New entrant and change in policy sends market into jitters

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LAHORE: All is ready to bring back a Japanese motorcycle brand to Pakistan under the guise of a ‘new entrant’ policy to facilitate that brand, which closed its operation in the country in June 2012, after producing two-wheelers for more than three decades.

According to sources, all the concerned departments of the Planning Commission and Board of Investment are against granting a special favour to anyone under the name of a ‘new entrant’. Especially when the brand used to be part of the market previously. However, despite the opposition of the Federal Board of Revenue, the Ministry of Industry, the Engineering Development Board and the Ministry of Commerce, a summary is ready for the approval of the Economic Coordination Committee (ECC) of the Cabinet to give special treatment to that brand. The summary would be tabled in the next ECC meeting for approval.

According to the abrupt proposed change in policy, initiated by the Board of Investment (BOI) to give incentives to a Japanese motorcycle maker to reenter the Pakistani market at zero rate, has shaken the confidence of the existing investors and local manufacturers of the motorcycle industry.

The Pakistani motorcycle industry sector has shown tremendous growth for some time. It has achieved 95 percent localization through the transfer of the latest technology, and involves billion of rupees in investment, with hundreds and thousands of skilled workers.

The sector has progressed exponentially so far, due to the consistent policy of the government, while it has provided protection to local investors to expand business locally, as well as globally.

The sector is apparently standing on its feet, not only is it able to meet the local demand, but it is also capable of exporting various models to various countries, resulting in becoming a steady source for earning foreign exchange for the country.

Motorcycle production in Pakistan has increased greatly in the past 12 years. It has increased from a mere 100,000 units at the start of the century to around two million this fiscal year. No other industrial sector has shown such high and sustained growth during the past one decade. In fact, Pakistan has emerged as a global leader in the production of 70 cc motorcycles. Now even new 125 cc bikes are also being exported.

The plan to allow a new investor to import all motorcycle parts at zero duty would be the negation of the previous policies and would encourage all Original Equipment manufacturers (OEMs) to bypass vendors and parts made locally, a representative of the OEM observed. The U-turn of policies would be worrisome and against the interests of the country and future industrialization, he added.

The arrival of this motorcycle manufacturer in the garb of a new investor conveniently ignores the fact that the same brand was being produced and marketed for decades in Pakistan and was forced to wind up as it failed to compete with the other brands, especially the Chinese motorcycles. Industry experts are dismayed at the constant pressure to grant special status to this OEM on its relaunch especially as they are insisting that a supposed, and highly misleading, $150 million investment figure would be made.

The local industry, based on the projection of the increase in demand, has already embarked on capacity enhancement plans and by the end of the current fiscal year will have invested around $100 million, out of which, a sizeable amount has already been invested while plans for the rest have already been submitted.

The proposal given to the government reflects that the OEM’s investment is hardly a couple of million dollars in the initial years. The remainder is merely a commitment to reinvest the tax saved in the form of exemptions granted, when all other motorcycle manufacturers have readily agreed to pay a high duty on the import of parts that are not being produced in Pakistan.

Another surprising aspect is that the government wants to allow the Japanese manufacturer to import parts from anywhere, most probably from China. The claim that the new investment would bring in new technology is an eyewash, as the existing players have all introduced the latest Euro-2 engines into the market without any special incentive. The current players are even willing to import the hybrid and EFI-based engine without special incentives. This is because many of the engine parts for the new emission standards were produced locally.

The investment proposal from this OEM has met resistance from all the relevant departments and ministries of the government. The proposal has attracted adverse remarks from the FBR, the Ministry of Industries, the EDB and even the Ministry of Commerce. Each one refused to support the proposal of allowing the duty free import of parts and motorcycles for a single entity.

The FBR, in its comments, stated that the “Reference Cabinet Division’s letter dated 2 January, 2012 circulating the summary dated 5th January, 2012 submitted by the Board of Investment (B01) regarding the subject matter to be taken up by the Cabinet Committee on Investment (CCOI) in its meeting to be held on 10-01-2012 (Annex-i). In this regard, it is stated that the BOI had earlier circulated the proposed summary in October 2011 for comments thereon. The same was examined and the comments of the FBR were offered vide letter dated 3rd November, 2011.

The BOI has sought the approval of the CCOI on the proposal contained in paragraph four of the said summary reproduced as below:-”The BOI as a facilitator of investment in the country strongly feels that new investment in the motorcycle industry needs to be encouraged through a reduction in the present prevailing duty to 15 percent on the CKD parts to five percent as an incentive for new investment in Pakistan for five years from the start of production”.

The FBR’s comments on the above proposal are as under:-“the Auto Industry Development Plan (AIDP) prepared by the Ministry of Industries after consultation with all the stakeholders and approved by the ECC of the Cabinet has provided a predictable tariff structure and incentives for the entire auto industry for five years. Currently, the authorized manufacturers of motorcycles are allowed to import the non-indigenized kit of motorcycles at 15 percent (Annex-II). The vendors have been allowed to import raw materials at zero percent, sub components at five per cent, components at ten per cent and sub-assembles at 20 per cent. This indicates that the industry is already availing concessions. On the other hand, the rate of duty for CBU motorcycles is 65 percent.

In one aspect of the plan, the Auto industry Investment Policy (AIIP), has provided incentives to new entrants. According to the incentive, the new entrant would be allowed to import 100 percent CKD kits at the leviable customs duty, for a period of three years from the start of assembly / manufacturing. The AIIP has been implemented through notification No. SRO 1098(1)/2011 dated 16-12-2011. However, this incentive was not extended to the motorcycle industry.

The indigenization level in the motor cycle industry is approximately 85 to 90 per cent and the production of motorcycles in the range of 1.3 million in FY 2010-11. The industry has achieved this growth without additional incentives for new entrants. To promote indigenization, an additional customs duty at 32.5 percent has been levied on localized parts if imported by the authorized manufacturer/assemblers of motorcycles. The AIIP has also specified that the incentive would enable the new entrant of four wheelers to catch-up to the localization level within three years. However, M/s Yamaha is expected to localize 85 percent of its parts in the tenth year.

 

Courtesy: The News


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