Tuesday, August 27, 2013

Buying a car in Pakistan

In 2004, the Pakistani government placed an order for a luxurious Mercedes Cardiac ambulance at a cost of more than 13 million rupees (about $225,000). The vehicle, first of its kind, will be used exclusively by a select group of VIP patients in the capital, Islamabad. No doubt the privileged few will include civil and military bureaucrats and so-called representatives of the people.

But, at the same time, a large number of taxpaying people eager to buy a car are being denied a fair deal. Over the past couple of years the local car industry, which suffered negative growth of 24 percent during 1999-2000 due to lax demand, has witnessed a steep rise in demand that it is unable to meet. Needless to say, local car manufacturers and vending industries are exploiting this gap between supply and demand to their maximum benefit, and to the detriment of the consumer. Various factors, including car financing schemes introduced by local and foreign banks and a disarrayed transport system, have conspired in this situation. But the government ministries and officials concerned are also accomplices.

Misusing high tariff protection, which currently reaches to 150 percent on some vehicles, car manufacturers are selling their cars at twice the international market price. They charge full down payment at the time of booking and give a delivery date ranging from two to eight months. (According to some estimates, this period may extend from six months to two years.) For a spot delivery, the buyer has to pay a premium of 30,000 to 150,000 rupees, depending on the make and model of the car.

After persistent complaints from the few quarters advocating the interests of consumers, the federal cabinet agreed in February to reduce the import duty on completely knocked-down (CKD) and completely built-up (CBU) cars by 20-50 percent. Car dealers saw this as a mere eyewash -- a gentle rebuke to local car manufacturers that wont encourage the import of new cars. How can it? Even under the new duty structure, the price of an imported 800cc car is still higher than the price of the same locally assembled 1000cc car. A substantial reduction could make a difference; but that would harm that sacred cow; local industry.

The local car industry, even after years, is still heavily protected. Its vending industry, which provides it with parts and accessories, enjoys zero import duty on raw materials, and just 5 percent duty on the import of sub-components. What else do they need? A hapless people in need of personal cars with no free choice! Thanks to the governments protectionist policy, they already have these in abundance. People have no choice but to buy whatever the local auto industry offers them: no variety, no quality, an inflated price and a long wait. There are hardly 12 models in the local market, but if Pakistan opted for free trade, Pakistanis could choose from a range of more than 150 models with various prices and far better quality.

The crux of the matter is free trade: high tariffs on the import of new cars and a restriction to import re-conditioned cars have thrown cars way out of the reach of many people. So who does it benefit? Only the few that work in the local auto industry. To safeguard these few, the interests of the majority are being sacrificed on the altar of Localism, Nationalism, and Local Industry. So what if we are self-sufficient in car production! What does that mean for the consumer? Nothing!

Some time ago, the government was peddling the slogan: Be Pakistani, Buy Pakistani. What that really meant was: Be patriotic, buy low-quality, over-priced goods. Conversely, if the government reduces or minimizes the duty on the import of new cars, the price of cars will slide to an affordable level and the number of car owners in Pakistan will almost be doubled. If the restriction on the import of re-conditioned cars is lifted, this number may treble.

The fight is on. Local auto industry and its allied units enjoy a privileged position, which naturally they wish to defend. (They had a victory last year when they succeeded in stopping import of low priced Chinese 600cc car.) They are putting maximum pressure on the government not to reduce duty on the import of new cars, and not to allow the import of second-hand cars either. Meanwhile their opponents, car importers and consumer advocacy groups, are demanding at the very least a reduction in the import duty on new cars and a limited-period permission to import used cars.

But even if they win, the victory is likely to be short-lived. The official political philosophy in Pakistan hinges on a stolid protectionism. The government has applied for yet another exemption from WTO trade rules which are due to be implemented from 2005.

Only a demonstrable shift in public opinion disfavoring restrictions on free trade is likely to bring lasting change to the protectionist climate. Meanwhile it is tragic that in a world of countless cars, where high quality vehicles are churned out of plants every day, political boundaries have divided the world market into a plethora of smaller closed markets where people are tantalized with the idea of owning a car, but are denied the right to have one.

[This article was originally published in Tech Central Station on May 19, 2004.]

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