile industry

and derive a forecast of the projected demand for the automobiles. To promote timely delivery and service to the

customer, the dealer has to display cars equal to a demand of roughly two weeks of the automobiles, and this

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number is determined by the manufacturing company. Every dealer has to submit a business plan prior to

commencement of each calendar year, which highlights the sales plan for the automobiles, spare parts and

accessories, sales strategy for business expansion and increase in market share.

3.8.2 Booking System

Booking policy during the years of peak demand (2002-2005) was uniform for all manufacturers – all companies

took the full payment in advance on the pretext of discouraging speculators, investors and fake customers, who

used to book numerous cars on nominal down payment terms. Manufacturers maintain that this policy helped

reduced the delivery backlog by almost 50%.

Procedure of booking of cars for different automobile manufacturers varies with the type of vehicle. Physical

deliveries of vehicles are made as per the month of delivery agreed between the customer and dealer. In case of

delay beyond a prescribed period mark-up is paid where applicable. However, this policy does not seem to be

currently in effect. The booking information is not readily available with the automobile manufacturers; however,

they do have estimates of average delivery periods for various models. According to one automobile manufacturer,

it had decided to discontinue the balloting procedure in response to customer feedback, and now the customers’

orders are served on first come first served basis. It was also claimed by the manufacturing company that their

prices were uniform at all times, and it was not the company policy to demand or accept any extra payment for

expediting deliveries. Front page advertisements in 2010 and early 2011 in local newspapers also confirm the

company policy of not encouraging a policy of premium payments.

3.8.3 Observations

The relationship between manufacturers and dealers is interesting, where one automobile manufacturer defines

the relationship with its dealers as that of principal and agent whereas another manufacturer categorically says that

its relationship with its dealers is not a principal-agent relationship. However, the nature of duties performed by

dealers in the case of both assemblers clearly falls under the category of an agent. Dealers are not the owner of

the property. Cars delivered at the show room of a dealer remain the property of the assemblers and transfer of

ownership of the cars from the assemblers to the customers become effective upon making payment. The

assembler determines the final price of the cars to be sold and also the commission of the dealer. Assemblers

make supplies to their dealers in the quantities as per their discretion. Assemblers determine the number of

vehicles for two weeks stock, to make the cars available for delivery to customers.

The relationship of dealers with their manufacturers/assemblers helps understand the market structure in the

automobile industry. The automobile market is segmented according to the engine size of cars. These few market

players do not face competition from each other in their respective sphere of market based on engine-size. They

sell their cars through channels which are merely their extensions and there is absolutely no competition in the

downstream market for a particular brand of a car. Dealers act on the advice of their respective

manufacturer/assembler, who determines the terms and conditions of the availability and price of the cars in the

market. This leads to a total lack of intra-brand competition. Absence of inter-brand competition among the

assemblers and further lack of intra-brand competition at the level of dealers has manifested itself in late deliveries

and charging of premiums.

The current dealership/supply chain structure in the industry does not allow for meaningful competition.

Dealerships are merely agents of the manufacturing companies and have no real incentive to compete in the

market. It is the company that controls the quantity to be sold and the price to be charged. These dealership

agreements go on to eliminate intra-brand competition by disallowing discounts. It must be noted here that the

existing booking structure contributes to the lack of competitiveness. Customers, by paying the full price of the

vehicles months in advance, are not just covering the product based variable costs for the companies, but are also

losing interest they could have earned in the capital markets. On the other hand, the companies are enjoying a

break on investment as well as reaping the interest that accrues on the advance payments made by the customers.

For these reasons, it seems appropriate to revise the dealership and booking arrangements so as to solve the

problems that have been highlighted.

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4 Recommendations and the Way Forward An important element of any competition assessment is to identify the beneficiaries and affectees of any lack of

competition in the market. The Pakistani passenger car market only has three major players, each of which

dominates a different segment of the market. Hence, the noticed vulnerability in our automobile industry is the

lack of internal as well as foreign competition. Therefore, to improve the competitiveness of the industry, the

following recommendations are put forward:

1) Commercial import of used cars should be allowed and open to all. The prevalent scheme of

allowing used car imports under the Gift, Personal and Baggage Schemes adds to transaction

costs in the form of extra legal formalities, in addition to high import duties. This practice should

be replaced with open commercial import of used cars.

2) The recent reduction of age limit for import of cars from 5 to 3 years42 will make the import of

cars unfeasible owing to limited depreciation allowance and therefore will eliminate competition,

posed so far to a limited extent, by foreign cars on local manufacturers.

3) On the other hand, the import of cars older than 5 years may be subject to strict road

worthiness tests. The import of used cars older than 5 years may not provide effective

competition to local new cars. For example, the import of 10 year old used cars may enable

advanced countries to dump their discarded cars and there is high probability that these cars may

have low road-worthiness. Experience shows that imports of extremely old cars often raise the

issue of non-availability of spare parts as well, and these cars became unserviceable.43

4) Significantly lower and relatively more uniform tariffs should be introduced across all categories

of automobiles, and the tariff structure should be finalized in consultation with the National Tariff

Commission (NTC).44 We understand that higher tariffs have historically been placed on bigger

capacity luxury cars and lower tariffs on smaller capacity cars based on the idea that the

wealthier buyers of the expensive cars can bear the burden of higher tariffs, while middle-income

buyers of smaller cars struggle to be able to afford the smaller cars. However, extremely high

tariffs on luxury cars suppress demand and create a significant entry barrier for foreign players.

High tariffs must not become prohibitive tariffs, rendering import of new vehicles unfeasible.22

Since 2007, the auto tariffs have largely remained stagnant in Pakistan; therefore it is the need of

the hour to end the excessive protection that has been provided to the domestic automobile

manufacturers. This will provide relief across the spectrum, and also push the local car

assemblers to become more competitive. Consequently, the Effective Rate of Protection (ERP)

across all categories would be significantly lowered. In this way, the industry will be exposed to

greater global competition and the internal distortions caused by varied rates will be reduced.

Incentives should also be provided to the assemblers/manufacturers in the form of low tariffs on

raw materials.

5) The reduction of depreciation allowance for used cars45 should be reconsidered. This measure

is likely to reduce consumer welfare by increasing the prices of imported cars in the domestic

market. Hence, in effect, it may restrict consumer choice and facilitate a protective rather than a

competitive environment.

6) Mandatory testing for emission and road-worthiness are needed to be introduced as part of a

regulatory regime which may not only determine the minimum criteria in line with EU or North

42 Ministry of Commerce SRO 1441(I)/2012 dated 12 December, 2012

43 In India, second hand/ used vehicles are required to have minimum road worthiness for a period of 5 years from the date of importation into

India, with the assurance of service facilities within the country during the five year period.

44 Previously high duties have been reduced and we note that we are moving in this direction on high end cars. We need to keep moving in this direction, more vigorously.

45 Custom General Order (CGO) 13/2012 dated 31 August 2012

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American standards but also keep abreast of international developments. Emission testing should

be an annual requirement for any vehicle over 2 years old while road-worthiness test should be

bi-annual (after two years) for vehicles over 3 years age and mandatory as part of resale or

registration transfer. Renewal of registration would be dependent on the passing of these tests.

7) Legislation should be introduced to prohibit premiums charged by the manufacturers and the

dealers and to restrict hoarding by unscrupulous investors or traders of cars. The existing

booking structure negatively impacts competitiveness as well, imposing an additional burden on

customers. By paying the full price of the vehicle months in advance, the customers are not just

covering the product-based variable costs for the companies, but are also losing interest that

they could have earned otherwise. The car manufacturers claim to oppose the charging of

premiums, however, they seem to adopt a “look the other way” policy on the issue of premiums

charged by the dealers to expedite delivery of vehicles. According to the dealership agreements

studied by us, it is the manufacturing company that controls the quantity to be sold and the price

to be charged. Hence, dealerships are merely agents of the manufacturing companies and have no

real incentive to compete in the market. Strict laws that prohibit both parties (manufacturers and

dealers) from charging premiums would be beneficial for the consumers as well as for the auto-

manufacturers and dealers that apparently declare premiums to be a false practice.

The way forward for the automobile industry in Pakistan lies in the removal of investment and regulatory barriers.

It is time that the practice of giving excessive protection to the industry through high import tariffs and custom

duties is discontinued, and tariffs and duties are significantly lowered and made relatively more uniform across

different categories. In this way, the industry will be exposed to greater global competition and the internal

distortions caused by varied rates will be reduced. At the same time doors for foreign investment and new players

should be opened so that a more competitive environment can propagate in the automobile industry.

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Annex 1: Methodology

1 . S O U R C E S O F T H E M E T H O D O L O G Y

For the purpose of this study, the OECD’s Competition Assessment Toolkit46 and the Department for International

Development’s (DFID) Competition Assessment Framework47provided useful guidelines.

According the Toolkit, Governments establish and enforce laws, rules and regulations to achieve desirable policy

goals. Such regulations sometimes affect the nature and degree of competition. A competition assessment is

thereby a process of evaluating government regulations, rules and/or laws to (1) identify those that may

unnecessarily impede competition and (2) aid in their redesign so that competition is not unduly inhibited.

A competition assessment is not only assessment of laws and their impact on competition but also the behaviour

of market players and its effect on the competition. A competition assessment should analyse the strength of

competition in the relevant market/s, and should identify any factors impeding more effective competition. Sectors

selected for competition assessment should be both important to the economy or consumers, and have

characteristics that suggest competition might be limited. Where competition is found to be limited, an estimate

should be made of the likely extent of the harm that results from this. An assessment should conclude with a view

on whether there are competition problems in the sector that require correction, and if so, what the most

appropriate remedies are.

The Framework lists several steps to assess the state of competition in a selected sector. We present only those

steps that are most relevant for our study. These steps are:

2 . I D E N T I F Y T H E R E L E VA N T M A R K E T S

A ‘market’ is a group of products most buyers regard as being reasonably substitutable for each other, taking

account of their respective prices and conditions of sale. Markets have geographic limits that depend on the

product’s value, the cost and availability of transport, and other factors. For our purposes the automobile market

in terms of product includes passenger cars only. The geographic boundaries/limits of the market consist of whole

of Pakistan. For our product market, we divide it according to the engine size, particularly, for passenger cars

market. This addresses the question of products being reasonably substitutable.

3 . I D E N T I F Y T H E C O M P E T I T O R S

Any competition assessment must begin by identifying the market suppliers. Identifying existing competitors means

taking a look at who supplies the market as well as who are the main buyers and what are their purchases from

these suppliers. If there is a discernible pattern, it could mean that the market is less competitive that preferable.

4 . E X A M I N E T H E M A R K E T S T R U C T U R E

Market shares are an important indicator of market structure and market power. Market shares are usually

measured by the value of sales, but the quantity of goods sold or the capacity of the suppliers may also be relevant.

For our analysis of the market shares see our section below on market shares. DFID competition assessment

framework also outlines the following question as important for determining and examining market structure.

These are:

a. Have the market shares of the major suppliers (or buyers) been stable over a long period?

b. Has there been much market entry in the past and how successful has it been?

c. Does a single buyer, or a small number of large buyers, account for a substantial part of the market?

d. If the concern is with the market behaviour of the buyers, rather than the sellers, does a single seller or a

small number of large sellers account for a substantial part of the trade?

e. Does the market structure suggest that competition might be limited?

46 OECD Competition Assessment Toolkit 2007, available online at http://www.oecd.org/dataoecd/15/59/39679833.pdf

47 Competition Assessment Framework, DFID, 2008, available at http://www.dfid.gov.uk/Documents/publications/comp-assess-fwork-2008.pdf

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We address these questions in our sections below on investment policies and market shares in the automobile

sector. The framework particularly points out that in this context issues of interest are how long the new firms

stayed in the market, how successful they were in winning market share and how long it took them to get to a

significant size.

5 . L O O K F O R B A R R I E R S T O E N T RY

There are three types of main barriers that can restrict competition in market. These are

a. Natural Barriers

b. Strategic Barriers

c. Regulatory and Policy Barriers

Natural barriers result from resources or technology needed to become a supplier in the market. They could

include the existence of large economies of scale, such as with network industries. Other natural barriers include

problems that new entrants would have in obtaining access to technology, raw materials, or distribution channels.

Another example is where entry into a market would require large ‘sunk costs’. Strategic barriers result from

actions by existing suppliers that are intended to discourage new entry. They could include:

creating excess capacity (If significant excess capacity exists, this could reduce the interest of new firms in

entering the market);

‘bundling and tying’ (to force new entrants either to compete for the grouped products or to compete on

one product; However, there might be good reasons for this pattern if it is cheaper to produce the

bundled products together than separately);

arranging long term exclusive contracts and exclusive supply and distribution agreements;

Individually or collectively acting in ways that indicate the incumbent firm or firms would act in a

predatory or aggressive way if new entry took place, such as through price responses.

The third type of barriers may exist because of government regulations and policies specific to certain economics

sectors. The rationale for restrictions that limit competition requires objective justification. Firms in the sector

might be hindered by factors such as licensing restrictions, foreign direct investment (FDI) restrictions or trade

barriers. If there are any regulatory barriers that restrict competition, the harm likely to result from the loss of

competition should be compared with the benefits claimed for the existence of the barriers. However, other

possibilities for limited market entry must be considered. For example, there might be a natural monopoly, or

there might have been no significant growth in the size of the market, or the government might not have granted

licences required for entry).

6 . L O O K F O R A N T I C O M P E T I T I V E C O N D U C T

Ascertain if government policies or institutions limit competition.

i) State-Owned Enterprises

The issue of whether competition in a market is distorted by the existence of a state-owned enterprise requires

examination. A related issue is whether privatised state-owned enterprises were given a preferential position when

the new owners acquired the business, such as monopoly rights to provide certain goods or services.

ii) Public Procurement

Public procurement can represent a significant part of trade in an economy, and the way in which procurement is

undertaken can raise substantial competition issues. Where a government is a major buyer of the product/s, the

way in which it organises its procurement might limit the scope for new competitors to enter the market. There

could be a negative impact on competition if there is no requirement for a minimum number of tenders, or there

is a short time period for responding to tender notices, or if the criteria for tenders favour existing or larger

suppliers.

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iii) Regulated Sectors

Sector regulation may be needed when the market structure makes it difficult or impossible for competitive

markets to develop, such as with natural monopolies, or where the sector’s operations may affect public welfare.

Other reasons for sector regulation include providing a mechanism for maintaining necessary technical standards

to ensure quality or safety, ensuring access to essential facilities, and to provide processes to encourage efficiency

and cost-related pricing. Regulation may be justified where competition cannot be achieved by market forces (as

with natural monopolies, where one firm can supply more efficiently than two or more), where competitive

markets would not result in an outcome that is considered socially desirable, including where there are

‘externalities’, that is, costs or benefits to people other than the parties to transactions in the market.

iv) Trade Policy and Industrial Policy

Are there any trade or industrial policies that appreciably restrict competition in the market/s? For example, do

non-tariff barriers impose quantitative restrictions on, or otherwise limit, the importation of particular categories

of products? Are the tariff rates on some products very high, or is extensive and possibly unjustified recourse had

to anti-dumping remedies, or do some suppliers benefit from tax concessions while other competitors do not? If

so, do these policies appear to have adequate justification, taking account of their effects on competition?

v) Unequal Enforcement of Laws and Regulations

Do any firms in the market suffer from the unequal application of laws or regulations? Examples of where this

might occur include the unequal enforcement of taxes, labour regulations, health and safety regulations, access to

land, access to key infrastructure, standards and intellectual property rights.

Significant anti-competitive behaviour is that arising from collusion among competitors, from the abuse of

dominance by firms with market power, and from some mergers and acquisitions. Factors that might limit the level

of competition in markets include:

Entry barriers such as high duties and tariffs resulting in high protection levels for incumbent players.

High prices resulting from collusive behaviour translating into predatory pricing which forces new

entrants to exit the market.

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Annex 2: GoP’s Auto Industry Development

Programme (AIDP)

Productive Asset

Investment Incentive

(PAII)

Objectives

i) To expand and modernize capacities in auto parts manufacturing.

ii) To encourage localization of auto parts for the local production of vehicles and

for export.

iii) To encourage development of critical components and achieve competitiveness.

iv) To promote interdependence between assemblers and auto parts manufacturers.

Incentives

i) PAII will be in the form of customs duty credit equal to a certain percentage of the

value of productive assets installed by the eligible auto parts manufacturers. The

duty credit so acquired will be spread equally over a period of 5 years to offset duty

on eligible imports.

ii) The duty credit will be transferable to vehicle assemblers and will remain

nontrade-able in the open market.

iii) Duty credits so earned would be allowed to offset import of inputs and further

productive assets by a parts manufacturer or by assemblers against import of CKD

kits and tooling.

Technology Acquisition

Support Scheme (TASS)

Objective:

i)Technology upgradation to improve performance, efficiency and quality.

ii) Matching grants to enhance the technology levels of automobile manufacturers

and encourage localisation.

Eligibility criteria:

i) The auto part manufacturers must be supplying or contracted to supply to the

vehicle assemblers or export market.

ii) Must be registered with the sales tax department.

iii) Having suitable in-house facilities to manufacture auto parts.

iv) Must be a limited liability company.

v) The company offering itself for full disclosure and detailed scrutiny at any time

during the currency of the scheme.

Auto Cluster

Development (ACD)

Objective:

i) Detailed working and requirements of envisaged automobile clusters to achieve

the production target of 0.5 million cars by 2011-12.

ii) Acquisition of land for auto clusters with enabling infrastructure to provide for

establishment of auto units.

iii) Resolution of crucial issues relating to land acquisitions, exorbitantly high prices

and other issues being the potential bottleneck for the new units to establish or for

the existing ones to expand.

Auto Industry

Investment Policy (AIIP)

Benefit of policy:

New Entrants will be allowed to import 100% CKD kit, at the leviable customs duty,

for a period of three years from the start of assembly/manufacturing.

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Eligibility Criteria

i) In case of cars, the potential new entrant will have 500,000 units annual

production in countries other than Pakistan.

ii) The new entrant will have significant global presence by way of manufacturing at

least 25,000 units of trucks and buses separately, 40,000 LCVs and at least 50,000

units in the case of Agriculture Tractors annually in countries other than Pakistan.

iii) New entrant will have the plan for the progressive manufacturing of vehicles.

iv) New entrant will have serious and demonstrable intention to develop parts

locally either in house or through the vendors to achieve competitiveness.

v) New entrant will clearly identify the destinations in his plan or in agreement with

its partners for export of vehicles and parts manufactured in Pakistan under this

policy.

vi) Registration to produce road worthy vehicles complying to environment

standards, with the EDB, M/o IP&SI for the entitlement of benefits under