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September 2007

— Export performance and potential — Implications of the WTO Agreements

The Automotive Parts Sector in Pakistan

This publication has been produced with the assistance of the European Union (EU) as part of an EU-funded Trade Related Technical Assistance (TRTA) programme with the Government of Pakistan. The International Trade Centre (ITC) is implementing the programme. The content of this publication is the sole responsibility of the consultants. Facts and figures set forth in this publication are the responsibility of the consultants and should not be considered as reflecting the views or carrying the endorsement of the EC, ITC, UNCTAD, or WTO. The factual details and in-country resources in the publication have been researched and compiled by the consultants. ITC has not formally edited this report.

© International Trade Centre (UNCTAD/WTO) Palais des Nations, 1211 Geneva 10, Switzerland Email: [email protected] http://www.intracen.org Distribution: UNRESTRICTED September 2007

ITC: Your Development Partner in Export Success ITC Mission ITC enables small business export success in developing countries by providing, with partners, trade development solutions to the private sector, trade support institutions and policy-makers. ITC strategic objectives

Enterprises – Strengthen the international competitiveness of enterprises.

Trade support institutions – Develop the capacity of trade service providers to support businesses.

Policy-makers – Support policy-makers in integrating the business sector into the global economy.

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http://www.intracen.org/

Acknowledgements

The report was prepared by:

• Morten Scholer, Senior Market Development Adviser, International Trade Centre (ITC), Geneva, Switzerland

• Jan Oude Elferink, Global Automotive Consultant, the Netherlands

• Ikram Haider, National Automotive Consultant, Karachi, Pakistan

• Bastiaan Bijl, Trade Data Analyst, Independent Consultant, New Delhi, India

• Madiha Butt, Senior Research Executive, Aftab Associates (Pvt.) Ltd, Lahore, Pakistan

• Inaam ul Haque, WTO Adviser, WTO Cell, Planning & Development Department, Government of the Punjab, Pakistan

Inputs and support were provided by:

• H. Aftab Ahmad, CEO, Aftab Associates (Pvt.) Ltd, Lahore, Pakistan

• Quratulain Ibrahim, COO, Aftab Associates (Pvt.) Ltd, Karachi, Pakistan

• Arif Ahmed Khan, ITC National Programme Coordinator, Islamabad, Pakistan

• Aizad Imdad, WTO Cell, Planning & Development Department, Government of the Punjab, Pakistan

• Kaneez Fatima, Research Executive, Aftab associates (Pvt.) Ltd, Lahore, Pakistan

• Mehdi Ali Rizvi, Ex-Chairman, PAPAAM, Karachi, Pakistan

• Shariq Suhail, Chairman, PAPAAM, Karachi, Pakistan

• Rasheed Ali, Language Editor, Lahore, Pakistan

• Muhammad Ali, Language Editor, Lahore, Pakistan

• Julie–Anne Lee, Business Advisory Services Consultant, ITC, Geneva, Switzerland

• Maryam Yunus, Formatter/Proof reader, Lahore, Pakistan

The companies that provided input to our queries (in alphabetical order): • A-One Techniques • Allwin Engineering Industries Ltd • ATA group of Industries • Automotive Spare Parts and Accessories (Pvt.) Ltd • Bolan Casting Ltd • Mir Sons Industries • FAAM Equipment (Pvt.) Ltd • Quality Casting Pvt. Ltd • Giuhar Industries • TM Enterprise

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• R.K. Gears • Hussein Engineering Works • Mumtaz Engineering • Auto Plymer Enterprise • Rubatech • Transmission Engineering Industries Ltd • Shaheen Engineering Works • Manna Shahid Forgings Ltd

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Abbreviations

ACGR Annual Compound Growth Rate AM After Market CBU Completely Built Up CIF Cost Insurance Freight CKD Completely Knocked Down CNG Compressed Natural Gas CSF Competitiveness Support Fund EDB Engineering Development Board EMCC European Monitoring Centre on Change FTA Free Trade Agreement GDP Gross Domestic Product GOP Government of Pakistan GSP Generalised System of Preferences IPR Intellectual Property Rights ITC International Trade Centre LCR Local Content Requirements LCV Light Commercial Vehicles LDC Least Developed Country MFN Most Favoured Nation MPV Multi Purpose Vehicle NOC No Objection Certificate OE Original Equipment OEM Original Equipment Manufacturer PAAPAM Pakistan Association of Automotive Parts & Accessories Manufacturers PAMA Pakistan’s Automotive Manufacturers Association PKR Pakistan Rupees R&D Research and Development RTA Regional Trade Agreements SAARC South Asian Association for Regional Cooperation SAFTA South Asian Free Trade Area SEZ Special Economic Zones SKD Semi Knocked Down SME Small and Medium Enterprise SMEDA Small and Medium Enterprise Development Authority SUV Sports Utility Vehicle TBS Tariff Based System TBT Technical Barriers to Trade TDAP Trade Development Authority of Pakistan TRIMS Trade Related Investment Measures TRIPS Trade Related Agreements on Intellectual Property TRTA Trade Related Technical Assistance UK United Kingdom US United States USAID United States Agency for International Development WTO World Trade Organization

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Table of contents

Acknowledgements i

Abbreviations i i i

Executive summary 1 Industry overview 1 Findings – recommendations - conclusions 1 Implications of the WTO Agreements 4

1 Background and objectives 7 1.1 EC TRTA Programme for Pakistan 7 1.2 Five sector studies 7 1.3 Methodology 8

2 Autoparts sector in Pakistan 9 2.1 The sector in general 9 2.2 Production process and technologies 16 2.2 Availability, quality and price of raw materials 19 2.3 Technology and skilled labour 19 2.4 Export markets 19 2.5 Price trends of raw materials and end products 20 2.6 Growth in the sector 20 2.7 Exports/imports of autoparts 21 2.8 Price structure of the industry 21 2.9 Annual turnover and some projections 21 2.10 Rules and regulations affecting the sector (non-WTO) 22 2.11 Six studies on international trends 23 2.12 Classification and trade of automotive parts 28 2.13 SWOT analysis of Pakistan’s automotive industry 49 2.14 The role of associations – PAAPAM and PAMA 51

3 Implicat ions of WTO Agreements 54 3.1 Background 54 3.2 Information on the WTO issues 57 3.3 Implications of the WTO Agreements 61 3.4. Trade conditions of the Pakistani automotive parts sector 73

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4 Obstacles and shortcomings to export 77 l

5 Export services in Pakistan 79

tually are – expressed views

6 Recommendations 87

– at three levels 87

Annexes 95

List of Tables

otive assembly production, 2001-02 to 2005-06 ..................................... 12

List of Figures ure of car assembly in Europe / United States........................................ 10

4.1 Obstacles and shortcomings – at company leve 77 4.2 Obstacles and shortcomings – at country level 77

5.1 Export service providers 79 5.2 Export services as they ac 83 5.3 Export services as they should be – expressed views 84 5.4 Other export services - examples 84

6.1 Overall overview 87 6.2 Recommendations 6.3 The way forward – if we had a million 90

Annex A — Competitiveness Support Fund (CSF) 95

Table 2.1 AutomTable 2.2 Capacity of auto assemblers ............................................................................. 12 Table 2.3 Present status of automobile assemblers and manufacturers........................... 13 Table 2.4 Number of assembler/manufacturing units in automobile sector of Pakistan.... 21 Table 2.5 Autoparts from China – Myths and realities........................................................ 24 Table 2.6 HS codes for automotive parts .......................................................................... 28 Table 2.7 Pakistan’s exports by product and major destination, 2004-2005 ..................... 31 Table 2.8 Pakistan’s imports by product and major origin, 2004-2005.............................. 33 Table 2.9 Top 10 world importers - Broad categories (US$ million) .................................. 37 Table 2.10 Top 10 World exporters - Broad categories (US$ million) ............................... 39 Table 2.11 World and Pakistan vehicle production figures, 2004-2005 ............................ 40 Table 2.12 Tariffs in export markets for autoparts (%) ...................................................... 44 Table 2.13 Import tariffs on vehicles.................................................................................. 46 Table 2.14 Import tariffs on automotive parts .................................................................... 47 Table 2.15 Import tariffs on raw material ........................................................................... 49 Table 3.1 Pakistan’s import and exports of automotive parts (US$ million) ...................... 74

Figure 2.1 StructFigure 2.2 Structure of car assembly in Pakistan .............................................................. 10 Figure 2.3 Sources of Chinese capital cost advantage ..................................................... 24 Figure 2.4 Pakistan’s automotive component exports and imports, 2004-05.................... 30 Figure 3.1 Functional scope of the WTO........................................................................... 55 Figure 3.2 Upward and downward information flows on the WTO .................................... 58 Figure 3.3 Relevance intensity of the WTO Agreements .................................................. 62

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List of Boxes Box 3.1 Multilateral discipline of trade rules – The WTO system........................................54 Box 3.2 Regional Trade Agreements (RTAs) ....................................................................64 Box 3.3 WTO Agreements in a nutshell.............................................................................72 Box 3.4 Automotive parts – Pakistan’s exports and imports profile ....................................73 Box 3.5 At a glance - Impact of the WTO Agreements on Pakistan’s autoparts sector .....76

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Executive summary

Industry overview

There are around 1,250 units in the auto vendor industry in Pakistan; about 500 are registered vendors with assemblers, i.e. original equipment manufacturers (OEMs).

The auto vendor industry constitutes 90% of small to medium-sized family owned enterprises (SMEs), of which 95% are self-financed. These units produce a wide range of parts also for the replacement market. Through indigenous, technical resources and technical tie-ups with some well-known global companies, the industry has by and large developed into a well-organised sector.

In the last five years the auto vendor industry had an annual growth rate of almost 35% in the wake of a sharp increase in the demand of automobiles. OEMs and vendors have made a heavy investment during the last three years, which has helped them to enhance their production capacities as well as achieving progressively higher indigenisation levels. The Engineering Development Board (EDB) under the Ministry of Industries, Production and Special Initiatives has set a target for the automotive industry at an annual compound growth rate (ACGR) of 20% for the next five years.

EDB’s projections indicate that by 2010-11 the production of passenger cars and light commercial vehicles (LCVs) would reach 510,000 units — up from almost 193,000 in 2005-06. The projected level would provide additional direct employment for about 300,000 professionals, engineers, technicians and skilled workers in the automotive sector alone. The auto vendor industry’s contribution to GDP is projected to increase from 2.8% in 2005-06 to 5.6% by 2010-11.

At least 78% of the national demand for automotive parts – also called automotive components or just autoparts – is being met by imports, while local manufacturers cover about 22%. Motorcycles dominate (60%) the composition of autoparts demanded in Pakistan, with cars making up 22%.

Pakistan’s exports of automotive parts amounted to US$24 million in 2005. Imports reached US$432 million the same year. In 2001 the amounts were US$10 million and US$155 million, respectively.

Findings – recommendations - conclusions

The dominating issue in the industry relates to the absence of economy of scale, which is the cause of high costs of production that often do not meet international standards.

Among other key issues are poor infrastructure, shortage of skilled labour, the absence of advanced research and development (R&D) facilities, scarcity of raw material, poor dissemination of information on technical and trade-related matters, combined with a country image that is not among the best.

These and several other issues are discussed in the report based on input from companies and experts from Pakistan and abroad.

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Recommendations

Chapter 6 of the report includes a number of recommendations for policy-makers, trade support institutions, sector associations and companies. Some of the most important recommendations are the following - not mentioned in any order of importance.

Develop a long-term policy

• Develop a 10-year national master plan for the automotive industry to set a clear vision, a mission and directions for the industry’s development.

Strengthen trade associations

• Conduct awareness workshops and seminars on the latest technology, processing techniques, designing criteria and implementation of international quality standards.

• Arrange exposure visits to the auto industries in Japan, Germany, Thailand and other selected countries.

• Establish vendor development and training cells.

• Organise training workshops for operators on the use of modern technology.

• Establish export points to explore export potential opportunities and provide assistance to potential exporters with links to international export agencies.

• Establish an autoparts laboratory and testing facilities.

• Establish information and R&D centres.

• Create a large-scale central warehouse of imported raw materials.

• Set up a display centre for international buyers.

• Establish an investment advisory service.

• Collaborate with the international automotive industry: in particular benchmark with the world leading manufacturers at or near the industrial clusters in special economic zones operated and managed by the private sector or by the automobile associations, i.e. PAAPAM and PAMA.

• Establish a formalised system of information flow on WTO issues: WTO–government–associations–companies as well as companies-associations-government-WTO.

Set up special economic zones (SEZ)

• Set up at least two SEZs at Karachi and Lahore with zero customs duty on plant and machinery, raw material, parts and components. The zones should offer up to 10 years tax holiday, develop a world-class infrastructure and make provision of utilities at rates comparable to those in other countries in the region. The management of these SEZs is to be entrusted to the private sector.

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Facil itate incentive-based quality and productivity improvements

• By means of financial incentives and possibly grants, encourage the establishment of new, and upgrading and modernisation of existing, testing labs/facilities at firm level, preferably within the vicinity of clusters of SEZs.

• Encourage vendors with matching grants to go for international accreditations and certifications.

Establish a technology up-gradation fund

• Provide funds at individual firm level for technology transfer and replication of modern machines.

• Develop linkages with international machinery suppliers.

• Hire experts/consultants with matching grants on the basis of output, productivity, efficiency and operational performance improvements.

Develop skil led labour

• Make an assessment of manpower needs and encourage linkages between the industry, engineering universities and technical training institutes to promote demand-driven technical education and vocational training.

• Set up vocational training centres meeting the demands and needs of the industry in private-public partnerships. The Zakat Fund and other funds available for poverty alleviation could be used to provide scholarships to deserving students.

• Liaise more systematically with international organisations from Japan (JETRO, JICA), Korea (KOICA), the European Union (European Commission), the United States Agency for International Development (USAID) and the International Trade Centre (ITC) for training of workers and for other assistance.

Conclusions

Consistent government policies and transfer of technical know-how are on target in the broadest sense. In other words, they are where Pakistan needs guidance and assistance for achieving growth and progress.

In this situation, larger external investments based on joint investments with multinational companies could give a boost to the auto vendor industry. They would enable the industry to capture a significant share of the export potential and to appear as a global autoparts supplier in the world market.

The most important challenge is to build a policy on the belief that the strength lies at the firm level. The role of the Government should be restricted to be only that of a facilitator and supporter.


Implications of the WTO Agreements

The implications of the World Trade Organization (WTO) Agreements have been looked at from four key angles:

• WTO Agreements and their relevance to the sector • Information flows on the WTO issues • Trade conditions for the sector • Threats and opportunities for the sector

WTO Agreements relevant to the autoparts sector

The agreements of direct relevance to the automotive parts sector are the General Agreement on Tariff and Trade (GATT 94) and Trade Related Investment Measures (TRIMs). Other agreements having high level of relevance are the Trade Related Agreements on Intellectual Property (TRIPs), Technical Barriers to Trade (TBT), Rules of Origin and the Customs Valuation.

Information f lows on WTO issues

The information flow on WTO issues is not satisfactory; neither for information from WTO via the Government and associations to companies (downwards), nor from companies via associations and the Government to WTO (upwards). A proactive role is indicated on the part of the Ministry of Commerce and the Trade Development Authority of Pakistan (TDAP). They should provide leadership in this regard and collaborate efforts with Small Medium Enterprise and Development Authority (SMEDA), provincial government’s WTO cells, the Chamber of Commerce and Industry and trade associations.

Trade condit ions for the automotive parts sector

Improvement in market access for automotive parts manufactured in Pakistan has taken place in the industrial countries’ markets. This has happened as a result of the WTO agreements bringing down tariffs worldwide.

Pakistan has also opened its market, among others, in respect of autoparts. Since 1998, the import regime of Pakistan has been significantly liberalised through reduction in tariffs, rationalisation, and removal of import quotas, import surcharges and regulatory duties. The unweighted (i.e. simple) average statutory tariff has come down from 47% in 1997-98 to 14% in 2006-07. The net actual liberalisation on the part of Pakistan has been much more than multilaterally required in the WTO agreements. Some experts are of the view that Pakistan should not have unilaterally reduced tariffs to such a steep extent.

Threats and opportunit ies for the sector

The central objective of the WTO is to help international trade flow smoothly, freely, fairly and predictably. The WTO rules, with their trade liberalisation orientation, have indeed led to a rapid expansion of world trade. Under this liberal international trade regime, there are both threats and opportunities for Pakistan.


If a proper strategy is adopted and the Government plays a supportive and facilitative role, it can lead to a significant increase in international trade and substantially contribute to economic growth. Action is to be taken by government agencies, trade bodies and, above all, by entrepreneurs themselves. The business community has the primary responsibility for converting tariff reductions and liberalisation commitments into opportunities for trade by adopting appropriate export promotion and development strategies.

There is, prima facie, no serious threat to this industry in Pakistan. However, with greater liberalisation in the future, imports of automotive parts may increase further. In order to cope with this emerging situation, Pakistan’s automotive parts industry will have to improve price competitiveness and quality of its products.

In terms of opportunities, market access is not a problem for Pakistan’s automotive parts. The main problem faced by Pakistani exporters is that of the supply side which needs to be addressed. Pakistan has to improve the capacity to meet international demand by producing automotive parts of good quality and standard at competitive prices. Under the WTO’s liberalised import regime, Pakistani exporters should, in particular, take full advantage of markets where tariffs are very low.



1 Background and objectives

1.1 EC TRTA Programme for Pakistan

The International Trade Centre (ITC) is implementing, on behalf of the European Union (EU), a Trade-Related Technical Assistance (TRTA) programme in Pakistan. The overall objective of the programme is to assist Pakistan to foster its integration into the world economy and, ultimately, to contribute to poverty alleviation through the achievement of trade-related conditions for sustained and stable economic growth.

More specifically, the programme aims to enhance awareness among government officials, the business sector and civil society about the implications of the World Trade Organisation (WTO) agreements on the economy of the country, and to assist Pakistan in building the necessary capacity to address issues resulting from its participation in WTO.

1.2 Five sector studies

Within this framework, the programme has undertaken five studies on sectors selected by the Ministry of Commerce in Pakistan: automotive parts, footwear, furniture, pharmaceuticals and sports goods.

The studies have been undertaken by national consultants working in cooperation with the respective business associations, national and international experts and ITC.

The studies identify export opportunities and threats in each sector and look at the implications of the WTO agreements. Specifically they include:

• An overview of the sector and its relevance to Pakistan, including production processes, pricing and turnover performance, regulatory environment and export performance.

• A summary of other studies, reports, policy papers, strategies, etc. developed in recent years for the sector.

• An overview of the sector’s trading performance for key products, including the sector’s global trade position, national sector data, imports and exports over the last five years, and the global position of key Pakistani companies.

• Identification of the WTO agreements relevant to the sector and analysis of their implications for the sector globally and in Pakistan, both currently and in the future. This includes analysis of changed or new market threats or opportunities arising out of the emerging multilateral trading environment.

• An assessment of the availability and accessibility of relevant information on WTO, including the information flows between the government and the business community.

• Identification of the key obstacles or shortcomings for improving the sector’s export performance and provision of proposals for improvement or rectification.

• An assessment of the current export support services provided by the Government and suggestions on how these could improve the export performance in the relevant sector.


• Recommendations aimed at individual companies, business associations and relevant government authorities – including some hands-on suggestions in the form of scenarios with proposed partners and estimates of costs.

1.3 Methodology

As part of the study, the lead consultant in Pakistan, Aftab Associates (Pvt.) Ltd (AAL) carried out a series of interviews with several senior staff members of autoparts manufacturers and exporters of Pakistan. Six representatives of AAL interviewed five manufacturers-cum-exporters and thirteen manufacturers between March 28 and May 02, 2006. The interviews were made on the premises of the companies in Karachi and Lahore.

A 30-point questionnaire was used and the average duration of interviews was an hour.

Of the 18 companies interviewed, 55% deal in assembly, 44% in castings, 27% in rubber and 22% in forgings. Product mix includes rubber (floor mats, mounting, rings, other types of mats, tyres, brake washers, filters i.e. oil filters, different types of seals, i.e. rubber seals, oil seals, etc.), casting (aluminium, iron, dye, cylinder block), assembly (brake assembly, gear shaft assembly, speed-o-meter or rev meter, flasher, lever combination assembly, jack assembly, frame, brake, etc.) and forging (water body, gear forge, axle, shocks bracket, valve, gear lever, exhaust manifold, hub forging, shafts, caps, connecting pads, brake drum, ductile iron, hub, brake disc, car rim, water pump body, etc.).

Six companies had up to 150 employees, nine companies had 151 to 300 employees, and three companies had around 700 to 1,100 employees.

The main export markets of the manufacturers-cum-exporters are Sri Lanka, Malaysia, Gulf Estates, USA, Germany, Spain, Italy, England, Brazil and Singapore.


2 Autoparts sector in Pakistan

2.1 The sector in general

2.1.1 Review of the autoparts industry in Pakistan

The Pakistan automotive industry dates back to 1953 when National Motors Limited established the country’s first assembly plant in Karachi to assemble Bedford trucks. This plant later also housed the assembly of light trucks and cars. The industry remained extremely protected till the early 1990s after which a policy of major deregulation was adopted that allowed an influx of Japanese manufacturers to enter into the industry. This allowed the market to experience some levels of competition amongst manufactures like Suzuki, HINO Trucks, Toyota, Honda and Mazda cars, to name a few.

Although during this period the industry did experience a substantial amount of growth and development, it continued to remain relatively protected and immature. It wasn’t until 2001-02 that the auto industry entered a rapid growth phase. The developments in the auto industry were largely triggered as a consequence of the high growth in the economy as a whole. The Pakistan economy not only experienced an increase in the purchasing power of consumers but also a massive increase in the availability of credit and financial options, coupled with low interest rates. This change in the economic environment resulted in a major increase in demand, which was unable to be met by supply. This deficit in supply was particularly felt in the automotive industry, with manufacturers unable to meet the demands for motorcycles, cars and tractors. To tackle this issue, the Government relaxed its import policies and made it easier to import automotives. Despite a massive increase of over 800,000 automotives in the industry in the last four years, coupled with large amounts of imports, Pakistan has been unable to meet its growing demand. Although the situation has improved and continues to improve, the supply side gap still remains prevalent.

Today, the automotive industry on a global level has become one of the most mature industries in the world after having implemented many changes in response to globalisation trends. Currently, the industry is confronted with an overcapacity in the western world while the demands in East Europe and Asia continue to rise. As competition among car builders is tremendous, cost elements and local presence play a crucial role in gaining and maintaining market share. Due to these factors there has been a trend for Original Equipment Manufacturers’ (OEM) to expand their capabilities to new markets while capacity in the traditional market shrinks. Moreover, over 75% of the cost of the car is delivered by the supply chain, which continues to be dominated and controlled by Western suppliers. Although the local market of the automotive industry has been growing at a phenomenal speed, Pakistan’s contribution in global terms has been almost non-existent. It is a mere 0.3% of the world production of 66.5 million passenger and commercial vehicles per year.

Pakistan’s automotive industry achieved rapid growth and localisation from 1985 to 2006, primarily due to the adoption of a deletion programme by the Government. This programme mandated a compulsory local component for each model of vehicle to not only promote but also provide protection to the growing local infant industry. During the deletion programme’s implementation, the industry managed to localise a large number of automotive parts, including sheet metal parts, rubber and plastic parts, aluminium parts such as radiators, wire harnesses, chassis, tyres, tubes, car seats and lights, etc.


2.1.2. Structure of the automotive industry in Pakistan and abroad

To fully understand and comprehend the dynamics of Pakistan’s automotive industry, it is essential to have a detailed understanding of the supply structure of this complex industry. Understanding the structure of the industry also helps when comparing the local structure with the rest of the world; to analyse the differences and suggest recommendations that may allow Pakistan to achieve the same levels of economies of scale as those achieved globally.

The automotive industry’s supply structure comprises an Original Equipment Manufacturer (OEM) who receives its supplies from first, second or third tier suppliers.

A systems supplier develops, produces/assembles and delivers complete (sub) assemblies, e.g. instrument panels, front and rear axles, brake systems, sunroof modules, seats, heating and cooling devices, etc.

The first tier supplier is responsible for the delivery of parts such as steel coils, body paints, tyres, etc. The second and third tier supplier delivers mono parts, such as door hinges, door locks, bolts, nuts and other plastic parts.

Figure 2.1 Structure of car assembly in Europe / United States

Figure 2.2 Structure of car assembly in Pakistan

3rd tier suppliers

2nd tier suppliers

System/1st tier suppliers

Car assemblers (OEM)

Car assemblers (OEM)

System/1st tier suppliers

2nd tier suppliers

3rd tier suppliers


As illustrated in Figure 2.2, Pakistan’s supply structure is such that second and third tier suppliers have direct contact with both the system suppliers, i.e. the first tier suppliers, as well as the OEMs themselves. Comparatively, in the more developed and mature automotive industries around the world, the OEMs have considerably reduced their supply chain (figure 2.1). They concentrate primarily on first tier suppliers who then deal with second and third tier suppliers, respectively. The second and the third tier suppliers have minimum, if any, contact with the OEMs and deal mainly with the system suppliers, hence creating not only a far more efficient allocation of resources, but also a highly developed and organised supply chain.

However, in Pakistan all the three tier suppliers deal and do business directly with the OEMs. This widespread supply chain management restricts the OEMs’ achievement of those volumes of production that are essential to be able to compete at international level. It increases the dependency of the OEMs on second and third tier suppliers, and any shortcoming of supply on their part completely halts the assembly line. This dependency also makes it difficult for further product enhancement; it prevents the OEMs from concentrating on R&D and from achieving larger volumes, as the OEMs’ top priority becomes its supply chain management. A leaner supply chain would not only decrease the dependency of the OEM on its suppliers, but would also ensure a less risky and volatile assembly line, allowing it to achieve greater volumes and hence reap the benefits of economies of scale, making Pakistan a more prominent player in the international market.

2.1.3. Pakistan’s automotive sector

Pakistan has come a long way since it started its journey in the automotive industry back in 1953. The industry has become far more diverse and competitive, new players have and continue to enter the industry, bringing in a range of new and diverse products.

The automotive industry of Pakistan can be divided into two main segments:

Manufacturing and sales of passenger automotives:

• Passenger cars (including sports utility vehicles, SUVs, and multi purpose vehicles, MPVs)

• Trucks and buses • Motorcycles

Manufacturing and sales of heavy equipment:

• Agricultural equipment, e.g. tractors • Earthmoving equipment and • Logistic handling equipment, e.g. forklift trucks.

Pakistan’s automotive industry has achieved massive growth over the past five years. It is estimated that in 2005-06 the production of cars reached 160,642 units, compared to 40,088 in 2001-02. Similarly, the production of trucks and buses has increased more than five times since 2001-02, reaching a total of 5,343 units in 2005-06. Motorcycle production has also seen a similar rate of growth, achieving a production level of over 751,667, as illustrated in Table 2.1 below.


Table 2.1 Automotive assembly production, 2001-02 to 2005-06

Auto production 2001-02 2002-03 2003-04 2004-05 2005-06

Cars 40,088 61,814 100,240 124, 710 160,642

Trucks and buses 1,134 1,929 2,522 4,900 5,343

Motorcycles 120,627 165,105 322,816 484,223 751,667

Pick ups 9,055 13,371 15,694 21,121 32,053

Tractors 23,801 26,240 37,770 39,659 48,887

Source: PAMA.

Currently there are 93 active assemblers in the following segments, operating below their capacity.

Table 2.2 Capacity of auto assemblers

Auto segment Assemblers Capacity (units)

Trucks and buses 13 21,400

Light commercial vehicles 6 32,500

Cars 7 164,000

Tractors 6 50,000

2/3 wheelers* 61 733,000

Total 93

* 6 major players only

Source: SMEDA, 2005.

2.1.4. Pakistan’s autoparts industry

Along with the automotive industry the autoparts industry of Pakistan has also achieved great levels of growth and success. During 2003-04 and 2004-05 the sharp increase in demand for automotives resulted in a subsequent growth in the autoparts industry, bringing the total number of organised units to about 1,100 by 2004-05. Autoparts manufacturers are generally registered vendors to assembler and OEMs. They manufacture elaborate parts, such as pistons, engine valves, gaskets, camshafts, shock observers, brake drums, wheel bumpers and radiators to name a few. Along with these organised manufactures in this sector, a number of small and medium units are also operating. It was estimated that 90% of the autoparts industry comprised small and medium sized enterprises (SMEs), of which at least 95% are self-financed, providing a wide range of parts for the replacement market.

The automotive and the autoparts industries have proved to be extremely important players in the economy of Pakistan. The job multiplier in the automotive industry has been very high, a total of over 201,000 direct jobs were created by the sector in 2005 compared to about 100,000 in 2002. Furthermore, the industry made a contribution of PKR 198 billion (ca. US$3.3 billion) to the country’s GDP, a 100% increase from its 2002 contribution. Investment in the industry


also increased from PKR 50 billion in 2002 to over PKR 115 billion (almost US$2 billion) in 2005.

The annual plant capacity and production of autoparts assemblers and manufacturers is given in the table below.

Table 2.3 Present status of automobile assemblers and manufacturers

Assemblers* Make and model Annual plant capacity**

Production 2005-06**

Cars

Pak Suzuki Motor Co. Ltd Suzuki Mehran, Alto, Cultus, Liana

68,000 82,597

Indus Motor Co. Ltd (Toyota) Toyota Corolla, Altis and Coure

50,000 38,977

Honda Atlas Cars (Pakistan) Ltd Honda Civic, City 30,000 30,464

Dewan Farooque Motors Ltd (Hyundai, Kia)

Hyundai Santro Kia

15,000 10,000

8,604

Nexus Automotive (Pvt.) Ltd Chevrolet – Exclusive n/a n/a

Transmission Motor Co. (Pvt.) Ltd Alif, Bay n/a n/a

Adam Motors Company Limited Revo n/a n/a

Total 160,642

Light commercial vehicles and SUVs (Jeep)

Pak Suzuki Motor Co. Ltd Bolan, Ravi, LCV) Potohar (Jeep) (4x4 1,000cc)

12,000 17,137

Indus Motor Co. Ltd (Toyota) Toyota Hilux (LCV) 8,000 2,575

Master Motor Corporation. Foton, yuejin 6,000 1,767

Sigma Motors (Pvt.) Ltd Manufactured at Gandhara Nissan Plant

Land Rover (Jeep) n/a 1,182

Sind Engineering Ltd Dong Feng 3,000 24

Delta Innovation (Pvt.) Ltd Star (LCV) n/a n/a

Dewan Farooque Motors Ltd (Hyundai, Kia)

Shehzore n/a 9,368

Silver seal International King Star n/a n/a

Roma Automobile Company Changgan n/a n/a

Adam Motors Company Ltd Zabardast and B.J.C. Boltoro (Jeep)

n/a n/a

Total 32,053

Trucks and prime movers (Heavy commercial vehicles)

Sind Engineering Ltd Dong Feng Trucks n/a 4

Karakoram Motors (Pvt.) Ltd King power n/a 0

Adam Motors Company Limited Mudan Zabardest n/a n/a

Hinopak Motors Ltd Hino Trucks and Prime Movers

10,000 1,499




Gandhara Industries Ltd Isuzu 3,000 897

Gandhara Nissan Ltd Nissan 500 1,652

Master Motor Corporation. FAW n/a 466

Volvo Motor Co Volvo n/a 0

Trans mobile Yasoob n/a 0

Total 4,518

Buses (Chassis/body manufacturers)

Hino-Pak Motors Ltd Hino buses and bus chassis 2,400 668

Sind Engineering Ltd Dong Feng Busses 1,000 40

Gandhara Industries Ltd Isuzu 2,000 63

Gandhara Nissan Ltd Nissan n/a 48

Master Motor Corporation Ltd Yuejin, Foton and FAW 5,000 6

Afzal Motors (Pvt.) Ltd Daewoo - bus chassis 5,000 0

Total 825

Tractors

Al-Ghazi Tractors Ltd (Fiat) Ghazi (65hp-85hp) 25,000 24,574

Millat Tractors Ltd Massey Ferguson (50hp-80hp) 25,000 24,313

Universal Tractors Pakistan (Pvt.) Ltd

Universal n/a n/a

Dewan Automotive Engineering Limited

Dewan Lifan and, Tumoson n/a n/a

International tractors (Pvt.) Ltd International n/a n/a

Fecto Belarus Tractor Ltd Belarus n/a n/a

Total 48,887

Motorcycles and auto rickshaws***

Atlas Honda Ltd Honda 500,000 360,561

Dawood Yamaha Ltd Yamaha 200,000 74,423

Suzuki Motorcycles Pakistan Ltd Suzuki 65,000 16,965

Plum Qingqi Motors Ltd Qingqi 100,000 16,221

Pakistan Cycle Industrial Cooperative Society Ltd

Sohrab 60,000 16,970

A.B. Engineering (Pvt.) Ltd Laser 25,000 414

A.S Auto Industries Yaqeen n/a n/a

Ahmed Automobiles (Pvt.) Ltd Safari 10,000 3,890

Ali Raza Industries (Pvt.) Ltd Royal Star 6,000 2,800

Al-mehran Auto Industries Mehran n/a n/a

Babar Auto Trading and Manufacturing Co.

Asia Hero 4,000 991

Baweja Automobiles Challenger 10,000 1,970




Burraq Motor Company (Pvt.) Ltd Burraq n/a n/a

Blue Star Automobiles Blue Star 15,000 2,046

Crown Motorcycle Company Crown Lifan 3,000 1,514

D. S. Motors Unique 8,000 14,331

Dewan Motorcycles Ltd Star Dewan Lifan 35,000 6,351

Eagle Industries (Pvt.) Ltd Eagle 6,000 7,704

Excel Industries Excel 5,000 2,358

Fateh Motors (Pvt.) Ltd Hero 54,000 33,118

Ghani Automobile Industries Ltd Ghani n/a n/a

Habib Motorcycles (Pvt.) Ltd Habib 40,000 1,873

HKF Engineering (Pvt.) Ltd Ravi 30,000 17,418

H M S Automotive Industries (Pvt.) Ltd

HMS n/a n/a

Khyber Automobile Industries Khyber n/a n/a

King Hero Motorcycles Industries King Hero 10,000 4,510

Master Motorcycles (Pvt.) Ltd Master 30,000 572

Master Engineering Company Leader 17,000 0

Memon Association Foundry Super Star n/a n/a

Metro Hi-Tech (Pvt.) Ltd Metro Hi-Tech 20,000 10,534

Moon Traders Moon Star 4,000 294

N.J. Auto Industries (Pvt.) Ltd Super Power 25,000 34,997

New Asia Automobiles New Asia 15,000 6,513

Omega Industries Road Prince 10,000 2,983

Pak Hero Industries (Pvt.) Ltd Pak Hero 108,000 31,3995

Pak Star Enterprise Pak Star n/a n/a

Raazy Motor Industries Hi-Speed 25,000 5,550

Rafeeq Engineering (Pvt.) Ltd Royal 15,000 200

Raja Auto Cars (Pvt.) Ltd Hawk 18,000 548

Sameer Moto Industries Champion 10,000 0

Sara Automobile Industries Union Star n/a n/a

Shafeeq Sons Jinan 30,000 6,000

Sitara Auto Impex Sitara Guangta 3,000 919

Sonica Auto Industries (Pvt.) Ltd Sonica 10,000 430

Specialized Motorcycles (Pvt.) Ltd Hunter 25,000 0

Stahlco Automobiles (Pvt.) Ltd Stahlco n/a n/a

Star Asia, Lahore Star Asia n/a n/a

Suleman Auto Industries (Pvt.) Ltd Geo 10,000 3,434

Super Asia Motors (Pvt..) Ltd Super Asia 10,000 9,189




Toyo International Motorcycles Toyo 10,000 2,736

United Sales United 18,000 11,218

ZXMCO Pakistan (Pvt.) Ltd ZXMCO 10,000 6,265

Total 1,549,000 751,667

* Source: Articles and magazines ** Source: PAMA *** Note: There are 12 approved manufacturers of rickshaws.

This trend has also been similarly duplicated by the autoparts industry. In the past three years the autoparts industry has made heavy investments, which have helped them enhance their production capacities and achieve progressively higher indigenisation levels. The economic indicators related to the automotive parts manufacturing industry reveal that in 2004-05 the sector generated employment of over 500,000. The sector also contributed PKR 25 billion (ca. US$420 million) to the country’s GDP and invested a total of PKR 103 billion (ca. US$1.7 billion).

Although the industry has been growing at a phenomenal rate, currently it is still not in a position to reap the benefits of economies of scale, bringing Pakistan to the level of a mature industry dealing with mature partners. If the projected levels of growth — a forecast that Pakistan will produce at least 500,000 vehicles by 2012 — are to become a reality, then the industry has to take radical steps to reach the required levels of maturity and development. Furthermore, the need to mature will become even stronger if export ambitions from the industry are taken into consideration. The growth expectation requires the industry to put high pressure and give top priority to the following areas:

• R&D know-how • R&D facilities • Capacity enhancement • Sufficient skilled labour • Capital for expansion • Investments in latest machinery and technologies.

Developing these areas will require both time and money. Therefore, the industry must consider creating closer cooperation and relationships with each other, by sharing facilities and knowledge. It is also of utmost importance to create alliances with foreign automotive systems and with 1st tier suppliers. These endeavours and efforts are likely to help bridge the gaps in less time and in a more efficient manner, as investments would be made in areas that have the highest priority.

2.2 Production process and technologies

The automotive industry is called by some ‘the mother of all industries’. It encompasses almost all types of industry, including steel, plastics, rubber, textile, leather, electrical and electronics, chemicals and so forth. However, this report focuses only on four technologies, which represent almost 95% of the constituents of the entire sector. The technologies are:


• Rubber parts • Castings and forgings • Stamping (sheet metal parts) and • Assemblies (components and sub-assemblies).

2.2.1 Rubber parts

The rubber technology for the car industry is extremely diverse. It is essential for Pakistan’s supplier base to have the capabilities to produce:

• Injection moulding rubber; this includes 2-compound systems as well as metal reinforcements

• Extrusion profiles; with or without metal inserts

• Rubber pressed parts.

This type of technology is used for the production of numerous parts, such as floor mats, handle core mats, tyres, brake washers, filters, steering covers, etc. It is also used for the production of various types of seals, which include rubber seals, oil seals, pipes, belts, shock absorbers, window channels and metal/rubber bushings to name a few.

The manufacturing process for all these different products is highly complex and requires a great deal of detail and precision. Depending on the product specification, there is a series of different processes, such as punching, vulcanizing, sizing, queering and, eventually, packaging.

It was found that 50% of the companies purchase materials locally, while the rest used a mix of local and imported raw materials. Local materials purchased include PVC sheet, rubber sheet, foam sheet, foam PVC sheet, plastic compound, MS pipe, hardware and different types of rubber. Imported raw materials that are used include smoked rubber, synthetic rubber, sulphur, zinc, aluminium and plastic compound aggregate sheets. Most of the raw materials are imported from Japan, Malaysia, Korea, Thailand, Singapore and Holland.

2.2.2 Castings and forgings

The automotive industry depends on the application of various techniques and all kinds of alloys. The quality demands are high and for the Pakistan industry it is very difficult to meet the correct specifications; very often the industry is forced to import expensive raw materials from Western Europe, Russia, Far East, China and the UAE. Moreover, to substitute steel, there is also a growing demand for innovative weight saving materials. In casting and forging the application of magnesium is also rapidly increasing.

Casting parts include a wide range of commodities. A few examples are cylinder blocks, brackets, brake drums, hubs, brake discs, car rims, brake discs, radiator, pullies and engine parts. Forging parts vary from casting parts and include products such as gears, axle, shafts, caps, engine valves, shock absorbers and paddles. Since the potential customers for this industry demand that their suppliers are capable of casting or forging as well as machining of these parts, the lack of technological know-how has resulted in over-dependence on technologies from the US and Europe.


More than 75% of companies use local as well as imported raw materials, while 25% purchase their raw materials locally. Local raw materials include silicon, pig iron, and heads. The raw materials mostly imported are pig iron, coal, nichol, coke, silicon manganese, aluminium, aluminium alloys and foundry chemicals. China, Russia and Africa were found to be the dominating suppliers. However, imports also come from other countries, such as Korea, Iran, Brazil, Ukraine and Canada.

In forging, it is an equal mix of local as well as imported raw materials. Companies purchase pullies, round bars, pig iron, alloy steel, carbon steel and engine valves locally. Pins, shock absorbers, valves, tapers, hammer and steel items are mostly imported. Imports mainly come from China, but Italy, India, Korea, the UK, Turkey, South Africa and America are also relatively significant players.

2.2.3 Stamping and fabrication (sheet metal parts)

Most of the body and chassis parts consist of sheet metal parts. Raw material is mild steel sheets in various gauges depending on its use, reliability and safety. Steel sheet is given a desired shape and then welded together to form the shape of the vehicle. The technology is diverse and generally consists of many processes, such as shearing, blanking, forming, drawing, trimming, notching, bending, piercing, embossing, re-striking, welding, etc.

In order to produce quality stamping or fabrication, the first operation is to determine the dies to be used in manufacturing the part and, after considering the specified quantity, material type and dimensional tolerances, material information is obtained. Most drawings clearly identify the required material. Some material specifications can be a problem, resulting in production delays. These more difficult material specs can involve special types, special tempers, non-standard thickness and special thickness tolerances.

Tolerances vary according to the design of the part, its ultimate use, the size of the part, the operations to be performed and the material to be used. This means that each part has its own practical tolerance. But, generally speaking, the tighter the dimensional tolerance, the higher the engineering needed. Each basic metal stamping operation is usually done with one hit. That means the part's entire periphery is cut with one hit (blanking). All holes and openings are done in one operation with punches located at the point of contact. When possible, forming operations are done in punch presses using hardened tools.

Standard tools and engineering fixtures are used or, when customised tooling is required, computer assisted equipment ensures close tolerances. Each of these processes represent "limited quantity" sheet metal manufacturing, different level of quality, close tolerance ability and "finished" look.

2.2.4 Assemblies (components and sub-assemblies)

Assembly techniques are used for making sub-assemblies for cars, motorcycles and tractors. Components produced using assembly techniques are: brake assemblies, gear shaft assemblies, speed-o-meters, flashers, lever combination assemblies, jack assemblies, frames, all types of shocks, shaft assemblies, CNG assemblies, duct assemblies, panel assemblies, muffler assemblies, spindle gear shaft assemblies, air cleaner assemblies, CNG bracket assemblies, wiper assemblies, sound dumping assemblies, dash insulation assemblies, parcel trays, package trays, seats, dimmers, stoppers, oil level gauge seals, rings, fuel and water tanks.


Companies purchase 40% of their raw materials locally, while 60% use local as well as imported raw materials. The material purchased locally includes MS sheet, hardware, springs, coating material, glass rooftop, carbon rod, local sheet, carbon steel and ball bearing. The imported material includes steel wires, metal sheets, tools, plastic compound, and different types of round bar, galvanised and steel wires. These imported raw materials come from Japan, Saudi Arabia, China, Belgium, Korea and some countries in Europe.

2.2.5 Product specif icat ion certif icates

Almost all suppliers from China, Italy, Korea, Turkey, South Africa, America, the UK, Japan, Holland, Belgium, Europe, Russia, Dubai and Canada give certificates mentioning the origin as well as the specifications of the product being supplied.

2.2 Availability, quality and price of raw materials

A large number of exporters and manufacturers dealing in rubber and assembly are not satisfied with the availability of raw materials from local sources.

Raw materials available for casting and components for assemblies are not of good quality and, in order to ensure premium quality, most raw materials and components are imported.

The price of raw materials and components is very high. The prices of materials over the last few years have increased considerably.

2.3 Technology and skilled labour

Neither local nor imported rubber technology are easily available to new entrants and their cost to acquire is very high. Skilled quality labour is also scarce and expensive. Entrepreneurs have to invest a great deal in training.

For casting and forging, local technology is not easily available and the quality of finished products is not satisfactory. However, the prices of casting and forging are reasonable. Premium imported castings and forging are available in the market but they are extremely expensive. Skilled labour is a major issue; despite being of poor quality, labour rates are very high.

Stamping technology is locally available at reasonable cost but the quality of the dies manufactured as well as their cost is not satisfactory. Skilled labour is available at reasonable cost.

Assembly technology is easily available locally and is of good quality. The costs of fabricating the equipment for assembly line as well as labour rates are satisfactory.

2.4 Export markets

Countries to which companies are exporting autoparts are the USA, Italy, the UAE, Sri Lanka, Spain, Bangladesh, Malaysia, England, Brazil, Germany, Poland, Turkey and European countries.


2.5 Price trends of raw materials and end products

The prices of both local and imported equipment show an upward trend for all technologies in the last five years.

Almost 70% of the exporters/manufacturers dealing in rubber technology said that in the last five years the prices of local sales have increased. One of them said prices remained stable and another said that prices decreased. All said that there was an increase in the prices of export sales.

The prices of local sales of castings have increased, whereas most export prices have remained stable. The prices of local sales of forging parts remained stable, while the prices of export sales showed an increase.

Prices of sheet metal are very sensitive and largely depend on market demand and supplies worldwide. Good quality sheets of automobile grade are not being manufactured locally. These sheets are generally imported from Japan, Taiwan, Korea, China and South America. Adding heavy freight costs for low volumes, the prices of finished parts become unacceptable to OEM assemblers, thus leaving very little margin for the local industry.

Almost all dealing in assembly said that there has been an increase in the prices of local sales, whereas a few were of the view that there was a decrease in prices. The prices of export sales have also shown an increasing trend.

2.6 Growth in the sector

Market forecasts show growth for the car industry from 200,000 vehicles in 2005 to around 500,000 vehicles in 2010. Beside the projected growth in the domestic market, there are some possibilities for the supplier industry to grow by means of export. Here one needs to make a distinction between OEM deliveries and After Market (AM) deliveries.

2.6.1 Original Equipment Manufacturers (OEM)

The price pressure from the automotive industry on the suppliers in other continents is still very high. The industry is forcing suppliers more and more to implement a global purchase and marketing strategy. In other words: “Follow us to the markets where we are active”.

This trend opens opportunities for Pakistan automotive suppliers to deliver as a 2nd tier to the system and the 1st tier suppliers all over the world. The alternative is to establish alliances with automotive suppliers from other continents.

2.6.2 After Market (AM)

Some Pakistani suppliers manufacture wear parts and are not bound to the regulation that they may not sell on the after-sales (replacement) market. This group has opportunities to start exporting their product (lines) to other parts of the world. Competition in the AM is severe and as long as potential buyers can increase their gross margin considerably, some of them will not hesitate to buy where they can make the best deal. Before embarking on this, intensive market studies must be carried out.


2.7 Exports/imports of autoparts

The trade deficit in the autoparts sector stands at just over US$400 million, with imports of US$432 million and exports of US$24 million in 2005.

There is consensus in the industry that, in order to reduce the deficit, the Government must put a complete ban on the import of second-hand completely built-up unit (CBU) vehicles that have flooded the local market. The import of second-hand CBU vehicles are not only hurting local assemblers but also badly damaging the autoparts industry.

2.8 Price structure of the industry

Those suppliers who want to do business with the OEM industry must have an open book structure. A complete breakdown of all cost price elements has to be handed over. For this to occur, one must consider that for a long-term agreement prices have to be reduced all the time. Where parts/components are labour-intensive, Pakistani automotive suppliers have a competitive edge towards the high labour cost countries. The industry, as such, does not allow high profits in spite of the high risks involved in investment in R&D and tooling costs.

For the AM, other price structures are applicable. Depending on the selection of the distribution channel, separate price policies/strategies have to be developed.

2.9 Annual turnover and some projections

Car manufacturers have investment plans to enhance their production capacities to 516,000 vehicles by 2011-12 and employment opportunities for 13,900 workers. Honda will increase its investment to PKR 13.5 billion to achieve its projected production of 100,000 units. Suzuki is expanding its production capacity to 250,000 units with an additional investment of PKR 8 billion. The Dewan Mushtaq Group has earmarked an additional investment of PKR 1.3 billion and has projected production of 48,000 vehicles, up from the existing level of 25,000 units. The Indus Motor Company (Toyota) has projected to invest PKR 10 billion to increase its production capacities to 100,000 vehicles from 50,000 units at present. Similarly, all other assemblers as well as autoparts manufacturers are aggressively investing in the country.

The automobile sector of Pakistan comprises 93 assemblers/manufacturing units.

Table 2.4 Number of assembler/manufacturing units in automobile sector of Pakistan

Type of automobile No. of assemblers/manufacturing units

Cars 7

Tractors 6

Trucks 13

Light commercial vehicles 6

Two wheelers 49

Auto rickshaws 12

Total 93

Source: Engineering Development Board, Performance Review 2005-06, www.engineeringpakistan.com


http://www.engineeringpakistan.com/

These units efficiently manufacture sophisticated parts like pistons, engine valves, gaskets, camshafts, shock absorbers, struts, steering mechanism, cylinder heads, wheel hubs, brake drums, wheel bumpers, instruments and instrument panels, gears of all types, radiators, cylinder liners, blinkers and light/lamps, door locks and auto air conditioners. Along with the organised sector, a good number of small and medium units are also operating. In fact, SMEs form 90% of the automotive parts industry, of which about 95% are self-financed. These units produce a wide range of parts for the replacement market.

The autoparts sector posted phenomenal growth during 2003-04 and 2004-05 in the wake of a sharp increase in the demand for automobiles. It was noted that OEMs and vendors have made a heavy investment during the last three years, which has helped them enhance their production capacities besides achieving progressively higher indigenisation levels.

The current annual production of autoparts in the country amounts to around PKR 60 billion (US$1 billion). At least 22% of Pakistan’s autoparts requirements are being catered for by imports, while local manufacturers are catering for about 78% of this national demand. Demand for autoparts in Pakistan is dominated by motorcycles (60%) and cars (22%).

Pakistan’s autoparts industry has its own peculiar problems. Technical know-how is the major field where it needs guidance and assistance to achieve the required growth rate. Advancement in technology has necessitated the autoparts industry to go for proper development of human and technological resources.

2.10 Rules and regulations affecting the sector (non-WTO)

To be a full system supplier, the industry has set some demands/requirements, including the following:

• Vendors have to be certified in accordance with ISO 9000 and/or ISO 16949.

• For environmental issues, vendors have to be certified in accordance with ISO 14001.

• Vendors must meet the SA 8000 regulation (conventions of the International Labour Organisations).

• Vendors have to accept product liability.

• In some cases vendors must meet European directives, see http://europa.eu.int/comm/enterprise/automotive/directives/index.htm.

• International standards must be adhered to.

During the interviews, various rules and regulations were addressed, including the following.

2.10.1 Rules and regulat ions related to autoparts exports

• Government laws and duties.

• Government tax.

• Sales tax.


http://europa.eu.int/comm/enterprise/automotive/directives/index.htm

• Letters of Credit (LC) and other documentary requirements like delivery against documents have to be fulfilled.

• Purchase orders.

• Prices already determined and negotiated.

• Advance payments.

• Parts have to be manufactured according to the customer’s requirement (given in the form of drawings). Before delivery, the product is tested in their labs and then shipped (assembly, forging).

2.10.2 Rules and regulat ions related to autoparts imports

• Different laws are implemented depending on the type of product being manufactured. • Import duties. • Central excise duty (casting). • LCs, purchase orders. • Sales tax (assembly).

2.11 Six studies on international trends

To give an overview of the global changes and trends in the automotive industry, the following studies have been used:

• China’s Automotive Market – Myths and Realities, published 2004 by McKinsey & Company.

• Trends and Drivers of Change in the European Automotive Industry, published 2004 by the European Monitoring Centre on Change (EMCC).

• Unlocking the Value of Globalisation, published 2004 by Deloitte Research.

• Supplier of the Future – the CEO Agenda, published 2002 by Roland Berger Strategy Consultants.

• EU Market Survey 2004 on parts for cars, trucks, trailers and other mobile equipment, published 2005 by the Centre for the Promotion of Imports from the Developing Countries (CBI), The Netherlands.

• Power Buyers – Secrets of the world’s best automotive purchasing and supply managers, Purchasing and Supply Management (PSM) survey and analysis by Original Equipment Suppliers’ Association (OESA) and McKinsey & Company, published 2006 by Russell Hensley.

China’s automotive market — Myths and realit ies, by McKinsey & Co.

China is seen as a threat to the Pakistan automotive industry. The myths and realities, plus the areas where the Chinese can have great influence on costs (competitiveness), are summarized in Table 2.5 below.


Table 2.5 Autoparts from China – Myths and realities

Myths Realities

With the recent sales slowdown, China’s automotive bubble has finally burst

Strong automotive market growth will continue though (most) OEM/supplier price and profitability will come down to international level.

Chinese buyers do not care about brands, they just want a cheap car

Chinese car buyers respond strongly to emotional appeals of brands, and place tangible features/benefits above engineering excellence.

Chinese suppliers will flood the market with cheap parts

Most Chinese suppliers are still subscale, and realizing the full potential of China sourcing will require significant supplier development efforts by global OEMs/suppliers.

Local champions with low cost and global ambition are emerging.

Figure 2.3 Sources of Chinese capital cost advantage

In summary, one can say:

• China will remain one of the few high-growth automotive markets in the foreseeable future. Due to strong competition, price and profitability (for most OEM suppliers) will come down to global mature market level.

• Winners in China will be those OEMs/suppliers with distinctive brand attractive products, tailored for local market and competitive structure.


• A few Chinese OEM’s/suppliers will emerge as potential global competitors and their road to success may differ from their Japanese and Korean counterparts.

• German OEMs/suppliers must learn to adapt to local market conditions in order to be successful or maintain their early lead in the Chinese market.

Note: For complete report see www.mckinsey.com.

Trends and Drivers of Change in the European Automotive Industry, by EMCC

This report seeks to provide a general picture of the European automotive industry, covering all 25 EU Member States and the three candidate countries of Bulgaria, Romania and Turkey. [Bulgaria and Romania have subsequently become members of the EU.]

It looks at the industry’s strengths and weaknesses and offers a brief analysis of the drivers of change and the resulting trends in work organisation, technology and employment.

Note: For complete report see www.eurofound.eu.int.

Unlocking the Value of Globalisation, by Deloitte Research

Deloitte studied the globalisation efforts of nearly 800 companies around the globe, with combined revenues of close to US$1 trillion, and found that most organisations fail to capture the real value of their efforts.

Over the last three years, only about one in 10 companies have launched extensive initiatives to optimise the supply chain network structure. As a result, most companies are struggling to compete on cost, quality, innovation and customer service offerings against manufacturers that constantly redesign their business from a global point of view.

The question Deloitte seeks to address is, how can companies facing increasingly complex global operations and a fast changing business environment optimise their global network to (1) minimise the cost of doing business (2) grow revenue and profits, and (3) manage the associated risks?

Note: For complete report see www.deloitte.com.

Supplier of the Future – The CEO Agenda, by Roland Berger

Roland Berger is a European automotive strategy consultant. He interviewed 140 executives from 75 supplier firms and 11 vehicle manufacturers across four continents.

Financial analysts have been unable to send very positive messages about the automotive industry to Wall Street and other major stock markets for some time now. Leaving the exception of excellent performance aside, the industry as a whole has not been among the favourites of private and institutional investors in recent years. Too much bad news about disappointing results, unmatched forecasts, unsuccessful mergers, huge overcapacities, tremendous price competition in the markets, high investment requirements to get the product


http://www.mckinsey.com/

http://www.eurofound.eu.int/

http://www.deloitte.com/

on the road, highly unsuccessful vehicle designs, and even the headlines about a “broken” business model have pounded this industry for some time.

With this study, Berger wants to describe a scenario of how the industry will, or simply needs, to develop over the next decade as it continues to face tremendous challenges and paradigm shifts. His intent is to provide a window into the key strategic decisions that suppliers in North America, Europe and Japan must make, and to define a list of actions to guide them forward.

The main conclusions are:

• The industry business model can be improved. It is not the intention to paint a rosy picture and play down the enormous challenges that lie ahead for OEMs and suppliers alike. Costly and disciplined actions will be necessary to successfully master these challenges, and not everybody in the industry will survive. There are still many suppliers in the market that can provide the necessary technology and manufacturing capabilities, but unfortunately for some. With emerging markets like China increasingly coming into the picture, more will come. Nobody in this industry has a lifetime assignment – not even the most technologically advanced suppliers. Nobody is indispensable. But, and this is the good news they submit, suppliers have the opportunity to adapt their business models to the new and future requirements. The key questions are just “who will?” and “how fast will they do it?”

• The potential for improving profits does exist within different supplier clusters along the value chain. Without predicting a new industry boom, suppliers in different regions can expect to return to the better profitability levels they have experienced in the past by adapting their business model and carrying out the required actions and measures quickly, consistently and comprehensively.

• To return to higher profitability levels, suppliers will need to be more focused and efficient than ever before. Regardless of the region and their position in the value chain, success for suppliers will depend upon eliminating non value-added resources and focusing on what they do best, i.e., being a system integrator, a technology driven supplier, or an expert in highly efficient manufacturing and supply processes.

Note: For complete report see www.rolandberger.com.

EU Market Survey 2004 on parts for cars, trucks, trailers and other automobile equipment, published by CBI

The CBI is an agency of the Dutch Ministry of Foreign Affairs, established in 1971. The CBI’s mission is to contribute to the economic development of developing countries by strengthening the competitiveness of companies from these countries in the EU market.

For those companies who want to export to Europe, this survey is an indispensable instrument and it guides you to all kinds of market information and market access requirements.


http://www.rolandberger.com/

Power Buyers: Secrets of the World’s Best Automotive Purchasing and Supply Managers, by Russell Hensley

The article highlights the current challenges faced by global automotive industry suppliers. The survey results paint a bleak picture of the challenges facing the global automotive supplier industry, which continues to miss its cost–reduction aspirations.

The research identifies seven key reasons for this shortfall:

• Image problems (very few top talent individuals get attracted to the purchasing function)

• Mindset and behaviour (majority of companies interviewed in the survey don’t consistently engage in role model collaboration. Supplier mindsets toward their own supplier tend to be quite narrow; with most indicating that they rarely involve their own suppliers in areas such as concept/design activities or in cost-reduction exercises).

• Total cost approach (purchasing choices are based on price alone, lack of information, i.e. basic facts for making purchasing decision)

• Direct and indirect materials (suppliers lack ability to execute these materials. For example, while suppliers establish cross-functional commodity teams, few such teams are able to conduct clean-sheet cost build-ups.)

• Global sourcing (suppliers should follow steps taken by their OEM customers to reduce costs and capture value)

• Integration with product development (purchasing should take place at early stages of product lifecycle where cost can be controlled)

• Improving buyer-seller relationship.

Factors driving strong performance for each of the seven areas are:

• Making purchasing more attractive to top management,

• Allotting high proportion of resources on strategic activities,

• Creating and maintaining a comprehensive database of their suppliers having detailed information about them,

• Having a clear understanding of global supply chain costs,

• Putting effective risk strategies into action,

• Purchasing during the concept stage of product development,

• Setting market–based reliable targets, and

• Developing long-term, performance-based collaborative supplier relationships.

The study reveals that the industry needs to work at improving these factors. A strong purchasing performance can make the difference between success and failure. Some key companies are also making use of bad practices and also have room for improvement.


2.12 Classification and trade of automotive parts

2.12.1 Product classif ication — HS codes

The HS classification system for traded goods was introduced in 1988, and has since then become an internationally accepted method of classification wherever products are traded. The HS classification is "harmonized" in relation to the classifications of the United Nations and the European Communities. Goods are classified according to simple objective criteria and applications. The HS, a revision of the CCCN (Customs Cooperation Council Nomenclature) 1974 classification system, includes a 6-digit sub-heading that was introduced for more precise tagging of products.

Many countries that have adopted HS have added one or more digits to further classify products of particular national interest (8-digit or 10-digit level). Pakistan started reporting its exports categorized according to the HS classification in 2002 up to the 8-digit level.

Table 2.6 HS codes for automotive parts

Categories and parts HS codes

Bodies and parts of bodies (Body)

Windshields; Mirrors; Leaf Springs; Helical Springs; Bumpers; Body parts; Chassis; Locks; Mountings; Seat belts; Seats

700711, 700721, 700910, 732010, 732020, 732090, 830120, 830230, 870810, 870821, 870829, 940120

Drive train parts and components (Drive train)

Brake Linings; Brake Pads; Mounted Brakes; Servo Brakes; Gears; Driving Axles; Non-Driving Axles; Road Wheels; Shock Absorbers; Clutches; Steering Wheels; Parts of

681310, 870831, 870839, 870840, 870850, 870860, 870870, 870880, 870893, 870894, 870899

Tyres and rubber materials (Rubber)

Tyres new; Retreaded Tyres; Solid Tyres; Inner tubes; Other rubber articles

401110, 401120, 401140, 401191, 401199, 401210, 401310, 401390, 400910, 400950

Engines and engine parts (Engine)

V-belts; Engine parts; Engines; Fuel pumps; Cooling and Lubricating Pumps; Air filters; Fuel Filters; Oil Filters; Gaskets; Radiators; Exhausts

401011, 401012, 840820, 840991, 840733, 840734, 841330, 841490, 842123, 842131, 842199, 848490, 870891, 870892

Electrical equipment and parts (Electrical)

Batteries; Spark plugs; Alternators; Distributors; Ignition Coils; Ignition; Starter motors; Generators; Lighting; Signalling Equipment; Horns; Audio Equipment; Lamp Holders; Co-Axial Cables; Ignition Wiring Sets; Wipers; Defrosters; Demisters; Carbon Brushes; Other parts for electric equipment; Air-conditioning; Alarms; Instruments; Car Clocks

850710, 8511, 851220, 851230, 851240, 851290, 852721, 853661, 854420, 854430, 841520, 854441, 854520, 902920, 910400

The automotive parts and components sector is classified under various chapters, not following the groupings of the HS. Automotive parts and components can best be re-grouped into body parts, drive train parts and components, engines and engine parts, electrical equipment and


parts and tyres. Table 2.7 below highlights the product classification according to these five broad categories. The rest of this overview adheres to this grouping.

2.12.2 Pakistan – Import/export overview

Pakistan’s imports of automotive components far outweigh its exports. Total exports in 2005 were worth US$24 million while imports reached US$432 million, up significantly from US$305 million in the previous year. Exports of automotive parts make up less than 0.2% of Pakistan’s total exports worth US$16 billion – where textiles and clothing are the dominating products.

The most valuable exports are in the drive train parts category making up 62% of the value of exports. In terms of world market share, though, they make up only 0.01% of world exports. Exports of drive train parts increased from US$12.7 million in 2004 to US$14.8 million in 2005. Engine parts exports, the second most important category, have shown a sharper increase, from US$2.8 million to US$4.2 million, though starting from a very small base. This has been due mainly to an increase in exports of vacuum pumps and compressors to Germany.

The large-scale parts and components imports feed into local OEMs. The major import categories are drive train parts and rubber parts (mainly tyres and tubes). Tyre imports consisted mainly of tyres for trucks and busses. Truck and bus tyre imports in 2005 added up to almost US$105 million, up from US$75 million in 2004. Drive train parts imports saw a stunning 60% increase from 2004 to 2005 while body and electrical parts imports showed a very slight increase over the same period. While imports come from a range of countries, Japan and China are the major sources. It is very likely that the Suzuki and Toyota plants influence this pattern. India, along with China, is the key origin of rubber components.

A more detailed look at individual products within the broad categories reveals big jumps from one year to the next suggesting that many export orders are rather sporadic. This is particularly the case for electrical parts. Rubber and engine part exports show more consistency. Leading products within these categories include oil and fuel filters, pump/compressor/fan parts destined for Germany, UAE, Bangladesh and Afghanistan and motor cycle tyres destined for Spain and Italy.


Figure 2.4 Pakistan’s automotive component exports and imports, 2004-05

151.1 112.5 Rubber

Source: Calculations from COMTRADE

0.9

12.7

1.2

2.8

33

51.5

Drive Train

Electrical

Engine 32.1 4.2

Import 05

0.8

14.8

1.2

12.2

114.5

26.8 28.8

Import 04

Export 05

Export 04

185.6

16 Body

0 20 40 60 80 100 120 140 160 180 200 US$ million


Table 2.7 Pakistan’s exports by product and major destination, 2004-2005

Value US$’000 Quantity HS code

Category Description 2004 2005 2004 2005

Unit Main destination

870810 Body Bumpers and parts for motor vehicles 540 411 216 145 Tons UAE, Italy

870821 Body Safety seat belts for motor vehicles 2 52 1 7 Tons n/a

870829 Body Parts and accessories of bodies nes for motor vehicles

343 362 60 63 Tons Hungary, Afghanistan

885 825

870840 Drive Train Transmissions for motor vehicles 1 77 2,000 n/a Units Germany

870850 Drive Train Drive axles with differential for motor vehicles

1,136 2,351 407 n/a Units USA, Italy

870870 Drive Train Wheels including parts and accessories for motor vehicles

44 174 2 25 Tons UK

870899 Drive Train Motor vehicle parts nes 11,522 12,169 6,262 4,695 Tons Afghanistan, USA

12,703 14,771

841520 Electrical Air conditioners used in vehicles 0 73 0 4 Tons n/a

850710 Electrical Lead-acid electric accumulators used for starting piston engines

488 972 25,216 n/a Units Afghanistan, Saudi

851110 Electrical Spark plugs 519 6 995,118 n/a Units UAE

851150 Electrical Generators and alternators 77 0 597 0 Units Afghanistan

851180 Electrical Glow plugs and other ignition or starting equipment nes

54 131 n/a n/a n/a UK

853661 Electrical Electrical lamp-holders, for a voltage not exceeding 1,000 volts

64 53 504,900 n/a Units Yemen

854420 Electrical Co-axial cable and other co-axial electric conductors

21 0 11 0 Tons Afghanistan

1,223 1,235

840991 Engine Parts for spark-ignition type engines nes

15 104 2 14 Tons UK, Afghanistan




Unit Main destination

841330 Engine Fuel, lubricating or cooling medium pumps for int comb piston engines

345 43 137 n/a Tons UAE, Sweden

841490 Engine Parts of vacuum pumps, compressors, fans, blowers, hoods

1,648 3,087 259 436 Tons Germany, Bangladesh

842123 Engine Oil or petrol-filters for internal combustion engines

550 667 581,613 n/a Units UAE, Afghanistan

842131 Engine Intake air filters for internal combustion engines

22 50 n/a n/a n/a n/a

842199 Engine Parts for filterg or purifyg mchy and apparatus for liquids or gases, nes

125 76 21 17 Tons UK, UAE

848490 Engine Gasket sets consisting of gaskets of different materials

26 86 n/a n/a Tons Iran

870891 Engine Radiators for motor vehicles 64 64 3,845 n/a Units USA, Bangladesh

2,795 4,177

401110 Rubber Pneumatic tyre new of rubber for motor car

5 641 270 n/a Units UAE, Afghanistan

401120 Rubber Pneumatic tyre new of rubber for buses or lorries

93 390 4,530 n/a Units Saudi, UAE

401140 Rubber Pneumatic tyre new of rubber for motorcycles

1,385 1,257 571,780 n/a Units Italy, Spain

401199 Rubber Pneumatic tyre new of rubber nes 1,075 212 192,874 n/a Units Afghanistan, Syria

401210 Rubber Retreaded tyre 249 458 7,931 n/a Units Syria, Hong Kong

401310 Rubber Inner tubes of rubber for motor cars etc buses or lorries

68 6 5,508 n/a Units Italy

401390 Rubber Inner tubes of rubber nes 166 18 40,116 n/a Units South Africa

3,041 2,982 823,009

Source: Calculations from COMTRADE.


Table 2.8 Pakistan’s imports by product and major origin, 2004-2005



Unit Main origin

700711 Body Safety glass toughened (tempered) for vehicles

1,713 3,811 2,300 4,387 Tons China, Taiwan

700721 Body Safety glass laminated for vehicles 662 440 683 314 Tons Taiwan, China

700910 Body Rear-view mirrors for vehicles 999 1,289 106 130 Tons Spain, China

732010 Body Springs, leaf and leaves therefor, iron or steel

186 189 53 39 Tons Japan, UK

732020 Body Springs, helical, iron or steel 119 772 28 157 Tons USA, Japan

732090 Body Springs, iron or steel, nes 1,487 2,049 367 458 Tons Japan, USA

830120 Body Locks of a kind used for motor vehicles of base metal

373 276 196 141 Tons China, Japan

870810 Body Bumpers and parts for motor vehicles 635 1,014 147 234 Tons Taiwan, Japan

870821 Body Safety seat belts for motor vehicles 842 1,044 207 131 Tons Australia, Taiwan

870829 Body Parts and accessories of bodies nes for motor vehicles

5,054 5,039 1,727 1,353 Tons Japan, China

940120 Body Seats, motor vehicles 156 127 8,248 n/a Units Thailand, China

12,226 16,050

681310 Drive Train Asbestos brake linings and pads 715 414 606 79 Tons Malaysia, USA

870831 Drive Train Mounted brake linings for motor vehicles

87 78 11,168 n/a Units Japan

870839 Drive Train Brake system parts nes for motor vehicles

1,106 907 4,03,604 n/a Units Japan, China

870850 Drive Train Drive axles with differential for motor vehicles


870860 Drive Train Non-driving axles and parts for motor vehicles

119 187 n/a n/a n/a Japan

870870 Drive Train Wheels including parts and accessories for motor vehicles

2,652 4,225 194 370 Tons China, Taiwan




Unit Main origin

870880 Drive Train Shock absorbers for motor vehicles 617 382 77,113 n/a Units Japan, China

870893 Drive Train Clutches and parts for motor vehicles 494 970 93,755 n/a Units China, Singapore

870894 Drive Train Steering wheels, steering columns and steering boxes for motor vehicles

662 391 1,09,820 n/a Units Japan, Turkey

870899 Drive Train Motor vehicle parts nes 1,07,732 1,77,755 4,01,08,348 29,947 Tons Japan, Thailand

1,14,502 1,85,560

841520 Electrical Air conditioners used in vehicles 9,709 7,385 80,150 n/a Units Japan, Thailand

850710 Electrical Lead-acid electric accumulators used for starting piston engines

449 301 10,797 n/a Units Sweden, Singapore

851110 Electrical Spark plugs 1,146 1,235 17,78,219 n/a Units Japan, USA

851120 Electrical Ignition magnetos, magneto-generators and magnetic flywheels


851130 Electrical Distributors and ignition coils 242 163 3,02,192 n/a Units China, Japan

851140 Electrical Starter motors 492 690 54,762 n/a Units USA, China

851150 Electrical Generators and alternators 254 63 1,758 n/a Units USA, France

851180 Electrical Glow plugs and other ignition or starting equipment nes

346 267 89,082 n/a Units Singapore, USA

851190 Electrical Parts of electrical ignition or starting equipment

447 542 95 75 Tons Malaysia, Japan

851220 Electrical Lighting or visual signalling equipment nes

3,899 5,543 9,52,037 n/a Units Thailand, Japan

851230 Electrical Sound signalling equipment 567 787 6,15,765 n/a Units China, Taiwan

851240 Electrical Windscreen wipes, defrosters and demisters

91 217 62,302 n/a Units UK

851290 Electrical Parts of electrical lighting, signalling and defrosting equipment

310 128 31 19 Tons Thailand, China

852721 Electrical Car radio 1,153 1,935 60,285 n/a Units UAE, Malaysia

853661 Electrical Electrical lamp-holders, for a voltage not exceeding 1,000 volts

331 417 24,52,973 n/a Units Germany, China




Unit Main origin

854420 Electrical Co-axial cable and other co-axial electric conductors

3,164 5,218 802 1,329 Tons China, Turkey

854430 Electrical Ignition wiring sets& other wiring sets used in vehicles, aircraft etc

625 267 99 51 Tons Japan, USA

854441 Electrical Electric conductors, for a voltage not exceeding 80 V fitted w connectors

2,815 3,009 927 684 Tons Japan, China

854520 Electrical Carbon or graphite brushes 402 444 1,29,701 n/a Units USA, Germany

902920 Electrical Speed indicators and tachometers; stroboscopes


26,780 28,780

401011 Engine Conveyor belt metal reinforced vulcanised rubber

116 985 49 320 Tons Germany, China

401012 Engine Conveyor belt textile reinforced vulcanised rubber

1,641 3,242 1,184 2,412 Tons Italy, UK

840733 Engine Engines, spark-ignition reciprocating displacing > 250 cc to 1000 cc

0 356 n/a n/a Tons Japan

840734 Engine Engines, spark-ignition reciprocating displacing more than 1000 cc

2 255 n/a n/a n/a Japan

840820 Engine Engines, diesel, for the vehicles of Chapter 87

184 217 187 n/a Units China

840991 Engine Parts for spark-ignition type engines nes

9,685 18,129 3,166 2,645 Tons Japan, Italy

841330 Engine Fuel, lubricating or cooling medium pumps for internal combustion piston engines

3,912 3,792 8,46,42,064 n/a Units Turkey, UK

841490 Engine Parts of vacuum pumps, compressors, fans, blowers, hoods

9,109 14,072 321 768 Tons Belgium, USA

842123 Engine Oil or petrol-filters for internal combustion engines

1,363 1,660 4,16,539 n/a Units Japan, USA

842131 Engine Intake air filters for internal combustion engines

768 1,427 65,686 n/a Units USA, UAE




Unit Main origin

842199 Engine Parts for filter or purifying machinery & apparatus for liquids or gases, nes

2,694 3,077 156 153 Tons USA, Germany

848490 Engine Gasket sets consisting of gaskets of different materials

2,516 4,089 3,96,001 n/a Units USA, Germany

870891 Engine Radiators for motor vehicles 128 191 13,325 n/a Units Korea, Japan

32,118 51,492

400910 Rubber Tubes, pipes & hoses vulcanised rubber not reinforced etc, without fittings

1,053 1,313 587 699 Tons Japan, China

400950 Rubber Tubes, pipes & hoses vulcanised rubber reinforced or not, with fittings

1,338 1,063 513 453 Tons Hungary, Japan

401110 Rubber Pneumatic tyre new of rubber for motor car

14,706 17,890 8,17,995 n/a Units Japan, Korea

401120 Rubber Pneumatic tyres new of rubber for buses or lorries

75,443 1,04,901 14,59,235 n/a Units China, India

401140 Rubber Pneumatic tyres new of rubber for motorcycles

1,838 2,589 4,40,492 n/a Units China, India

401191 Rubber Pneumatic tyres new of rubber with herringbone or lug treads

4,685 11,186 54,900 n/a Units China, India

401199 Rubber Pneumatic tyres new of rubber nes 10,646 7,120 2,26,773 n/a Units China, India

401210 Rubber Retreaded tyres 216 232 744 n/a Units UK, Japan

401310 Rubber Inner tubes of rubber for motor cars etc buses or lorries

941 1,761 5,04,139 n/a Units China, Korea

401390 Rubber Inner tubes of rubber nes 1,620 3,027 6,40,644 n/a Units Korea, China

1,12,486 1,51,082

Source: Calculations from COMTRADE.


2.12.3 Global trade overview

Table 2.9 Top 10 world importers - Broad categories (US$ million)

Body 2001 2002 2003 2004 2005

World Total 39,610 44,054 51,468 60,712 64,362

USA, PR, USVI 9,505 10,465 11,393 12,146 13,464

Canada 7,009 7,513 7,516 7,902 7,877

Germany 3,473 4,130 5,214 6,637 7,010

Mexico 3,640 3,728 3,442 3,453 3,750

Belgium 2,501 2,581 2,935 3,613 3,882

France 1,551 1,876 2,599 3,267 3,373

United Kingdom 1,346 1,712 2,276 2,938 2,969

China 686 1,219 2,558 3,117 2,901

Spain 1,181 1,364 1,693 1,942 1,855

Japan 891 1,034 1,220 1,338 1,377

Drive Train 2001 2002 2003 2004 2005

World Total 94,354 104,013 120,480 142,225 152,119

USA, PR, USVI 19,243 21,410 23,545 28,144 31,180

Canada 10,037 10,803 10,776 12,430 12,942

Spain 7,970 8,741 11,606 13,359 12,957

Germany 7,214 8,198 10,191 12,273 13,045

United Kingdom 7,335 8,336 9,573 10,571 10,525

France 5,656 6,124 7,656 9,390 9,786

Mexico 6,674 6,280 5,548 6,225 7,297

Belgium 3,931 3,967 4,457 5,421 5,411

Italy 2,960 3,310 4,053 4,470 4,737

China 1,997 2,049 4,020 4,634 4,151

Tyres/Rubber 2001 2002 2003 2004 2005

World Total 22,727 24,728 29,602 35,563 40,474

USA, PR, USVI 4,541 5,149 5,743 6,907 8,413

Germany 2,287 2,310 3,029 3,636 3,917

United Kingdom 1,303 1,526 1,815 2,192 2,290

Canada 1,514 1,546 1,557 1,853 2,138

France 1,241 1,317 1,702 2,005 2,180

Italy 1,093 1,161 1,389 1,732 1,770


Tyres/Rubber 2001 2002 2003 2004 2005

Belgium 909 953 1,242 1,597 1,723

Netherlands 884 1,009 1,247 1,598 1,541

Spain 895 1,003 1,319 1,479 1,308

Mexico 1,042 1,101 1,063 1,136 1,354

Engine 2001 2002 2003 2004 2005

World Total 66,363 72,036 82,918 98,025 106,125

USA, PR, USVI 14,231 15,157 16,093 18,190 19,874

Germany 8,198 8,832 10,796 13,080 13,879

Canada 7,683 7,601 7,706 8,620 9,409

France 3,600 4,246 4,803 5,373 5,940

Mexico 3,915 4,516 4,564 4,899 5,317

United Kingdom 3,172 3,746 4,137 4,616 5,086

Belgium 3,625 3,569 4,033 4,469 4,474

Spain 2,850 3,132 4,100 4,837 3,752

China 1,295 1,694 2,840 3,791 3,648

Italy 1,816 1,893 2,518 3,032 3,093

Electrical 2001 2002 2003 2004 2005

World Total 41,962 44,874 50,015 57,496 60,994

USA, PR, USVI 12,564 13,514 13,994 14,863 16,026

Germany 5,178 5,237 6,258 7,265 6,857

Canada 3,315 3,402 3,227 3,619 3,714

France 1,754 2,022 2,508 3,197 3,601

Japan 1,909 2,206 2,468 2,898 3,346

Mexico 2,269 2,286 2,103 2,217 2,521

United Kingdom 1,670 1,874 2,221 2,588 2,603

Belgium 1,755 1,725 1,838 2,194 2,242

Spain 1,224 1,540 2,011 2,088 1,885

Italy 979 1,018 1,277 1,425 1,444



Table 2.10 Top 10 World exporters - Broad categories (US$ million)

Body 2001 2002 2003 2004 2005

World Total 40,613 45,144 50,918 58,174 61,019

USA, PR, USVI 11,119 11,542 10,858 11,283 11,891

Germany 5,378 6,113 7,730 9,983 9,476

Canada 4,242 4,797 5,508 5,262 5,723

Japan 3,607 3,718 4,379 4,908 4,880

Mexico 3,416 3,867 4,033 4,351 4,907

France 2,549 2,792 2,439 2,901 3,007

Italy 1,239 1,395 1,812 2,217 2,293

Belgium 1,164 1,367 1,626 2,098 2,079

United Kingdom 1,137 1,208 1,683 1,968 1,918

Spain 953 1,122 1,351 1,674 1,839

Drive Train 2001 2002 2003 2004 2005

World Total 91,730 100,660 119,798 144,361 157,615

USA, PR,USVI 18,321 18,221 17,833 20,149 20,355

Germany 11,824 13,626 17,842 22,040 23,038

Japan 11,896 13,308 15,690 18,961 20,707

France 8,234 8,808 11,152 12,315 12,305

Italy 5,858 6,242 8,076 9,772 10,097

Canada 6,203 6,686 7,037 7,843 8,491

Spain 5,007 5,742 7,406 8,594 8,872

United Kingdom 4,723 4,777 5,153 5,693 5,587

Mexico 2,817 3,419 3,484 4,533 5,518

Korea Republic 1,628 2,003 3,400 4,855 7,141

Tyres/Rubber 2001 2002 2003 2004 2005

World Total 23,163 24,846 29,660 36,252 41,011

Japan 3,081 3,455 4,153 4,680 5,201

Germany 2,230 2,498 3,145 4,127 4,070

USA, PR, USVI 2,545 2,465 2,397 2,780 3,090

France 2,032 2,049 2,543 2,973 3,056

China 1,003 1,224 1,618 2,526 3,873

Korea Rep. 1,396 1,486 1,686 2,065 2,411

Spain 1,367 1,333 1,607 1,811 1,902

Canada 1,316 1,319 1,358 1,510 1,669


Tyres/Rubber 2001 2002 2003 2004 2005

Italy 1,142 1,196 1,369 1,680 1,612

United Kingdom 869 811 920 1,024 1,026

Engine 2001 2002 2003 2004 2005

World Total 66,535 70,563 82,500 98,514 106,604

USA, PR, USVI 13,344 13,544 13,366 14,036 15,776

Germany 9,431 10,219 12,712 16,568 17,559

Japan 8,748 8,976 9,903 11,232 11,876

France 4,199 4,239 5,965 7,262 7,672

Canada 4,133 4,322 4,597 5,106 5,133

United Kingdom 3,758 4,300 4,894 5,215 4,993

Hungary 2,967 3,277 4,298 5,382 6,304

Austria 2,888 3,072 3,744 4,240 4,619

Mexico 3,142 3,201 3,271 4,224 4,718

Italy 2,309 2,426 3,045 4,090 4,073

Electrical 2001 2002 2003 2004 2005

World Total 37,380 40,380 45,697 53,306 57,054

Mexico 7,183 7,999 7,960 8,453 9,097

Germany 4,197 4,687 5,971 6,946 6,747

USA, PR, USVI 5,612 5,583 5,293 5,702 5,975

Japan 3,146 3,373 3,429 3,901 4,260

France 2,144 2,361 2,704 2,985 2,988

China 1,154 1,487 2,010 2,684 3,470

Spain 1,176 1,259 1,558 1,908 1,883

Italy 1,033 1,095 1,330 1,670 1,792

Belgium 1,057 1,141 1,328 1,526 1,579

Korea Republic 1,008 1,020 1,213 1,423 1,802


Table 2.11 World and Pakistan vehicle production figures, 2004-2005

2004 2005 % change

Passenger cars

Europe 17,829,721 17,636,131 -1

America 8,566,853 8,956,858 5

South America 2,098,399 2,289,548 9


2004 2005 % change

Asia 17,870,039 19,096,260 7

Africa 287,655 319,598 11

Total 44,554,268 46,008,847 3.3

Pakistan 76,456 133,998 75

Light trucks

Europe 2,290,405 2,405,212 5

America 9,722,868 9,608,904 -1

Asia 4,718,386 5,030,279 7

Africa 113 175 55

Total 16,844,759 17,219,185 2.2

Pakistan 16,716 22,224 33

Heavy trucks

Europe 642,332 684,362 7

America 597,713 686,815 15

Asia 1,592,012 1,582,715 -1

Africa 20,807 26,727 28

Total 2,852,864 2,980,619 4.5

Pakistan 2,022* 3,204* 58

Buses

Europe 72,242 75,763 5

America 60 71,914 20

Asia 111 107,934 -3

Africa 1,105 1,147 4

Total 244,329 256,758 5.1

Pakistan 1,380* 1,762* 28

* Source: OICA, SMEDA, 2003/4 and 2004/5

2.12.4 World trade of key Pakistani export products 1

Fuel and oil f i lters

The global market for fuel and oil filters is estimated at US$3.3 billion with growth averaging 18% per year in recent years (2001-05) in value terms. The key buyers are United States (US), Germany, and Belgium with a combined market share of 26%. The OE for assembly market is important for this product, judging by the long list of importing countries that all have automotive assembly plants. Non-assembly countries — UAE, Saudi Arabia and Denmark — are

1 Source: ITC Trade Map www.trademap.org.


http://www.trademap.org/

the 21st, 24th and 32nd respectively on the list of world importers. Therefore, without looking into the exact details of OE markets vs. after markets, OE for auto assembly is clearly important. Nevertheless, filters need to be changed regularly when cars are serviced, so the after market has also to be important. The US total servicing market was estimated to be worth US$142 billion in 2005.2

The fastest growing markets include China (35% p.a.), Hungary (52% p.a.), Turkey (46% p.a.), Russian Federation (30% p.a.) and Ukraine (30% p.a.). Unit price appears also to be on an upward trend in these fast growing markets, as import quantity growths are slower.

Key exporters of the product are the traditional Germany, US, France and Japan, together making up a 47% share of world exports. Germany and the US are net exporters, exporting far more than they import, likely to be adding value to the filters in the process. Developing country exporters include Thailand, Malaysia, Mexico, Indonesia, India, Turkey, South Africa, Brazil, and Argentina. Turkey, Thailand and Argentina are gaining market share most rapidly.

In terms of tariff barriers, as can be seen from Table 2.12 below, the key markets in Europe, US and Japan apply zero tariffs and the majority of other markets apply tariffs between 0% and 10%. Bangladesh (25%), Sri Lanka (28%), Iran (25%) and Jordan (30%) apply high-end tariffs to Pakistan.

Engine pumps for fuel, oi l and cooling f luid

Global imports of this product in 2005 are estimated to be worth US$7 billion. The major buyers are the US, France, Germany, UK and Korea. Germany and, less so, France and US are top exporters. Japan and the Czech Republic are also key exporters. The Czech Republic is performing especially well; exports have grown at almost three times the world average, revealing rapid gains in market share.

Import markets showing rapid gains include countries “new in the automotive business” — Slovakia (57% p.a.), Romania (68% p.a.), China (41% p.a.), India (65% p.a.), and Japan (40% p.a.).

In terms of tariff barriers, as can be seen from Table 2.12 below, tariffs for this product are zero in Europe and the US and in Korea are 8%. Japan and China also apply a low tariff, 0% and 3%, respectively, while India applies 15%.

Bumpers

The US had a 24% share of the US$3.7 billion worth of bumpers and parts imported in the world in 2005. The global import market for this product has been showing an upward trend; world imports grew on average 15% per year between 2001 and 2005.

Looking at the US imports statistics in more detail, bumper and part imports are classified into bumpers, bumper parts and stampings. Bumper parts make up just under half the imports, while stampings make up 13% and bumpers 38%. Canada, Japan and Germany are key suppliers of bumpers and parts, while stampings are supplied mainly by Canada, Taiwan and Mexico.

2 Datamonitor.


Besides being the major supplier to the US, Canada in turn is the second largest global importer; 8% of world imports. However, 81% is supplied by the US. Trade flows would suggest that a significant part of the US bumper and part manufacture takes place in Canada.

Other importers in the 1%-6% world market share range include Western European countries, Mexico, China, Thailand, Indonesia, India, Russia and Saudi Arabia. The fastest growth can be witnessed in Indonesia (120% p.a.), the Russian Federation (68% p.a.), India (86% p.a.), Singapore (79% p.a., likely to be Malaysian shipments) and Thailand (32% p.a.).

In terms of tariff barriers, as can be seen from Table 2.12 below, the US, EU and Japan charge no tariff for bumpers and parts. Canada applies between 0% and 6% and Saudi Arabia and Russia both apply a tariff of 5%.

The UK is world’s top exporter of bumpers and parts, reporting a major portion headed for Turkey and South Africa. However, there is a major discrepancy with what South Africa and Turkey report in terms of imports from the UK; further investigation into intra firm shipments is required. Other global players in export include Germany, Japan, US, Canada and Spain. India, Mexico, China, Malaysia and Thailand are also significant developing country exporters.

Lead acid batteries

World total imports of lead acid batteries in 2005 are estimated to be worth US$3.4 billion and growing at an impressive average rate of 14% per annum over 2001-05. As with most autoparts, the US is the largest buyer purchasing 15% of world imports, followed by Germany (10%), Canada (7%), France (5%) and the UK (5%).

Why would Canada, which is neither the world’s largest car manufacturer nor the biggest consumer of automobiles, be third in the world? Looking more carefully at Canada’s import figures, we can see that only 68% of Canada’s 120,000 tons of lead acid batteries imported in 2005 are 12V, i.e. for a regular car. It is likely that an important share of the remaining 32% is for vehicles such as snowmobiles. Nevertheless, the very cold winters are likely to create more dependence on batteries.

The markets showing the fastest growth include India (85% p.a.), Vietnam (44% p.a.), Turkey (64% p.a.) and South Africa (39% p.a.), while Taiwan is showing decline over the same period. Saudi Arabia and Afghanistan are Pakistan’s most important buyers of lead acid batteries. As both countries are non-car producers it is likely that Pakistani exports have targeted them for their large after market value. Nevertheless, Pakistani exporters may wish to explore growing markets elsewhere such as Kuwait, Iraq, Kazakhstan, India and Ghana.

Tariffs applied for this product in major markets and the fastest growing markets mentioned above are minimal and generally 0% under GSP, Canada and Mexico being exceptions applying 7% and 15%, respectively, to imports of this product from Pakistan. Looking further at other developing country markets, tariffs range upward to 20% (Malaysia), 30% (Algeria) and 40% (Iran).


Table 2.12 Tariffs in export markets for autoparts (%)

Selected importers

4011

10

4011

40

4011

99

4012

10

4013

10

4013

90

8409

91

8413

30

8414

90

8421

23

8421

99

8507

10

8511

10

8511

50

8536

61

8544

20

8708

10

8708

29

8708

40

8708

50

Argentina 16% 16% 16% 9% 16% 16% 15% 18% 14% 16% 7% 18% 18% 18% 16% 16% 18% 14% 11% 11%

Australia 10% 10% 0% 5% 5% 5% 5% 5% 3% 10% 10% 8% 10% 8% 5% 5% 8% 5% 6% 6%

Bangladesh 25% 25% 25% 25% 13% 8% 6% 13% 19% 25% 6% 25% 13% 13% 25% 25% 13% 13% 13% 13%

Brazil 16% 16% 16% 9% 16% 16% 15% 18% 14% 16% 7% 18% 18% 18% 16% 16% 18% 14% 11% 11%

Canada (MFN) 7% 7% 0% 3% 7% 3% 3% 0% 0% 3% 0% 7% 6% 3% 0% 4% 4% 3% 4%

Canada (GSP) 0% 0% 3% 0%

Chile 6% 6% 6% 6% 6% 6% 6% 6% 6% 6% 6% 6% 6% 6% 6% 6% 6% 6% 6% 6%

China 10% 10% 15% 25% 15% 9% 5% 3% 9% 10% 8% 10% 10% 7% 10% 10% 13% 14% 12% 10%

Chinese Taipei 10% 10% 10% 10% 10% 5% 8% 8% 3% 5% 3% 6% 8% 13% 0% 5% 13% 9% 0% 8%

Egypt 22% 12% 5% 12% 12% 12% 2% 12% 5% 22% 5% 32% 12% 5% 22% 9% 12% 2% 2% 4%

Ghana 10% 10% 10% 10% 10% 10% 10% 10% 5% 10% 0% 10% 10% 10% 10% 10% 10% 10% 10% 10%

Hong Kong (SARC) 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

India 15% 8% 15% 15% 15% 15% 15% 15% 15% 15% 15% 15% 15% 15% 15% 15% 15% 15% 14% 15%

Iran (Isl. Rep.) 65% 50% 60% 60% 50% 50% 25% 20% 10% 25% 4% 40% 35% 25% 25% 30% 25% 25% 25% 25%

Japan 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

Jordan 30% 23% 30% 30% 30% 30% 30% 30% 30% 30% 10% 30% 30% 30% 30% 30% 30% 30% 15% 15%

Kazakhstan 20% 15% 5% 5% 20% 15% 15% 0% 0% 0% 0% 0% 15% 0% 0% 0% 0% 0% 0% 0% 0%

Kenya 25% 10% 10% 10% 25% 25% 10% 10% 10% 10% 10% 25% 10% 10% 10% 25% 10% 10% 10% 10%

Korea, Republic of 8% 8% 8% 8% 8% 7% 8% 8% 8% 8% 6% 8% 6% 6% 8% 8% 8% 8% 8% 8%

Malaysia 40% 40% 30% 5% 30% 30% 5% 13% 5% 13% 13% 20% 20% 5% 15% 18% 25% 25% 25% 13%

Mexico 35% 35% 20% 10% 35% 13% 12% 12% 12% 15% 13% 15% 14% 13% 13% 13% 13% 13% 13% 14%


Selected importers

4011

10

4011

40

4011

99

4012

10

4013

10

4013

90

8409

91

8413

30

8414

90

8421

23

8421

99

8507

10

8511

10

8511

50

8536

61

8544

20

8708

10

8708

29

8708

40

8708

50

New Zealand 15% 5% 0% 4% 0% 0% 2% 4% 0% 10% 5% 0% 0% 10% 9% 0% 5%

8% 5% 5% 8% 4% 9% 5%

Nigeria 50% 10% 10% 10% 20% 20% 5% 0% 10% 10% 5% 20% 10% 10% 20% 20% 10% 10% 10% 10%

Norway 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

Romania (MFN) 30% 30% 30% 30% 30% 30% 0% 2% 0% 8% 10% 0% 0% 0% 15% 15% 0% 0% 15%

3% 12% 24% 24% 14%

Russian Federation 20% 15% 5% 5% 15% 15% 5% 5% 5% 5% 5% 15% 12% 12% 13% 5% 5% 5% 5% 5%

Singapore 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

South Africa 30% 25% 0% 10% 0% 0% 14% 0% 3% 8% 8% 5% 5% 8% 7% 8% 20% 20% 7% 13%

Sri Lanka 28% 28% 28% 22% 28% 28% 2% 2% 16% 28% 19% 28% 12% 12% 22% 22% 12% 14% 12% 12%

28%

Sudan 45% 45% 45% 28% 45% 28% 10% 10% 25% 10% 10% 25% 10% 10% 10% 45% 10% 10% 10% 10%

Thailand 10% 10% 10% 10% 10% 10% 10% 1% 6% 8% 10% 10% 10% 10% 8% 30% 30% 30% 30% 30%

Turkey 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

Ukraine 0% 7% 20% 14% 15% 9% 15% 0% 0% 4% 4% 2% 0% 10% 3% 5% 0% 4% 4% 7% 1%

GCC Countries 5% 5% 5% 5% 5% 5% 5% 5% 5% 5% 5% 5% 5% 5% 5% 5% 5% 5% 5% 5%

EU (MFN) 0% 0% 0% 0% 0%

EU (GSP) 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

USA 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

Uzbekistan 10% 10% 10% 10% 10% 10% 10% 0% 0% 0% 0% 0% 0% 0% 0% 0% 30% 0% 0% 0% 0%

MFN General rate GSP Regional Agreement

Source: ITC Market Access Map, www.macmap.org


http://www.macmap.org/

Korea, Germany, Spain and US are the world’s leading exporters of lead acid batteries. The latter three are at the same time key importers, adding value in the process. For example, the US imports 362,222 tons at US$1,410 per ton (CIF) and exports 127,299 tons at US$2,226 per ton (FOB). Indonesia, Czech Republic, China and Brazil are up and coming suppliers in the world showing rapid gains in market share. Indonesia was quick to capture 70% of Afghanistan’s rapidly recovering market, of which Pakistan only captured 10% in 2004. However, Pakistan increased its share to 15% in 2005 and Thailand has taken over a significant portion of Indonesia’s share.

Motor cycle tyres

Global imports of motorcycle tyres totalled US$781 million in 2005, 58% imported by the EU27 and 15% by the US, and 5% by Japan. Other notable importers include Switzerland, Nigeria, Colombia, Malaysia, Taiwan, Brazil, Argentina and South Africa. EU countries classify their import data in more detail to reflect scooter tyre imports and larger wheel tyre imports. Imports of scooter tyres make up 10% in the EU.

The world market for motorcycle tyres grew by 16% p.a. in value in the period 2001-05. Growth well above the world average could be witnessed in Malaysia (65% p.a.), Taiwan (57% p.a.), and India (78% p.a.). Thailand and China are the dominant suppliers to Asian, African and South American markets while Japan and Taiwan dominate in Europe and the US.

2.12.5 Market access condit ions (tarif fs)

Tariffs in the traditional largest markets are favourable for autoparts; Pakistan frequently benefits from GSP status and in general, access to EU, US and Japan is entirely open in terms of tariff barriers.

Pakistan’s tariffs on imports

Imports of raw materials are not necessarily being constrained by import duties, as tariff are reasonably low, though additional taxes incurred make the overall cost significantly higher.

Tariffs imposed on autoparts currently being exported enjoy a reasonable level of protection ranging from 20-35%. It is understandable that this protection cannot be too high because of the larger quantity of imports of autoparts.

Looking at the assembled vehicle import tariffs, ironically, cars of less than 1500cc, which are the most produced vehicle in Pakistan, are protected less than other cars and trucks. Nevertheless, 50% tariff plus other taxes is a significant protection.

Table 2.13 Import tariffs on vehicles

Category MFN duty

Cars, less than 1500 cc 50%

Cars, 1500 cc to 3000 cc 65%

Cars, 1500 cc to 3000 cc CKD/SKD 75%

Cars, more than 3000 cc 75%


Category MFN duty

Light trucks, less than 5 tonnes 60%

Light trucks CKD/SKD 60%

Trucks 60%

Trucks CKD/SKD 60%

Busses 20%

Tractors 30%

Source: ITC Market Access Map, www.macmap.org.

Table 2.14 Import tariffs on automotive parts

HS code Product description MFN duty

40111000 Of a kind used on motor cars (including station wagons and racing cars)

25%

40112010 New pneumatic tyres, of rubber, of a kind used for buses and lorries (excl. tyres with lug, corner or similar treads): Of a kind used in light trucks

20%

40112090 New pneumatic tyres, of rubber, of a kind used for buses and lorries (excl. tyres with lug, corner or similar treads): Other

5%

40114000 Of a kind used on motorcycles 25%

40119900 Other 15%

40131010 Inner tubes, of rubber, of a kind used on motor cars, incl. station wagons and racing cars, buses and lorries: Of a kind used on buses, lorries or trucks

25%

40131020 Inner tubes, of rubber, of a kind used on motor cars, incl. station wagons and racing cars, buses and lorries: Of a kind used on motor cars

25%

40131090 Inner tubes, of rubber, of a kind used on motor cars, incl. station wagons and racing cars, buses and lorries: Other

25%

40139010 Inner tubes, of rubber (excl. those of a kind used on motor cars, incl. station wagons and racing cars, buses, lorries and bicycles): Of a kind used on agricultural tractors

20%

40139020 Inner tubes, of rubber (excl. those of a kind used on motor cars, incl. station wagons and racing cars, buses, lorries and bicycles): Of a kind used on motor cycles

25%

40139030 Inner tubes, of rubber (excl. those of a kind used on motor cars, incl. station wagons and racing cars, buses, lorries and bicycles): Of a kind used on jeeps

25%

40139090 Inner tubes, of rubber (excl. those of a kind used on motor cars, incl. station wagons and racing cars, buses, lorries and bicycles): Other

25%

84099110 Parts suitable for use solely or principally with spark-ignition internal combustion piston engine, n.e.s.: Rings for pistons of vehicles of Chapter 87

35%

84099120 Parts suitable for use solely or principally with spark-ignition internal combustion piston engine, nes.: Cylinders for vehicles of Chapter 87

35%



HS code Product description MFN duty

84099130 Parts suitable for use solely or principally with spark-ignition internal combustion piston engine, nes: Cylinder blocks for vehicles of Chapter 87

35%

84099140 Parts suitable for use solely or principally with spark-ignition internal combustion piston engine, nes: Cylinder heads for vehicles of Chapter 87

35%

84099150 Parts suitable for use solely or principally with spark-ignition internal combustion piston engine, nes: Cylinder liners for vehicles of Chapter 87

35%

84099160 Parts suitable for use solely or principally with spark-ignition internal combustion piston engine, nes: Inlet or exhaust valves for vehicles of Chapter 87

35%

84099170 Parts suitable for use solely or principally with spark-ignition internal combustion piston engine, nes: Other parts of engines for vehicles of Chapter 87

35%

84099180 Parts suitable for use solely or principally with spark-ignition internal combustion piston engine, nes: Parts for marine engines

5%

84099190 Parts suitable for use solely or principally with spark-ignition internal combustion piston engine, nes: Other

20%

84149010 Parts of : air or vacuum pumps, air or other gas compressors, fans and ventilating or recycling hoods incorporating a fan, nes: Of machines of heading 8414.1000 and 8414.3010

5%

84149020 Parts of : air or vacuum pumps, air or other gas compressors, fans and ventilating or recycling hoods incorporating a fan, nes: Of machines of heading 8414.3090

10%

84149090 Parts of : air or vacuum pumps, air or other gas compressors, fans and ventilating or recycling hoods incorporating a fan, nes: Other

20%

84212300 Oil or petrol filters for internal combustion engines 35%

84219910 Parts of machinery and apparatus for filtering or purifying liquids or gases, nes: Of machine of heading 8421.3910, 8421.3920 and 8421.3930

5%

84219990 Parts of machinery and apparatus for filtering or purifying liquids or gases, nes: Other

20%

85071000 Lead acid, of a kind used for starting piston engines 35%

85111000 Sparking plugs 5%

85366100 Lamp holders 25%

85442000 Co axial cable and other co axial electric conductors 25%

87081000 Bumpers and parts thereof: 35%

87082900 Other 35%

87084000 Gear boxes 35%

87085000 Drive axles with differential, whether or not provided with other transmission components

35%




Table 2.15 Import tariffs on raw material

Category MFN duty

Mineral ores 5%

Coal 5%

Sulphur 5%

Rubber

Primary forms products

5%

15-25%

Plastic

Primary forms products

5-20%

20-25%

Metal

Pig iron and ferro compounds

Non-alloy steel

Flat rolled alloy steel

Stainless steel

Pins, screws, springs

5%

10-25%

5%

5%

5-25%


2.13 SWOT analysis of Pakistan’s automotive industry

The following SWOT analysis is based on interviews with manufacturers, exporters and associations, as well as the views and observations of the national and international consultants.

Strengths (*means most important)

• Dominant position in domestic market* • SMEs are willing to cooperate (clustering)* • SMEs are flexible* • International quality standards are met* • Skilled management • Full awareness of the demands in the industry • Low labour costs • Most of SMEs are self-financed

Weaknesses (*means most important)

• Hardly any export knowledge* • No full R and D capabilities and facilities* • Backlog in process technology * • Lack of automated machines which can handle large volume production* • Limited spare capacity for export (high investment costs for expansion)* • High rejection rates due to old fashioned processes* • Low degree of CNC machines • Competent/skilled labour is scarce



• Dependent on import raw materials • Poor image as industrial nation • Poor infrastructure, i.e. availability of electricity, gas, sewage, etc. • Poor government policies • Corruption and bribery prevailing in society • Instability in prices • Illiteracy • Late delivery • Lack of subsidies • Lack of funds • Increase in freight charges

Opportunit ies (*means most important)

• Clustering offers better chances on more business*

• Automotive supply chain in Europe and USA is forced to buy in low labour cost countries*

• With better machinery, Pakistani products can also compete with other countries’*

• Free trade - if the quality of products is improved and costs are cut down, Pakistan can compete with India and China.*

• Using the unbalance in container shipments (now more full containers coming in than going out) the logistic costs could create a positive competitive edge

• Actual and future growth in the Asian area

• Increasing demand for cars

• Can compete with Chinese and Indian products if the quality is improved and costs are controlled

• Many opportunities in automation and spare parts

• 0% duties on exports

• High growth in industry

Threats (*means most important)

• Exchange rate fluctuations*

• Emerging suppliers from Eastern Europe and China*

• Investments needed to close certain gaps exceed possibilities of self-financed SMEs*

• China and India are a great threat since they have the latest technology and are making the same products as Pakistan is making; but their quality as well as costs are better*

• Unavailability of latest machinery*

• Rapid improvements in technology*


• Poor quality of electrical power

• Change in import policies by local government

• Political instability can prove to be a great threat

• High cost of production

• Electricity rates going up

• WTO -- Duties are too high due to open market, customers would not be able to purchase

• Import policies regarding cars

• Lack of government support

• Increase in taxation

2.14 The role of associations – PAAPAM and PAMA

2.14.1 Pakistan Associat ion of Automotive Parts and Accessories Manufacturers — PAAPAM

Pakistan Association of Automotive Parts and Accessories Manufacturers (PAAPAM) (www.paapam.com) was established in 1988 to represent and to provide technical and management cooperation to its members. PAAPAM, with it’s almost a decade old history, has attained an indispensable and extremely effective link between the policy-making echelons of government and the entity of its member firms.

The association achieved recognition from the Government of Pakistan in 1999 and today is represented in many government and semi government, as well as private, institutions by its members. PAAPAM is a member of the Federation of Pakistan Chamber of Commerce and Industry (FPCCI).

Aims and objectives

• To encourage, promote, stimulate and protect the business interest of Pakistan Association of Automotive Parts and Accessories manufacturers.

• To create a spirit of co-operation, goodwill and unity amongst the members of the PAAPAM.

• To represent the Association’s point of view to the local, provincial, central or other government authorities.

• To endeavour to eradicate all sorts of malpractices wherever these are found and to make every effort for honest and fair dealings amongst the members of PAAPAM.

• To co-operate with government organizations, other associations and Chambers of Commerce and Industry of Pakistan.

• To assist members to resolve their disputes and to arbitrate for settlement of disputes amongst parties.


http://www.paapam.com/

• To represent the members and all for promotion of the automotive parts and accessories manufacturers in Pakistan.

Services offered

The association offers various services to its members in the shape of:

• Providing a common platform for representation of various issues with the Government. • Interaction with the Assemblers on common problems. • Publication of quarterly newsletters and annual Directory. • Management of the www.paapam.com domain. • Management of technical seminars. • Management of international exhibitions for exports. • Management of local autoparts shows – PAPS.”

Source: Extract from PAAPAM Directory 2006

2.14.2 Pakistan’s Automotive Manufacturers Associat ion — PAMA

Pakistan Automotive Manufacturers’ Association (PAMA) (www.pama.org.pk) was established in 1982. It has a permanent secretariat with a full time Chairman and staff located in Karachi. PAMA supports the OEMs in presenting their views before the Government and its different agencies.

Its membership includes assemblers of four wheelers, buses, commercial vehicles and three wheelers. Members of PAMA:

• Pak Suzuki Motor Company Ltd • Indus Motor Compan Ltd • Honda Atlas Cars Pakistan Ltd • Dewan Farooque Motors Ltd • Sigma Motors (Pvt.) Ltd • Hinopak Motors Ltd • Ghandhara Nissan Ltd • Sind Engineering Ltd • VPL Ltd • Ghandhara Industries Ltd • Master Motor Corporation Ltd • Millat Tractors Ltd • Al-Ghazi Tractors Ltd • Atlas Honda Ltd • Dawood Yamaha Ltd • Suzuki Motorcycles Pakistan Ltd • Pakistan Cycle Industrial Cooperative Society Ltd • PLUM Qingqi Motors Ltd • Fateh Motors Ltd

Most of Chinese motor cycle manufacturers who are not members of PAMA have set up another trade body Association of Pakistan Motorcycle Assemblers (APMA). This association is not registered with the Directorate of Trade Organizations (DTO) of Federal Government


http://www.paapam.com/

http://www.pama.org.pk/

and as such, it is not a recognized trade body. It has a Chairman, two Vice Chairmen, one for South and one for North along with a General Secretary.

The services offered by PAMA are similar to those offered by PAAPAM.


3 Implications of WTO Agreements

3.1 Background

3.1.1 Mult i lateral discipline of trade rules

International trade for nearly six decades has been subject to the discipline of multilaterally agreed trade rules by which “countries are required to abide in their trade relations with one another”.3 The institution responsible for overseeing this rules-based system is the World Trade Organisation (WTO, www.wto.org) established on January 01, 1995. The WTO is the successor to the General Agreement on Tariffs and Trade (GATT) which had been performing a similar role since January 01, 1948.

Box 3.1 Multilateral discipline of trade rules – The WTO system

• International trade is subject to the discipline of multilaterally agreed rules by which countries are required to comply with in their trade relations with one another.

• The World Trade Organization (WTO) oversees this multilateral system. Its Agreements aim to help international trade flow smoothly, freely, fairly and predictably.

• Under the WTO trade regime there are both opportunities and challenges for Pakistan.

• It is for business community supported by the Government to convert tariff reductions and liberalization commitments into opportunities for trade.

• Likewise concerted action needs to be taken by both the public and private sectors to adequately meet challenges.

Source: WTO Cell, Planning & Development Department, Government of the Punjab

This chapter is divided into four main sections:

• General background

• Information on the WTO issues

• Implications of the WTO Agreements

• Trade conditions as a result of the WTO Agreements.

3.1.2 Purview of the WTO

The WTO purview encompasses management of three trade agreements, relating to: (1) Goods; (2) Services; and (3) Trade-Related Intellectual Property Rights. In addition, there are 12 associated agreements relevant to trade in goods.

3 ITC; Business Guide to the World Trading System (1999), p.3.


http://www.wto.org/

3.1.3 Functional scope

The functional scope of the WTO is depicted below.

Figure 3.1 Functional scope of the WTO

WTO

Trade in goods Intellectual property rightsTrade in services

General Agreement on

Trade in Services (GATS)

Trade Related Aspects of Intellectual Property

Rights (TRIPS)

General Agreement on Tariffs and Trade

(GATT 1994)

These Agreements seek to establish a trading system, which is non-discriminatory, freer, predictable, more competitive and arguably more beneficial to developing countries

• Business and professional services

• Communication

• Distribution services

• Educational services

• Environmental services

• Construction and related engineering services

• Financial services

• Health services tourism and travel-related services

• Recreational, cultural and sporting related services

• Transport services

• Other services

• Patents

• Copyrights

• Trademarks

• Industrial designs

• Geographical Indications

• Undisclosed information

Associate Agreements on: • Agriculture

• Application of Sanitary & Phytosanitary Measures (SPS)

• Product standards (TBT)

• Trade-related investment measures (TRIMs)

• Anti-dumping

• Customs valuation

• Pre- shipment inspection

• Rules of origin

• Import licensing

• Subsidies

• Countervailing measures

• Measures for safeguards


3.1.4 Dispute resolut ion

For disputes arising under GATT 94, GATS and TRIPs, there is a common dispute resolution mechanism embodied in the WTO Disputes Settlement Understanding (DSU).


3.1.5 Focus on trade in goods

In this report focus is on trade in goods. Hence, further reference will not be made to GATS while TRIPs will be referred to wherever it is relevant.

3.1.6 Obligation of conformity

Each member country of WTO is obliged to ensure the conformity of its laws regulations and administrative procedures with the agreements of the Organisation (Article XVI (4) of the Marrakech Agreement Establishing the WTO).

3.1.7 Threats and opportunit ies under the WTO regime

The central objective of WTO is to help international trade flow smoothly, freely, fairly and predictably. The WTO rules, with their trade liberalisation orientation, have indeed led to a rapid expansion of the world trade.

In ranking many achievements of the GATT-WTO system, among the most significant is the significant reduction in developed-country tariffs from high double-digit figures in 1947 to low single-digit numbers today.4 There have been also significant reductions in other barriers to trade.

Under this liberal international trade regime there are both opportunities and challenges for Pakistan. No doubt Pakistan faces many challenges. At the same time, the multilateral trade dispensation has created many opportunities. If a proper strategy is adopted and the government plays a supportive and facilitative role, it can lead to a significant increase in international trade and substantially contribute to the economic growth. Hopefully the ongoing trade negotiations would add to these opportunities. However, “the WTO is about providing opportunities -- it does not provide guarantees nor does it provide all the conditions for participation in the global economy”5. In short, Pakistan has to get its act together to realise the potential that has become available due to the trade liberalisation. Action is to be taken by government agencies, trade bodies and, above all, by entrepreneurs themselves. As it has been aptly observed “the business community has the primary responsibility for converting tariff reductions and liberalisation commitments into opportunities for trade by adopting appropriate export promotion and development strategies”.

Current status of efforts to l iberalise trade

Currently (late 2006), the ninth (and the first under the WTO) Multilateral Round of Negotiations called the Doha Development Agenda (DDA) is in progress (some call it a state of suspended animation).6 Earlier rounds have given a great impetus to the growth of international trade by slashing tariffs mostly in industrial countries as well as elimination of non-tariff barriers such as quantitative restrictions. Following the Uruguay Round (the most important Multinational Trade Negotiations held so far), average tariff rates in developed 4 See Patrick F. J. Macrory, Arthur E. Appleton and Michael G. Plummer, The World Trade Organization:

Legal, Economic and Political Analysis, Volume-I (2005) p.109. 5 See WTO “The Future of the WTO” (2004), p.16. 6 See Hong Kong Ministerial Declaration, WT/Min (05), Dec 22, 2005 and for update on the latest

developments and pending issues visit www.wto.org.


http://www.wto.org/

countries on manufactures stand at an average of 3 percent on imports, down from the 5.5% pre-Uruguay Round average, a 45 percent reduction. Tariffs, however, on the goods of export interest to developing countries still remain relatively high7 e.g. on clothing and footwear. DDA has been launched to improve the situation of developing countries in the multilateral trading system through focusing on issues of principal concern to them. The progress on negotiations has been so far very slow and deadlines for reaching agreement have been repeatedly missed. The meeting to take forward the DDA process held in late June and on 1 July 2006 turned out to be inconclusive. As a matter of fact, negotiations were temporarily suspended in August 2006 as the major participants had failed to show flexibility. One comment from an influential periodical graphically describes the situation as the Doha round lying “comatose after five years of fruitless negotiations”.8

Negotiations under the DDA on Non-Agriculture Market Access (NAMA) cover the sector under study. Modalities are yet to be finalised on a Swiss formula (i.e. envisaging the rate of reduction for a higher tariff to be greater than that for a lower one. For further details see: www.wto.org )

3.2 Information on the WTO issues

3.2.1 Information f lows

Figure 3.2 below illustrates the upward and downward information flows on the WTO.

The present arrangements leave a lot to be desired in terms of their content, sources, destination, user friendliness and nature of information, i.e. optional or compulsory leaves a lot to be desired. There are markedly divergent perceptions among entrepreneurs about the nature and frequency of such flows. Despite contrary claims made by individual entrepreneurs, one cannot help reaching the conclusion that flows are erratic in both directions.

7 See I. Haque, Doha Development Agenda: Recapturing the momentum of multilateralism and

developing countries, American University International Law Review, Volume 17 Number 5, p.1105-6. Also See Bernard Hoekman, Strengthening the Global Trade Architecture for Development: The Post Doha Agenda, Nov. 2001, at 2.

8 The Economist, 4 November 2006, p.40.


http://www.wto.org/

Figure 3.2 Upward and downward information flows on the WTO

WTO

j WTO Mission of Pakistan, Geneva

Ministry of Commerce/TDAP

Ministry of Industries

Chamber of Commerce and

Industry/PAAPAM Entrepreneurs


3.2.2 Information f lows – upwards: From companies via government to WTO

Government driven f lows – Upwards

There is no problem in respect of information transmitted by the Government of Pakistan to the WTO as an obligation of membership of the organisation. Regularly, the Ministry of Commerce sends necessary information about notifications to the WTO as agreed in the


Ministerial Decision on Notification Procedure.9 Some of the items that are notifiable are: Tariffs, Generalised System of Preferences (GSP) provisions, customs valuation, rules of origin, safeguard actions, details regarding exports subsidies and concessionary export financing.

Trade statistics

As regards trade statistics, the Government of Pakistan is obliged to furnish data for the integrated database of WTO. These figures are based on the data of the customs stations and are reliable. However, there has been a lag in furnishing these statistics. The problem is being sorted out.

Another compulsory upward information flow is generated from the Census of Manufacturing Industries (CMI) – conducted every five years.10 Results of CMI suffer from problems of coverage, from the industry, research design and lack of adequate response. Furthermore, these at best are historical data.

Information through consultative meetings

The Government of Pakistan informs itself about problems faced by the industry and suggestions made by the private sector at meetings preceding the formulation of each year’s Trade Policy. Apart from the Federation of Pakistan Chambers of Commerce and Industries (FPCCI), the regional Chambers of Commerce and sectoral associations, which are registered with the Government, are invited. As regards associations, some selection is made to ensure that representation is adequate in terms of both sectors and regions.

Information f low – Upwards: exporters’ opinion

Semi voluntary and sporadic

In interviews, automotive parts exporters claimed that the upward flow of information, by and large, was voluntary and they also admitted that the supply of information had been sporadic. According to them, companies at times furnish information to TDAP, SMEDA, Chambers of Commerce and PAAPAM. The information is of a general nature such as; statistics of sales, production, exports etc. (supplied mostly on a demand basis and not on a regular basis). However, some firms claim to have voluntarily provided information on a yearly basis.

Informat ion about government agencies/departments concerned

A majority of exporters generally had an idea that complaints/suggestions about WTO can be made to the Ministry of Commerce, the Ministry of Industries or TDAP. They were also aware of the websites of the government organizations concerned. According to them, they had not made complaints/suggestions to any body/institution so far. However, a few had consulted the Chamber to find answers to their queries.

9 WTO: Decision on Notification Procedures, Ministerial Decisions and Declaration adopted by the Trade

Negotiations Committee on 15 December 1993. 10 The census is undertaken under the Industrial Statistics Act, 1942 for those industrial units employing

10 and above workers registered or qualifying for registration. Information is treated confidential.


On the other hand, some entrepreneurs thought that there was no organisation to which they could make complaints, nor were they aware of any procedure for making their voices heard by the relevant government authorities. In short, information among entrepreneurs about approaching government authorities or trade bodies is not even. More enlightened entrepreneurs were aware of what to do while others remained ignorant of the avenues of articulation available to them.

3.2.3 Information f low – downwards: From WTO via government to companies

Complaints about the lack of information about WTO

All exporters interviewed claimed that no information related to WTO issues was readily available. A few were not even familiar with the term WTO. When asked whether they were aware of the WTO Cells in the Ministry of Commerce, TDAP, planning and development departments of provincial governments, or Chambers of Commerce and Industry, they replied in the negative.

However, one exporter reported getting information on WTO through newspapers, association meetings and websites. He normally checked the websites of the association every two to three months.

Knowledge about implications of the WTO Agreements

Very few exporters were aware of the specific WTO trade agreements and their implications for Pakistan’s automotive parts industry. Those who claimed to be knowledgeable about the agreements said that they were generally aware of decreasing tariffs and increasing prospects of imports. They recognised that markets under the WTO trading dispensation would become even more open in the days to come.

This vague notion about WTO does not suffice. The advice given by experts is that: “Detailed knowledge of the concessions obtained on goods and services products of actual and potential interest to the community would be necessary for evolving trade promotion strategies”.

Downward flows

The websites of the Ministry of Commerce (www.commerce.gov.pk) and other ministries, TDAP (www.tdap.gov.pk) and the WTO Cell of the Government of the Punjab (www.wtopunjab.gov.pk) have been playing useful roles. However, here again it was found that various notifications issued by the WTO Secretariat and which are regularly sent to the Ministry of Commerce are not put on their website. The plea taken in this regard was that this information was available from the WTO website. However, it is felt that the Government of Pakistan and its export/trade development organisations must play a more proactive role. WTO has also, in collaboration with the ITC and the European Commission, established WTO Reference Centres in the Ministry of Commerce, TDAP, and the Lahore Chamber of Commerce & Industry. Other such centres have also been established b y FPCCI, selected Chambers of Commerce and Industries and the Planning and Development Department of Punjab. These should be fully utilised by exporters and policy-makers.


http://www.commerce.gov.pk/

http://www.tdap.gov.pk/

http://www.wtopunjab.gov.pk/

Demand for proactive supportive role of the Government

Automotive parts entrepreneurs were of the firm view that the Government should create greater awareness about WTO issues by regularly organising focused seminars, workshops and discussions, circulating newsletters, magazines and creating websites. TDAP, Chambers of Commerce and Industry and PAAPAM should also come forward in creating awareness. The Government should compile a mailing list and regularly circulate updates on the WTO agreements to exporters/manufacturers.

Recommendations

The situation as to information flows is not satisfactory. A proactive role is required on the part of the Ministry of Commerce and TDAP. This organisation should provide leadership in this regard and collaborate efforts with SMEDA, the provincial government WTO Cells, the Chambers of Commerce and Industry and trade associations. Funds are not an insurmountable problem because the Ministry of Commerce and TDAP have ample resources in the form of the Export Development Fund (EDF). The real challenge is to organise a system that is user friendly and available in virtual real time. Technical assistance from ITC to set up/improve such an information system should be very much welcome. TDAP should intensify its activities for capacity building specifically for the better use of opportunities and coping with challenges emanating from the WTO system. Among other things, it is recommended that:

• The present generalised, marginally focused system of information on WTO should be changed to a sector-specific one, disseminating information regularly for instant use by entrepreneurs.

• A comprehensive plan for dissemination of sector-specific information may be prepared by that organisation and should be available on its website.

• A helpline, professionally manned, should be established in TDAP.

• Sector-specific experts should be available to callers.

• Special meetings/workshops/seminars for educating entrepreneurs about WTO issues should be organised by TDAP, preferably in partnership with the trade associations concerned, in this case PAAPAM.

• At least four such events should be held each year at different places.

(Action: Ministry of Commerce, TDAP and ITC)

3.3 Implications of the WTO Agreements

3.3.1. WTO Agreements relevant to the autoparts industry

The WTO agreements not only influence the volume of trade but also affect the operational space of a policy-maker and market access of an individual exporter.

The WTO agreements can be divided into three categories in terms of their relevance to the automotive parts sector: high intensity relevance, low intensity relevance and contingent relevance. Agreements possessing contingent relevance refer to those that come into effect in


certain situations only. The degree of relevance of these agreements for the automotive parts sector is the same in Pakistan and elsewhere, i.e. in other WTO Member countries as well.

The agreements of direct relevance to the automotive parts sector are the General Agreement on Tariffs and Trade (GATT 94) and Trade Related Investment Measures (TRIMs). Other agreements having high relevance are Trade Related Intellectual Property (TRIPs), Technical Barriers to Trade (TBT), Rules of Origin and the Customs Valuation. Agreements of lesser relevance are: Sanitary and Phytosanitary Measures (SPS), Pre-Shipment Inspection and Import Licensing Procedures. The category of contingent relevance consists of agreements on Anti-Dumping, Subsidies, Countervailing, Safeguards and the Dispute Settlement Understanding (DSU).

A diagrammatic representation of the degree of relevance of the WTO agreements to the automotive parts sector is given below.

Figure 3.3 Relevance intensity of the WTO Agreements

TRIMs

Automotive Parts

* Acquires high intensity relevance in the context of Regional Trading Arrangements and or where any scheme of preferential tariffs has been adopted.

Source: WTO Cell, Planning & Development Department, Government of the Punjab.

High intensity relevance

Low intensity relevance

Contingent relevance

DSU

Agreement on SCM Anti-

dumping

Preshipment Inspection

Custom Valuation

Rules of Origin*

TRIPS TBT

GATT 1994

Import Licensing Procedure

SPS


3.3.2 Specif ic WTO Agreements of relevance to the autoparts sector

General Agreement on Tariffs and Trade 1994

The structure of GATT 1994, which lays down the framework within which the international trade of goods takes place, rests upon five pillars that constitute the core of the legal obligations of the member countries.

The uncondit ional Most-Favoured-Nat ion (MFN) obl igat ion (Art ic le l )

Every member of WTO is required to treat imports from all other members “on an equal, non-discriminatory basis vis-à-vis all other members imports”. Thus if a country grants a special favour to another country (e.g. lower customs duty) the same treatment has to be extended to all other WTO member countries.

Impl icat ions for the automotive parts sector

Imports

Pakistan or any other WTO member country while importing automotive parts has to extend the same treatment to the same product of all the member countries. They are not allowed to give a differential treatment to any trading partner who is a member of WTO. This obligation leads to non-discriminatory trade and provides a level playing field to every member of WTO.

Exports

For Pakistani exports non-discriminatory market access to other markets is legally assured. This does not, however, indicate the rate of tariff that is leviable on automotive parts items. Market access will be virtually blocked if tariff rates are excessively high. Likewise, exports will be adversely affected if importing countries are using non-tariff barriers.

Except ion to the pr incip le

Some exceptions are permitted such as:

• Preferential tariff rates given to countries that are members of a free trade area/regional trading arrangements under Article XXIV of GATT as well as those arrangements among developing countries permitted under the Enabling Clause11 (See Box.3.2).

• Special access to markets of industrial countries at lower tariff rates granted to developing countries, e.g. Generalised System of Preferences (GSP).12

• Member countries are allowed to introduce trade restriction in case of balance of payment difficulties.

• The exceptions are, however, only allowed under strict conditionalities. 11 WTO, Guide to the Uruguay Agreements (1999) p.40 12 GSP was proposed at UNCTAD II in 1968. Entered into force in 1971. It gives developing countries a

margin of preference in the tariff rates their goods face in the markets of developed countries and in this way increases their competitiveness vis-à-vis those countries whose goods enter these markets on MFN rates.


Box 3.2 Regional Trade Agreements (RTAs)

Governments often take action to liberalize trade on a regional level through formation of free trade areas or preferential trade areas. Under these arrangements, goods can enter each other’s country market either without payment of any tariff or on some preferential terms and conditions. RTA, which includes bilateral free trade agreements between countries that are not in the same region, have become so widespread that all but one WTO member are now parties to one or more of them. It is estimated that more than half of world trade is now conducted under RTAs. Some 197 such agreements in force have been notified to the GATT/WTO.

Many experts regard these arrangements as building blocks for a freer non-discriminatory multilateral trading system. However, many other experts perceive these arrangements to be obstacles to the growth of a multilateral system. Regional arrangements are allowed (as exception to the Most Favoured Nation principle) under Article XXIV of the GATT 94 as well as under the Enabling Clause (trade arrangements between developing countries).

Pakistan is a signatory to an Agreement on South Asian Free Trade Area (SAFTA) that is a transformation of the SAARC Preferential Trading Arrangement (SAPTA, operational albeit half-heartedly since 1995) into a Free Trade Area among the SAARC members (Bangladesh, Bhutan, India, Nepal, Maldives, Pakistan and Sri Lanka).

SAFTA’s framework agreement envisages reduction of tariffs to 0-5% level and removing quantitative barriers to trade (a) within 10 years by its LDCs members — Nepal, Bhutan and Maldives, and (b) between 7–8 years in case of India, Pakistan, Bangladesh and Sri Lanka.

In addition to the above, a FTA has been signed with Sri Lanka. Early harvest agreements have been signed with China and Malaysia. Besides this a FTA agreement has been signed with China in November 2006. Negotiations are ongoing for signing FTA with Bangladesh, Turkey and Kenya. Discussions are also ongoing with Indonesia, Laos, Singapore and Thailand for exploring the possibility of entering into FTAs.


Nat ional t reatment obl igat ion (Art ic le I I I )

Once foreign goods have entered a country’s market, these and locally produced goods are to be treated equally (as if foreign goods have acquired importing country’s nationality).

This article embodies the same principle of non-discrimination as set out in the MFN commitment. It also establishes the principle that no tax will be imposed on imports in excess of the amount of the indirect taxes levied on the similar domestic products.

Reduct ion and bindings of nat ional tar i f fs (Art ic les I I and XI)

In order to make trade predictable, WTO Member countries are generally binding their commitments (Article Xl), i.e. ceilings are imposed on tariff rates that can be charged by a country.13 Under the WTO system, tariffs (i.e. customs duties) are the only permissible measure for trade protection (Article II and Article XI). The bound tariffs cannot be increased above the bound rates unless compensation is paid to other adversely affected WTO Members.

13 Pakistan has bound more than 99% of tariff lines.


In the case of developing countries, imports often take place on lower than the bound rates. These are called applied rates, which can be increased up to bound levels without consultation with anyone.

Reduction of tariffs is an important aspect of trade liberalisation. Tariff rates have been constantly coming down since GATT became operational. Industrial countries’ tariffs in most traded items have fallen to less than 4%. Such a significant reduction in tariff barriers has been very helpful in increasing trade. However, as stated above, on many items of interest to developing countries, tariff rates remain relatively high.

El iminat ion of quant i tat ive restr ic t ions (Art ic le Xl)

The domestic industry can be protected through tariffs only. Thus each Member of WTO is obliged not to erect any non-tariff barrier, such as quantitative restrictions. However, there are a number of exceptions to this rule. For example, export restrictions can be applied to prevent or relieve critical shortages (Article XI-2 (a)).


Exports

As tariff barriers have been substantially decreased all over the world, for the automotive parts sector market access is not a problem as such. Thus Pakistan enjoys better opportunities in the markets of industrial countries' trading partners on account of their low tariffs.

Imports

The combined effect of Articles II and Xl is that foreign automotive parts enjoy fair access to Pakistan’s market. Market access would have been easier had the tariff not been relatively high, i.e. 35%.

Transparency of Government Regulations Affecting Trade

Members are obliged to publish relevant laws, regulations, administrative rulings of general application, including those pertaining to the classification of the valuation of the products, etc. Governments are also required to disclose their policies and practices publicly within the country as well as by notifying the WTO. With a view to ensuring that Members adhere to their obligation, their trade policies are examined through a surveillance mechanism called the Trade Policy Review Mechanism. This also encourages transparency.


Transparency in government regulations, in Pakistan and abroad, helps in the smoother flow of trade. It is “in essence due process guarantees and a partial shield against arbitrary government action”.

Trade Related Aspects of Intellectual Property Rights (TRIPS)

Many countries entered into international agreements (non-WTO) to protect creative ideas and new knowledge by giving the creators of these knowledge-based assets certain rights (called intellectual property rights - IPRs), which are the following:


• The right to prevent others from “using their inventions, designs or other creations”14 and

• The ability to negotiate payment for intellectual property (IP) rights.

yrights, trademarks, industrial designs, geographical indications and undisclosed information.

Berne Convention, the Rome Convention and the Treaty in respect of Integrated Circuits.

as effected amendments in the existing laws relating to patents, copyrights and trademarks.

Relevance to the automotive parts sector

tive parts sector. As the sector becomes more sophisticated, its relevance will increase further.

onsider registering any innovative and special design so these be fully

However, protection given to IPRs (by several international agreements) was found to be inadequate. This was particularly true as to the level of protection, implementation and enforcement. Therefore, it was agreed to develop new internationally agreed rules. The result was the agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs) negotiated in the Uruguay Round, which sought to reduce distortions and impediments to international trade through promoting effective and adequate protection of intellectual property rights. The functional purview of the TRIPs agreement extends to patents, cop

The agreement spells out the way that basic principles of trading order and other intellectual property agreements should be applied. The MFN and national treatment requirements have constituted key elements of the architecture of the agreement on TRIPs. This agreement also required members to comply with pre-existing agreements governing IPRs. It was explicitly provided that nothing in the TRIPs agreement shall derogate from existing obligations as spelled out in the Paris Convention, the

The TRIPs agreement markedly narrowed the gaps in the manner these rights were recognised, protected and enforced among trading nations. It also provides for settlement of disputes through the WTO dispute settlement system. Pakistan, in compliance with the TRIPs agreement, has enacted new legislation (IPO law) as well

The TRIPs agreement is directly relevant to the automo

Protect ion of designs and t rademarks

• Innovations incorporated in an auto part can be protected through getting a patent.

• Automotive parts’ designs can now be protected through getting them registered under the Industrial Designs Ordinance (2000). The automotive parts industry should therefore seriously cprotected.

• Well-established companies are advised to get their trademarks protected.

14 This Agreement fixed minimum levels of protection that each member of the WTO is required to

provide to the intellectual property of other members.


• The quality of protection has significantly improved. By the same token the automotive parts industry in Pakistan cannot copy someone else’s designs or trademarks. Strict

elated Investment Measures (TRIMs) specifically prohibits investment measures that are inconsistent with the provision of Articles III or XI of GATT

t clearly prohibits such trade-distorting investment measures, even those that are mandatory or enforceable under domestic

w Tariff Based System (TBS), which is fully in compliance with the TRIMs agreement.

, irrespective of the type and category of the vehicle.

by the host governments

compliance with the provision of TRIPs will have to be ensured on the positive side. Pakistani automotive parts manufacturers and exporters may be able to take advantage of protection provided by this agreement.

(Action: Entrepreneurs/Associations)

Agreement on Trade Related Investment Measures (TRIMs)

At times, local content requirements and performance requirements have been, inter alia, employed by host countries as an instrument to promote development objectives such as industrialisation, import-substitution and export growth. Such requirements can affect international trade. For example, a requirement of local content in a product may prevent or limit the use of imported inputs. Any investment-related measure of this type has been now prohibited as a trade distorting measure.

The agreement on Trade R

1994. The agreement provides an illustrative list that explicitly prohibits local content requirements, trade balancing requirements, foreign exchange restrictions and export restrictions that would violate Article III:4 or XI:1 or GATT 1994. It has identified such measures, which had previously been widely tolerated as being contrary to existing GATT.15 It also sent out a clear signal for phasing out existing measures. I

law or administrative rulings.

As per the TRIMs agreement, Pakistan was required to eliminate local content requirements (LCR) by 2000. It was given an extension for four years (initially for two years). The last application for further extension was turned down. The government of Pakistan has accordingly announced to replace the deletion programme by the ne

Under the new system, import duty at the rate of 50% would be applicable to such components/parts which are manufactured locally and are either (a) imported for the assembly by the Original Equipment Manufacturer (OEM) or (b) imported by the commercial importers as replacement parts for vehicle plying in the country including such motor vehicles which were not manufactured locally. 25% duties would be levied on all other indigenised replacement parts


The TRIMs agreement is directly relevant to the automotive parts sector. The demand for prohibiting TRIMs has emanated from developed countries. These have made huge investment in the developing countries and keep on looking for investment opportunities. They feel inhibited in their decision-making on account of conditions imposed on investments.

15 See WTO Guide to the Uruguay Round Agreements p.78


As the LCR has been withdrawn, the downstream vendor industry of automotive parts has to face foreign competition. This sector has lost exceptional protection enjoyed by it due to LCR

Agreement on Technical Barriers to Trade (TBT)

ge

oduced products an unfair advantage. It also encourages countries to accord recognition to each other’s testing procedures. To help the stakeholders to know

arkets, all WTO members are required to

There is also a possibility that importing countries may practice disguised protectionism by have the effect of obstructing trade. For example,

a country may restrict automotive parts by arguing that these parts are causing environmental

case of unrelated parties will be the

conditionality. However, if the domestic manufacturers find that the foreign supplies have been indulging in unfair trade practices, e.g. dumping, they can have recourse to trade remedial measures. The domestic manufacturers should also carefully watch, and take action if necessary, in cases of under-invoicing of imported automotive parts.

(Action: Entrepreneurs/Association and GOP)

Every WTO Member while allowing imports has the right to adopt standards considered by it to be appropriate for human, animal or plant life or health or for the protection of the environment or for the prevention of deceptive practices. TBT seeks to assure that regulations, standards, testing and certification procedures do not create unnecessary hurdles to trade. However, with a view to preventing excessive diversity, TBT encourages member countries to use international standards where these are appropriate but it does not oblige them to chan(i.e. lower) their levels of protection in the process.

The TBT contains a code of good practice for the preparation, adoption and application of standards. It lays down that the procedures used to determine whether a product conforms with the national standards have to be fair and equitable. It does not approve of any methods that would give domestically pr

about the latest standards in the prospective mestablish a national enquiry point. Local offices of TDAP are the enquiry points in Pakistan.

The TBT gives a decisive advantage to industrial countries as they have superior technologies and do follow more rigorous and higher standards. On the contrary, Pakistan being a developing country has yet to progress to those relatively sophisticated standards. Among other things, Pakistan does not have sufficient number of high standard laboratories, which puts the country at a disadvantage.


laying down unrealistic standards that might

pollution. In such cases, Pakistani exporters may be well advised to plead that the arbitrary standards have been creating unnecessary hurdles to trade and constitute a violation of the TBT agreement. If relief is not expected to be given by authorities in importing countries, exporters should request the GOP to take up the matter in the WTO dispute settlement system.

(Action: Entrepreneurs/Associations and GOP)

Customs Valuation under GATT

The provision regarding customs valuation under GATT seeks to establish a fair and uniform system for the valuation of goods that provides protection to international traders from fixation of arbitrary values by customs authorities of importing countries. The agreement lays down that the customs value of the imported goods in the


transaction value. This means the price actually payable for the goods when sold for exports. Some costs such as: freight, packaging, commissions, etc. may be added for the purpose of

rmining value.

utomotive parts sector

ny of imported goods to


ting GSP or for a member of a regional arrangement of which Pakistan is a

Associations and GOP)

nt life or health. Under the agreement on Sanitary and Phytosanitary Measures (SPS), WTO has disciplined the exercise of discretion by member

working out customs value. The agreement, however, excludes items that are regarded irrelevant to fixing customs value, e.g. the price of goods on domestic market of the exporting country. If the customs authorities of a country have doubts about the declared value, they may determine the value by sequentially adopting one of the five options: (a) the value of identical goods, (b) the value of similar goods, (c) the imported price of identical or similar goods less applicable deductions for costs, (d) computed value and (e) if none of these methods work, reasonable means may be used for dete

Relevance to the a

Serious problems can arise if customs authorities of a country choose to fix arbitrary values. If the values fixed are excessive, the trade liberalisation policy can be effectively negated. In case values are on the low side, the tariff protection given to domestic manufactures will cease to be effective. Under invoicing, if not rectified by proper customs valuation, can turn out to be a major threat to the domestic industry. If automotive parts manufacturers or importers are faced with the misuse of customs processes, they can agitate the matter with the relevant revenue authority (Central Board of Revenue).

Rules of Origin

The WTO agreement on Rules of Origin contains a work-programme seeking to bring about harmonisation of these rules in the long run. The issue of Rules of Origin does not arise in cases where import and export take place on the MFN basis. It is relevant in cases where a country is to benefit from the lower tariff available through GSP or under a regional trading arrangement. Such concessional arrangement rightly requires the scrutiensure that they are coming from eligible sources.

Rules of Origin acquire a special importance where automotive parts exports are destined for a country granmember. Exporters will be advised in these cases to obtain complete documentation, certifying the Pakistani origin of the concerned articles. Importers should likewise in such cases insist on getting proper documentation from the importing country. Certificate as to origin are issued by TDAP. Exports are advised to approach the local office of the bureau.

(Action: Entrepreneurs/

Agreement on the application of sanitary and phytosanitary measures (SPS)

Member countries of WTO are allowed under Article XX of GATT 94 to regulate trade with a view to protecting human, animal or pla

countries by disallowing them to discriminate or misuse this authority serving as a form of disguised protectionism.

Members of WTO are allowed to establish their own standards but it is stipulated that the relevant regulations must be based on science and applied only to the extent necessary to


protect human, animal or plant life or health. They are not allowed to arbitrarily or unjustifiably discriminate between countries, where identical or similar conditions prevail. Member countries are encouraged to use international standards, guidelines and recommendations if these are available.

In order to make the process fair from the perspective of exporters, standards different from

lations. They are also required to set ation.

Relevance to the autoparts sector

e relevant to the automotive parts sector.

mestic industry. Article VI (2) of the agreement permits a country to offset or prevent dumping by levying on the concerned product

to be initiated, how investigations are to be conducted and the conditions for ensuring that all

idence.

ports is negligible. ust inform WTO about all preliminary

eport on investigations twice a year.

those already prescribed, can be applied. Similarly, different methods of inspecting products can be adopted. In order to make this happen exporters demonstrate that the measures which exporting countries have applied are at the same level of health protection as adopted by importing countries. Once that is done, an importing country is expected to accept the exporting country’s standards and methods. This agreement also lays down that governments must provide advance notice of new or changed SPS regua national enquiry point to provide up-to-date inform

Apparently, the agreement on SPS should not bHowever, protectionist interests can assume any garb and come up with objections as to the imported automotive parts being harmful to human, animal or plant health. It may be argued, for example, that automotive parts emit certain substances that are harmful to human, animal and plant life. In such a situation, it would be open for Pakistani exporters to press into service provisions in the agreement against untenable standards.

(Action: Entrepreneur/Association and GOP)

Anti-dumping Agreement

Article VI of GATT 94 finds the practice of sale of products of a foreign country at less than the normal value of the products in the exporting country (called dumping) objectionable if (a) the price level causes or threatens material injury to an established industry in the importing country or (b) materially retards the establishment of a do

anti-dumping duty not greater in amount than the margin of dumping. The margin of the dumping is the price difference determined in accordance with the Article VI (1).

Under the anti-dumping agreement, a country is allowed to act in a way that would normally infringe the GATT principles of binding a tariff on an MFN basis because anti-dumping action means “charging extra import duty” on a particular product from a particular exporting country. Detailed procedures have been laid down on how anti-dumping cases are

interested parties get an opportunity to present ev

Normally, anti-dumping measures expire five years after the date of imposition, unless an investigation shows that ending these measures would lead to injury to the domestic industry. Anti-dumping investigations are required to end immediately in cases where it is determined that the margin of dumping is insignificantly small (defined as less than 2% of the export price of the product). Likewise, proceedings must end if the volume of dumped imThe agreement lays down that the member countries mand final anti-dumping actions promptly as well as r



This agreement is important both for importers and exporters of automotive parts. If actionable dumping takes place in the Pakistani market, one can have recourse to the National Tariff Commission (www.ntc.gov.pk). If deemed appropriate, the government of Pakistan also can, on the basis of the anti-dumping agreement, agitate the matter in the Dispute Settlement Mechanism of WTO. The Ministry of Commerce is the concerned agency.


In case export of automotive parts from Pakistan faces anti-dumimporting country or before the Dispute Settlement Mechanism, it has

ping proceedings in an to be shown that

dumping has not taken place or the margin of dumping is insignificantly small. Given the , there is a little

es the actions that can be taken

. The

bsidies have been given, the respondent country

• Actionable subsidies: This category is less objectionable than prohibited subsides. Here that the subsidy has an adverse effect on its

interests. The agreement defines three types of damage that can be caused by this class

• Exception: Subsidies given by LDCs/developing countries with a GNP of less than US$1,000 per capita per year are exempted from the subsidy regime.

extremely small quantum of automotive parts exported from Pakistanlikelihood of anti-dumping action against Pakistan in the near future. Action against an unjustified anti-dumping proceeding is to be taken at the instance of the automotive parts industry by the Ministry of Commerce. Eventually complaint will be filed before the WTO dispute settlement system. In case Pakistan is disturbed by the dumping by others, recourse should be to the National Tariff Commission.

(Action: Entrepreneurs/Associations and Ministry of Commerce)

Agreement on Subsidies and Countervail ing Measures

This agreement disciplines the use of subsidies and also regulatby the countries to counter the effects of subsidies. A country can have recourse to the WTO dispute settlement mechanism and seek the withdrawal of the subsidy or the removal of its adverse effects. Another alternative is to launch its own investigation and charge extra duty (known as countervailing duty) on the goods in question to nullify the effects of a subsidy given by its trading partners. The agreement defines a subsidy and also introduces the concept of a specific subsidy, i.e. a subsidy available only to an enterprise/group of enterprisesdiscipline applies only to specific domestic or exports subsidies.

The agreement deals with the following two types of subsidies:

• Prohibited subsidies: Requiring the recipients of subsidies to achieve certain exports targets, or to use domestic goods instead of imported goods in their manufacture. Such subsidies (trade distorting) can be challenged in the WTO dispute settlement mechanism. In case, it is found that the prohibited suwill be ordered to withdraw it immediately. In case the order is not complied with then the complaining country can levy countervailing duty on such subsidised products.

a complaining country has to demonstrate

of subsidies (i) The domestic industry of the importing country is being hurt (ii) Rival exporters from another country may be hurt when the two compete in third markets (iii) Domestic subsidies in one country can hurt exporters trying to compete in the subsidising countries’ domestic market.



In case the subsidies of any kind, described above, are given to promote the export of reement to get an order for countervailing

duties. They would be well advised to take the matter with the National Tariff Commission. On bsidies (trade distorting) on the part of Pakistan are made ent provides the exporter with wherewithal to show that

laid down. The agreement also sets time limit on all safeguard actions (4 years) and addresses grey area measures by providing that the

rease or an increase in the import share of a shrinking market (even if the import quantity has not increased.)

This agreement can be used wherever any importing country finds that there has been a surge try. Affected parties are well advised to

pproach the government of Pakistan for remedial steps in such a case.

By th can always show that action under safeguard r s

(Action:

automotive parts, affected interests can use this ag

the other hand, if allegations about suby an importing country, this agreemcountervailing duty should not be imposed. Should the matter require reference to WTO, the Ministry of Commerce would have to be approached.


Agreement on Safeguards

This agreement disciplines the initiation of emergency safeguard measures by laying down requirements for safeguard investigations. These have to be transparent as well as oblige the member countries to follow the established rules and practices. The criteria for serious injury caused or threatened to be caused have also been

members must not seek/take or maintain any voluntary export restraints, orderly marketing arrangements or any other similar measures. An import surge that triggers action under this agreement is defined to be a real increase in imports, i.e. an absolute inc


in imports causing injury to the domestic indusa

e same token, the exporting countryp ovisions is not transparent or does not meet the criteria of serious injury or threat of seriouinjury.

Entrepreneurs/Associations and GOP)

Box 3.3 WTO Agreements in a nutshell

• General Agreement on Tariffs and Trade (GATT 94) regulates the international trade

ons, Transparency of

s. TRIPS Agreement is especially relevant for the

anitary Measures (SPS) disciplines exercise of hat it

in goods and rests on five pillars: Most-Favoured-Nation (MFN) Obligation, National Treatment Obligation, Elimination of Quantitative RestrictiGovernment Regulations Affecting Trade and Tariff Bindings.

• Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) seeks to reduce impediments to international trade through promoting adequate protection of intellectual property rightpharmaceutical industry.

• Agreement on Technical Barriers to Trade (TBT) contains a code of good practice forthe preparation, adoption and application of standards.

• Agreement on Sanitary and Phytosdiscretion when a country wishes to disallow import of any item on the ground twould be hazardous to life or health of human being or disallowing import to protect


human, animals or plants.

• Customs Valuation under GATT – Implementation of Article VII. This agreement seeks to establish a fair and uniform system for the valuation of goods that provides

s do

t on Trade-Related Investment Measures (TRIMs) seeks to prohibit ments

on of Article VI of the GATT 1994 (Anti-dumping)

y if the price level causes or threatens to cause material injury to an established industry in the importing country.

of subsidies and also regulates the actions that can be taken by the countries to counter

feguard investigations.

protection to international traders from fixation of arbitrary values by customs authorities of importing countries.

• Agreement on Rules of Origin seeks to clarify and harmonize rules of origin in member countries and in particular requires members to ensure that such rulenot create distorting or disruptive effects on trade. The rules of origin are of special relevance in cases where a country is to benefit from the lower tariff available through GSP or under a regional trading arrangement.

• Agreemeninvestment related measures that are trade distorting e.g. local content requireand performance requirements. It is of special relevance for automotive parts sector.

• Agreement on Implementatiregulates the practice of dumping i.e. the sale of products of a foreign country at lessthan the normal value of the products in the exporting countr

• Agreement on Subsidies and Countervailing Measures disciplines the use

the effects of subsidies.

• Agreement on Safeguards disciplines initiation of emergency safeguards measures by laying down requirements for sa

3.4. T

Improvem arket access for automotive parts manufactured in Pakistan has taken s’ markets. This has happened as a result of the WTO

g

utomotive parts – Pakistan’s exports and imports profile

rade conditions of the Pakistani automotive parts sector

ent of the mplace in the industrial countriea reements bringing down tariffs worldwide.

Box 3.4 A

Exports

• 2005: US$24 million • Rank as exporter in the world trade: 75th

• Major export destinations: USA, Germany, Poland, Afghanistan and Bangladesh

Impor

• 2005: US$433 million

ts

• Rank as importer in the world trade: 58th

• Major import sources: Japan, Thailand, China, Turkey and UK

• Applied tariffs: 35 % (50 % in some cases)


Pakistan has also opened its market, among others, in respect of automotive parts. Since 1998 the import regime of Pakistan has been significantly liberalised through reduction in tariffs, rationalisation, removal of import quotas, import surcharges and regulatory duties. The


unweighted (i.e. simple) average statutory tariff has come down from 47.1% in 1997-1998 to 14.4% in 2006-2007. The process in fact started in 1988 after the agreement on Structural Adjustment Programme was concluded with the International Monetary Fund (IMF). In the

at we should not have unilaterally reduced to such a steep extent.

pared to other countries. Secondly, the increasing competition in the world has helped in reducing prices and improving the

The WTO system is dynamically evolving. The WTO regime is not static but is dynamically n DDA proceed and the ultimate agreements reached will

stan (threats)

Rapid growth of imports

Pakista ports of automotive part any times larg an its exports at oint in time. A few figures for comparison are

case of Pakistan, unilateral liberalisation has been the principal avenue of liberalisation of trade. Pakistan has been complying with all its commitments under WTO. The net actual liberalisation on the part of Pakistan has been much more than multilaterally required in the WTO agreements. Some experts are of the view th

Pakistan has also opened its automotive parts market substantially for foreign suppliers, albeit on a higher rate of 35% (and in some cases at 50%) as com

quality of inputs, i.e. improve the import sourcing.

evolving. The way negotiations ohave an impact on international trade.

3.4.1 Other countries’ access to Paki

n’s im s are m er th this p:

Table 3.1 Pakistan’s import and exports of automotive parts (US$ million)

Year Exports Imports Trade imbalance

2001 10 155 -145

2005 24 433 -409

As stated above, the tariff duty applied by Pakistan to the import of different automotive parts products generally is 35%,16 which is relatively high compared to a large number of other countries.

Due to increasing needs of autoparts in the country, a rapid growth of imports under the WTO liberalised import regime has taken place. The market share of the main automotive parts exporting countries has been increasing at a rapid pace, e.g. US and Japan. Other countries like Thailand, Turkey and Germany are also exporting more and more to Pakistan as their products are found attractive in respect of quality and price.

Has liberalisation of trade posed a threat to the automotive parts industry of Pakistan? In the liberalised world under WTO, one cannot expect to have a closed economy. Hence one should not be upset by the flow of imports. The rate of growth of imports should, however, be a matter of concern and constitute a potential threat. Effectiveness of the system can be greatly nullified if the malpractice of under-invoicing is not checked.

16 Market Access Map, ITC.


Pakistan’s tariff rates are relatively high. The interest of domestic producers has been duly taken into consideration in the new Tariff Based System (TBS), which has replaced the WTO non-complaint (TRIMs) deletion (LCR) programme. Under the new system, as mentioned earlier, import duty at 50% is leviable on some of the components/parts while in case of all other parts the rate of customs duty is 35%.

There is, prima facie, no serious threat to this industry at present. However, with greater

provides an institutional mechanism for trade remedial action.

s valuation and in case of under-invoicing seek redress from the Central Board of Revenue. As a

s-declaration and smuggling constitute far graver threats to the domestic industry than the liberal import regime.

e has been a sustained growth in export earnings e.g. for the year 2005, these reached US$24 million. Though it cannot be claimed that WTO is the only

Market access is not a problem as such for Pakistan’s automotive parts. The main problem kistan

arts of standard at competitive prices. Under the WTO liberalised import regime,

Pakistani exporters should, in particular, take full advantage of markets where tariffs are very

given the duty-free access in many markets. Pakistan has a potentially satisfactory supply capacity, e.g. good engineering skills, lower wages and cheaper raw materials. After entering into the WTO agreements, Pakistan has been enjoying better market access in this sector. Elimination of quantitative restrictions and reduction in tariffs have equally been ensured for

liberalisation in the future, the import of automotive parts may increase further. In order to cope with this emerging situation, Pakistan’s automotive parts industry will have to improve price competitiveness and quality of its products. In appropriate cases the affected industries can approach the National Tariff Commission, which

In addition to the above, the Pakistani domestic industry should keep a watch on custom

matter of fact, under-invoicing/mi

3.4.2. Pakistan’s access to other markets (opportunit ies)

Improved market access

Sustained growth in export earnings has taken place. In year 2001, the export earnings amounted to US$9.8 million. Ther

factor underlying this growth, yet it can be inferred that the liberalised WTO regime has made an important contribution to the better export performance as the market access for Pakistan’s industry has improved under the WTO regime. A study of various tariff structures in several countries has shown that a large number of countries have either lower tariff rates or even zero tariff. See Table 2.12 for details.

faced by Pakistani exporters is that of the supply side which needs to be addressed. Pahas to improve the capacity to meet international demand by producing automotive pgood quality and

low.

3.4.3. Third parties’/countries’ access to other markets (threats/ competit ion)

Competit ion/potential

There is a great potential for increasing exports. Pakistani automotive parts exports represent a nominal share in world exports. There is a great potential for an increase of Pakistan’s share


the member countries. The Government should, however, facilitate imports at internationally neutral prices for components and parts that are required for manufacturing finished products.

here is a clear need to improve compliance with the WTO agreements. To compete in intern pliance in particular with TBT. Pakistan has to meet emerging stringent safety requirements.

autoparts sector

Need for greater compliance

Tational markets Pakistani exporters will have to become more careful about com

Box 3.5 At a glance - Impact of the WTO Agreements on Pakistan’s

Exports

• Better market access for Pakistan in the industrial countries.

w

export earnings has taken place.

eat potential for increasing exports but supply side problems must be tackled.

d on

latively higher duty.

• icing

• Trend of import growth increasing – potential threat.


• Tariff rates have been drastically reduced in developed countries’ markets (very loor even zero).

• Sustained growth of

• Gr

• Manufacturers must learn to produce what is liked and required abroad ancompetitive prices.

Imports

• Substantial opening of Pakistan’s market albeit on re

No serious threat at present but problem is caused by malpractice of under-invoand misdeclaration.


4 Obstacles and shortcomings to export

This is a list of the most important obstacles and shortcomings mentioned by companies interviewed in the regions of Lahore and Karachi. It is not in any order of importance.

4.1 Obstacles and shortcomings – at company level

• Lack of skilled labour

• The rate of absenteeism is high resulting in slow production; orders do not reach clients on time

• Lack of market information resulting in low level of awareness, which is affecting the exports very badly.

• Increasing prices of raw material and utility charges result in high costs of production

• Raw materials are very expensive. As a result, the items produced are also very expensive and companies incur losses

• Poor quality production caused by shortage of suppliers and manufacturers

• Quality of labour is deteriorating caused by lack of proper training. Consequently, the quality of work produced is low. In-house training is one way of improving the quality of labour

• Latest technology is not being used resulting in waste of time.

4.2 Obstacles and shortcomings – at country level

• Slow and costly services offered by government departments (especially customs and clearance department) (some parties mentioned corruption and bribery). Time is wasted and profitability of the business is badly affected.

• Poor infrastructure, e.g. power failure and lack of resources. It is the government’s responsibility to provide these facilities. Without a No Objection Certificate (NOC), the Government does not allow putting up generators

• The Government offers no incentives for the use of latest technology, resulting in wastage of time. The image of Pakistani products therefore goes down.

• Import duties on imported raw material are very high. This increases the cost of production.

• Sales tax procedure is very lengthy and cumbersome.

• The Government should give proper financial incentives. Procedures for taking loans should be made easy.

• The Government should show interest in this sector

• Image of Pakistan is very bad. Companies are exporting substandard products. Poor quality goods are made and as a result they end up getting fewer orders.


• The Government should make policies for the sector by taking into account the problems of exporters, e.g. by including a representative from the sector in the policy-making committee.


5 Export services in Pakistan

5.1 Export service providers

5.1.1 Trade Development Authority of Pakistan — TDAP

In late 2006 the Trade Development Authority of Pakistan (TDAP) (www.tdap.gov.pk) succeeded the Export Promotion Bureau (EPB) as the primary agency engaged in the promotion and boosting of export. Since EPB's inception in 1963 as an attached department of the Ministry of Commerce, it has facilitated exporters in overcoming difficulties faced by them on the supply and demand side of exports.

On the demand side, TDAP helps exporters to participate in exhibitions abroad and sends delegations to export markets with a view to exploring new markets and developing the traditional markets. On the supply side, TDAP has established over 32 training institutes and projects in various export sectors to train necessary manpower that can manage the export trade and industry professionally, meeting the requirements of the export markets. Export promotional activities are carried out in co-ordination with trade bodies at home and Pakistan's trade missions abroad.

TDAP has its head office in Karachi, the main industrial and commercial centre and a major export outlet of the country. TDAP has a staff of around 800 of which close to 600 are permanent.

Services provided by TDAP are as follows:

• Export facilitation committee • Resolving problems in exports • Simplification of procedures • Export procedures handbook • Establishing buyer-seller contacts • Fax on demand and the website • Interface with chambers/trade associations • Settlements of trade disputes

Regulatory services include the following:

• Formulation of proposals for the trade policy • Implementation of the trade policy • Textile quota management • Registration of importers/exporters • Registration of export contracts • Determination of minimum export prices • Issuance of GSP certificates

Functions of TDAP are listed below.


http://www.tdap.gov.pk/

Marketing

• Market research • Fairs and exhibitions - local and international • Trade delegations • Overseas and local publicity • Participation in trade-related events • Expo Centre - holding of exhibitions • Facilitation through trade officers abroad • Seminars/conferences/workshops

Communication

• Publication of trade inquiries/opportunities • Library • Export intelligence bulletin • Counselling • Year Book - statistics

Human resource development

• Training institutes • Seminars on ISO 9000 and 14000 • TQM • Social sector concerns • Environmental concerns

5.1.2 Small and Medium Enterprise Development Authority — SMEDA

The premier institution of the government of Pakistan under the Ministry of Industries, Production and Special initiative, SMEDA (www.smeda.org.pk) was established in October 1998 to take on the challenge of developing small and medium enterprises (SMEs). With a futuristic approach and professional management structure it has its focus on providing an enabling environment and business development services to small and medium enterprises. SMEDA is not only an SME policy-advisory body for the government of Pakistan, but also facilitates other stakeholders in addressing their SME development agendas.

SMEDA has its head office in Lahore and regional offices in Lahore, Karachi, Peshawar and Quetta.

SMEDA offers the following services:

• Assistance in raising finance • Financial advice • Project identification • Business plan development • Technical advice • Marketing advice (branding, labelling, packaging, distribution, promotion, etc) • Company incorporation, export registration and regulatory advice • Sales tax, custom duty, excise duty, etc • Training and development


http://www.smeda.org.pk/

• Information services (library, databases, project briefs, pre-feasibilities) • Business matchmaking

5.1.3 Federation of Pakistan Chambers of Commerce & Industry —FPCCI

Mr. G Allana originally formed the Federation of Pakistan Chambers of Commerce & Industry (FPCCI) (www.fpcci.com.pk) in 1949 but its membership then was confined to a limited number of bodies. The FPCCI is the supreme trade and industrial body in the country. It enfolds all chambers and national associations representing specific trades and/or industries. Indeed, it is compulsory for all chambers and associations of commerce and industry to become members of the federation.

Being federal in its constitution, the federation takes up only such issues and matters as concern the country's trade and industry as a whole; in other words, the interests of all chambers and associations together, e.g. economic planning, investment schedules, tax policy, money and credit transport and communication, export promotion, organisation of general trade missions to foreign countries, receiving general trade missions form abroad etc. Matters concerning specific trades and/or industries (e.g. cotton or steel) or individual firms and companies are left to associations and local and regional chambers.

The head office of FPCCI is based in its own building, Federation House, in Karachi. FPCCI has zonal offices in Lahore and Peshawar, which mainly deal with the provincial governments. FPCCI has a branch office in Islamabad to liaise with the federal government.

FPCCI offers the following services.

Trade promotion

FPCCI acts as a forward post of Pakistan's private sector abroad. In the first place, it maintains constant liaison with the diplomatic and commercial missions abroad and takes special care to develop, promote and strengthen cooperation and contacts with its counterpart bodies abroad through exchange of delegations, literature, directory(ies), business information, etc

Cooperation agreements

FPCCI has signed cooperation agreements with a number of foreign counterpart chambers of commerce including those of Japan, South Korea, France, Netherlands, Germany, Turkey, Bangladesh, Hungary, Romania, Malaysia, Philippines, Singapore, Oman, Australia, Brunei Darussalam, Indonesia and Syria. These agreements envisage a regular exchange of data and information on trade and investment opportunities, visits of trade and investment delegations and participation in trade fairs and exhibitions.

With the signing of cooperation agreements, joint business councils/economic cooperation committees have been set up in FPCCI and its counterpart chambers, which keep constant liaison with each other throughout the year. They have obligation to meet alternately once a year to dispose of agreed agenda, which pre-dominantly relates to the promotion of two-way trade, narrowing down trade gaps, identification of new commodities for mutual exchange, etc. Investment affairs, transfer of technology and training of personnel are the other areas normally deliberated on.


http://www.fpcci.com.pk/

Bilateral trade committees

A large number of bilateral trade and industry committees have been set up with several countries of the world for the promotion of trade, joint ventures and economic ties. These committees invite trade missions, trade officials and diplomats of the countries concerned for exchange of views and review of difficulties in the fields of trade, joint venture, investment, etc.

Standing committees

FPCCI has constituted a number of standing committees, which deliberate intensively on different problems and issues being confronted by the trade and industry in the country; prepare suitable pragmatic recommendations for their resolution and submit the same to the government for consideration. These standing committees have been established on the important subjects of banking, taxation, exports, imports, industry, investment, agriculture, planning and economic affairs, privatisation, research and development, ports and shipping, environment, health, transport, labour, tourism and many others.

Exhibit ions

FPCCI also undertakes the responsibility to organise, in consultation with Export Promotion Bureau, Pakistan's participation in international trade fairs and holds single country exhibitions of Pakistani goods and services in selected countries. At home, it also organises international trade fairs (such as PITF-84) and national industrial exhibitions and fairs of specialised single commodities.

Export trophy awards

To encourage the export of Pakistan's goods and technical/ consultative services, FPCCI instituted export trophy awards in 1976-77. The awards are given every year to those who excel in promoting the export of goods and services both in quantum, value and to new directions. In addition, the federation has instituted a 'Businessman of The Year’ award, which is conferred on a businessman/industrialist who, in the judgment of FPCCI, has made an outstanding contribution to the growth of national economy. A 'President of Pakistan' trophy is also conferred on a business house has made the overall best and highest performance in exports. FPCCI has also instituted a ‘Best Lady Exporter’ gold medal, which is conferred on a lady who, in the judgment of FPCCI, has made the best export performance during the year.

Arbitration

FPCCI has set up arbitration machinery under Section 12 of the Trade Organisations Ordinance, 1961, to arbitrate in matters of disputes arising between member bodies of FPCCI and its members.

Pakistan Shippers’ Council (PSC)

The Pakistan Shippers’ Council, having the status of a Standing Committee of FPCCI, works for the protection and furtherance of the interests of exporters and importers in Pakistan in relation to the transportation of goods by sea, land and air, and undertakes studies on problems


affecting shippers in Pakistan. PSC is affiliated to the Association of Shippers’ Councils of Bangladesh, India, Pakistan and Sri Lanka (ASCOBIPS), as a member.

Pakistan International Freight Forwarders’ Council (PIFFC)

PIFFC is another specialised agency of FPCCI functioning to safeguard the interests of freight forwarders who facilitate the transportation of import and export cargo of Pakistan. PIFFC is affiliated with the International Federation of Freight Forwarders Association (FIATA).

Trade delegations

FPCCI sponsors general and specialised trade delegations to various destinations in the world to promote export of goods and services and to locate most competitive sources of imports to save foreign exchange. Public sector industries and business houses’ representatives are also associated with such missions. Similarly, buyers and sellers missions from abroad are invited by FPCCI besides investment and joint venture delegations.

Pakistan's trade missions abroad

Briefing of Pakistan's trade officials abroad and an exchange of information, country profiles with them is the hallmark of FPCCI on this front. Since economic considerations have overtaken political considerations in the present world environment, even ambassadors/high commissioners and commercial counsellors of Pakistan posted abroad visit FPCCI for individual or collective briefing on economic and trade ties/issues before taking up assignment and during the course of assignment.

International symposia/seminars/workshops

Holding of international seminars/workshops/symposia in cooperation with international agencies in the fields of trade, industry, joint venture, training of manpower, etc is a regular feature of FPCCI. The programmes familiarise participants from business and industry with the latest market trends, the state of competitiveness, trade regulations, customs procedure, duty structure, port facilities, containerisation system, incentives offered by competitors, etc.

5.2 Export services as they actually are – expressed views

Most interviewees were of the view that SMEDA is offering no export services. Very few mentioned that SMEDA has provided facilities like training programmes, subsidies, loan, and 0% export duties, which according to them are effective as it really helps in giving a boost to exports. According to 53% of the exporters, TDAP has done a lot to promote this sector. The body frequently organises conferences, exhibitions and seminars, but according to the interviewed exporters they produce no concrete results. Recommendations by the exporters are ignored completely. Most of the exporters felt that all these efforts made by SMEDA and TDAP are only for big companies and there are no appropriate facilities for small exporters/companies.


5.3 Export services as they should be – expressed views

• Exhibitions, seminars and trade fairs should be organised at international and local level on a regular basis. Every exporter should take part in it. SMEDA should arrange one-on-one meetings with experts in this field. TDAP should not charge anything for putting up stalls at exhibitions. The size of stalls should be increased.

• TDAP should invite foreign delegates to share their knowledge.

• TDAP and SMEDA to voice the following issues to Government: - Government should provide funds for the import of latest machinery;

- Export policies should be made more flexible;

- Seminars and lectures should be arranged informing the exporters about the local as well as global market situation;

- Abandon deletion programme as it is costing thousands of jobs and incurring loss on government revenue;

- The export procedure and policies are very lengthy and complicated. The government should make an effort to simplify these procedures;

- Loan facilities; easy payback time;

- Image building done by sending Pakistani samples to potential buyers;

- Training institutes should be built;

- Government agencies should not bother the exporters with unnecessary requirements; and

- More subsidies to be given with the help of EPB/TDAP and the government.

5.4 Other export services - examples

Under the flag of development aid, some European countries took the initiative many years ago to establish agencies that sustainably and effectively promote the competitiveness of emerging markets and markets in transition. Two major organisations are leading in this field.

5.4.1 CBI – The Netherlands

The Centre for the Promotion of Imports from Developing Countries (CBI) offers the following services:

Market information

A variety of tools to keep exporters and Business Support Organisations (BSOs) in developing countries in stride with the very latest developments on the EU market. Market surveys are published on a regular basis.

Company matching

An on-line facility that links well-versed suppliers in developing countries eligible for CBI assistance to reliable importing companies in the EU and vice versa.


Export development

Export development activities are designed to assist entrepreneurs in developing countries in entering and succeeding in the EU market and/or consolidating or expanding their existing market share.

Training

Training for exporters and business support organisations in fields among others:

• General export marketing and management; • Trade promotion; • Management of international trade fair participation; and • Developing client-oriented market information systems.

BSO development

Institutional support for capacity building of selected BSOs in:

• Export marketing and management; • Market information systems; • Institutional development; and • Export diversification.

Content of these modules is always tailored to the specific needs of the clients.

CBI’s focus is on the total European market.

To participate in CBI programmes, companies must belong to the group of Small and Medium Seized Companies. For more information the CBI website can be visited. This website gives the most actual information on the running programmes and the application procedures.

With regard to Pakistan’s automotive industry it can be mentioned that today around 10 suppliers are participating in the Mobile Equipment Programme. This programme started in 2006 and continues until 2009. Also Pakistani companies have been selected for the Castings and Forgings Programme, which starts in 2007.

CBI (Centre for the Promotion of Imports from Developing Countries) Beurs-WTC Beursplein 37 3011 AA Rotterdam The Netherlands Website: www.cbi.nl

5.4.2 SIPPO - Switzerland

SIPPO is using trade promotion programmes and associated matchmaking instruments for small and medium sized enterprises in emerging markets to enter Switzerland and the European Union market.


http://www.cbi.nl/

The services offered by SIPPO are very similar to those from CBI, and the two organisations cooperate closely.

SIPPO (Swiss Import Promotion Programme) Stampfenbachstrasse 85 P.O. Box 492 8035 Zürich Switzerland Website: www.sippo.ch


http://www.sippo.ch/

6 Recommendations

6.1 Overall overview

This chapter summarizes the most important SWOT issues as well as obstacles and shortcomings at the company and country levels. Also listed are suggestions on who should take the lead and which other parties should be involved.

Looking at the shift of the global automotive industry towards Asia and today’s status quo in Pakistan, one might conclude that there are many gaps to close and that a lot of investment is necessary for Pakistan to play a global role. Many processes require different technologies and it is nearly impossible for an entrepreneur to invest in all technologies at the same time. Therefore, entrepreneurs should re-evaluate and invest in what their core business is or should be in the coming 10 years.

Also, close cooperation or making clusters with colleagues in branches can strengthen individual competitiveness as well as the supply chain.

Instead of investing in a range of R&D facilities, it makes sense to investigate which investments need to be done at company level and which could be shared by the industry. In Europe, this facility sharing is practised by many SMEs.

It should also be borne in mind that development of the autoparts sector will have a significant influence on Pakistan’s trade balance through import substitution: A dollar saved is usually worth more than a dollar earned.

6.2 Recommendations – at three levels

6.2.1. Individual companies

OEMs and Vendors are the most influential players in the automotive industry as it is through them that changes and improvements can be implemented. When these companies become more efficient and profitable, the industry as a whole will reap the benefits. The individual companies must partner up with other parties, like trade associations, unions, government and banks, etc in an effort to improve and expand the industry. The following are a few recommendations, which if implemented would benefit both the individual companies and the industry.

• A major drawback in the automotive industry has been the lack of skilled labour and the absence of proper training facilities. An in-house training facility is much needed within the local companies. It would perhaps be beneficial in the short term if a cluster of companies entered into joint ventures to provide in-house training for their particular services. For the individual companies to actually invest in such a programme these in-house training facility centres should be heavily subsidised by both government ministries and trading associations. For a long-term venture, the companies within the automotive industry should enter into an association with the government, schools and universities to establish a sustainable school or university which will specialise in training and educate students in both technical as well as management skills pertaining to the automotive industry.


• Individual companies need to make a very detailed inventory regarding the specific product needs and requirements of the automotive industry. This would help in establishing the much needed research and development capabilities and facilities that are severely lacking within the industry. Such information should be shared within the industry, hence benefiting the industry as a whole.

• The industry is suffering from limited production capacity, despite the investments made in capacity enlargement. Teamed with unions as well as the government, individual companies should attempt to introduce more shifts and attempt to make their assembly lines more efficient and productive.

• Although the automotive industry has come a long way since its birth in 1955 and continues to grow at a phenomenal rate, there still remains a dearth of export knowledge and market information with the industry. Companies should take the help of marketing offices, support organisations like CBI (The Netherlands) and SIPPO (Switzerland), the government and trade associations to conduct frequent market surveys, which would help create more efficient marketing and production strategies.

• The industry continues to suffer from poor quality goods and high rejection rates. Companies need to be willing to use the quality raw material, even if it means importing more expensive material. It must be realised that although it may seem as if their costs are increasing, in the long term it will be more profitable as it would reduce the rejection rates during the various process steps. Furthermore, to ensure quality standards, a quality system like the ISO 16949 should be implemented and strictly followed.

• Pakistan’s automotive industry still remains highly dependant on labour and has not yet been able to use the latest technologies and machinery. With the forecasted rise in quantities it is essential for investments to be made in the latest and most modern technologies. However, the balance between the machine hourly costs and the operator cost must be closely guarded in order to maintain the available competitive edge of low labour costs.

6.2.2 Trade associat ions

Trade associations have to play a more active role, and the chambers of industry (PAAPAM) fully supported by the government should be established for the industry in all big cities (i.e. Karachi, Lahore, Islamabad/Rawalpindi, Faisalabad, Sialkot, Hyderabad, Sukkur and Gujranwala). The role of these chambers, in addition to their regular function, should be to set up business support centres that should provide the following services:

• The centres should be equipped with R&D facilities for entrepreneurs with the latest prototype equipment to be used as laboratory projects. For instance, if an entrepreneur wishes to invest in an innovative product, he/she should have the opportunity to test whether the idea is feasible, and whether it has a high rate of success or not. This research facility should be made available to entrepreneurs at a subsidised cost. Such centres are already well established in Japan and other developed countries in order to promote the industry.

• The centres should set up a modernised technical computer library that is easily accessible and free of cost. This library should be equipped with latest resources from all over the world, up-to-date technology, latest market information, supply sources,


available management and technical skills and other conveniences and concessions to help them become globally competent.

• They should offer feasibilities for different business proposals as well as for innovative projects relatively free of cost. They should also provide management and financial assistance for these projects from the feasibility stage right up till the commercialisation of the project.

• These centres should set up warehouses for imported raw materials, parts and components. The centre should assess the total volumes needed in the country and negotiate discounted rates from large international suppliers. This implies that imported raw materials be bought by the centres in bulk at wholesale discounts and then sold to local entrepreneurs when needed on a no-profit basis. This will help the local businessman to be more competitive.

• Management skills and entrepreneurial skills should be taught and discussed at the centres. Workshops, forums, discussions, etc. should be held on issues confronted locally, and to upgrade competitive competencies at the global level.

6.2.3 Government support

The Ministry of Industry needs to initiate programmes that are aimed at developing the automotive industry and assisting it in reaching that level of maturity, which will allow it to be a prominent player in the international markets. To encourage the development of this industry, it is the government’s responsibility to encourage growth, promote domestic competition, and enhance innovation and investment through various government programmes and policy changes. The government must focus on areas that will lead to competitive and sustainable development of the industry. R&D, human resource development and testing facilities are of top priority.

The role of the government to develop infrastructure and to provide a friendly, efficient, dynamic and competitive investment environment is utmost essential. The government support has been lacking in the following areas:

• Stimulate an automotive focus;

• Good infrastructure (roads, harbours, availability of power);

• Diminish bureaucracy;

• Create entrepreneur-friendly tax climate;

• Knowledge dissemination (improve knowledge transfer between industry and knowledge institutes, in particular with SMEs);

• Improve access to capital for SMEs; and

• Facilitation of (eventual) pilot projects.

A five-year tariff plan for vendors and manufacturers of parts and components has been drafted by the Engineering Development Board, as was a similar plan for cars and LCVs:

• Establishment of a one-window operation to fulfil all regulating requirements such as income tax, sales tax and social security in order to overcome their inability to set up an


effective networking at their individual level. This would facilitate the industry to concentrate on the modernisation, expansion and globalisation of their businesses, rather than developing networking with the 101 different regulating agencies.

• Introduction of a development-banking concept for new business, where failures are considered acceptable. Not only would this enable entrepreneurs to feel less intimidated when starting a new business idea, but also it would ensure that if a business fails, the owners would not be left in disarray and thrown behind bars. Tax credits/exemptions should be granted to entrepreneurs starting with new innovative ventures until the equity contribution and loan of the development bank is repaid in full.

• A development fund is to be created and loans or grants given out for developmental purposes or for seeking the technical know-how/collaborations. These loans should be made available at considerably lower rates (~50% less than the normal rate) and should be payable over a longer period of time, even 20 years or more). This would encourage people to invest in projects that have a much longer pay back period. Furthermore, this would also increase the Research and Development sector in the industry.

• When a project is based on novel ideas or products, instead of granting a loan, the development bank should finance the project through refundable equity contribution (repayable at the option of the entrepreneur). This suggests that the bank should share a partnership with the business owner, thus sharing the profits and losses of the business on an equal basis. This relationship should be continued until the entrepreneur is able to repay the entire amount of the banks equity contribution. Management experts, hired by the bank, should review the projects on a periodical basis, until the project starts making profit and repayment of equity/loan is made in full.

• Pakistan’s levels of maturity in the automotive industry have largely been dwarfed due to its poor human resource development coupled with a barely existent R & D sector. The government must initiate programmes that will help develop these two segments of the industry. The skill levels in the automotive industry especially in the vending sector are at alarmingly low levels. Skilled human resource is of huge significance to the automotive industry. An effective approach to improve the levels of skills in the automotive industry is for the government to establish or promote in-house factory schools for the training of the employees from within the automotive industry. The government should provide vendors with tax incentives as well as funds to encourage the vendors and OEMs to set up such institutions. These schools and institutions should be managed by the industry, with minimum interference from other government departments.

6.3 The way forward – if we had a million

Here is a list of hands-on projects that could improve the conditions for production and trade in the sector. It is a wish list based on meetings with parties who assisted in the preparation of the study. Most of the project proposals are related to some of the conclusions and suggestions in the study.

All costs are early-stage estimates inserted as magnitudes for the ease of discussion of follow-up from the study. The project proposals are independent of each other (unless otherwise indicated) and are listed in no order of priority.


The study does not speculate on possible funding for the implementation of the projects proposed. Funding could be from the government of Pakistan, a trade promotion organisation, sector associations and their members, an external donor or in some cases from self-generated funds (selling services).

The project proposals are listed in no order of priority.

6.3.1 If we had US$60,000

Organise trade missions to Pakistan

Proposal The best method to take away the prejudice against Pakistan and to improve its total image is to invite potential export customers to visit the Pakistan automotive industry and to show the capabilities, including a presentation from the Government on how they stimulate and support the industry in their export activities.

Costs Organisation costs US$ 20,000 Lodging and transport costs US$ 40,000 Total costs per mission US$ 60,000

Part ies This activity can be executed by TDAP in close cooperation with PAAPAM and their affiliated counterparts abroad.

6.3.2. If we had US$300,000

Establish a national automotive knowledge/information centre

Proposal The industry is having difficulty in hiring skilled labour and is facing a lack of training. As improvement in knowledge transfer between the industry and knowledge institutes needs time, it might be considered that the sector sets up its own Automotive Centre that could facilitate the automotive industry as a whole. The activities can have a multi-functional character, for instance:

• Management skills and entrepreneurial skills should be taught and discussed at the centres. Workshops, forums, discussions, etc. should be held on issues confronted locally and to upgrade competitive competencies at the global level.

• They should offer feasibilities for different business proposals as well as for innovative and technology projects at nominal cost. They should also provide management and financial assistance for these projects from the feasibility stage right up to the commercialisation of the project.

• Mediating between the SMEs and the knowledge institutes.

• Match-making between the SMEs for establishing clusters.


• Giving specific training for the suppliers to the automotive industry.

Needs Physical resources • Building with 2 offices, meeting room and training room, including

furniture for max. 70 students • 3 personal computers, including network access • 1 laptop • Training methods, like PowerPoint software, overhead

projector/beamer • Copier machine, etc.

Human resources • One office manager • Two assistants • Temporary trainers, depending on the kind of training sessions.

Costs Basic capital US$200,000 Investments US$ 30,000 Salaries US$ 50,000 Rental costs (building) US$ 20,000 Total cost for first 2 years US$300,000

It is supposed that the industry pays for the training courses initially to cover the trainers’ costs/fees when they participate.

The final aim is that the centre will be self-financed after three years.

Part ies Initiative and responsibility for organising and control: PAAPAM in collaboration with EDB and TDAP.

6.3.3 If we had US$1,000,000 or more

A central R&D laboratory

Proposal As investment in a central laboratory with design and test equipment is crucial for SMEs, it would be of great help in keeping the costs competitive if a pilot production laboratory could be set up where an entrepreneur could develop a product and do a test and trial run. The centre should be equipped with R&D facilities for entrepreneurs with the latest prototype equipment to be used as laboratory projects. For instance, if an entrepreneur wishes to invest in an innovative product, he/she should have the opportunity to test whether the idea is feasible, and whether it has a high rate of success or not. This research facility should be made available to entrepreneurs at a subsidised cost. Such centres are already well established in Japan and other developed countries in order to promote the industry.

The centre should set up a modernised technical computer library that is easily accessible and free of cost. This library should be equipped with


latest resources from all over the world, up-to-date technology, latest market information, supply sources, available management and technical skills and other conveniences and concessions to help them become globally competent.

Needs The indication has to come from the industry. Below just a few examples are given which might meet this demand:

• Climate chamber • Road simulator • Corrosion tester • Stations for ‘final element method’ calculations • Noise test chamber.

Costs Climate chamber US$ 300,000 Road simulator US$ 400,000 Corrosion tester US$ 50,000 Finite element method station US$ 100,000 Noise test chamber US$ 400,000 Total costs US$1,250,000

Part ies Sponsored by a university and supported by incentives from the government, this laboratory based on pilot-type equipment could be set up near an automotive cluster in close cooperation with the associations and the industry.

6.3.4 If we had a further US$1,000,000 or more

Install consolidated warehouse

Proposal A consolidated warehouse of imported raw materials, parts and components should be set up. The warehouse should assess the total volumes needed in the country/cluster and negotiate discounted rates from large international suppliers. This implies that imported raw materials be bought by the consolidated warehouse in bulk at wholesale discounts and then sold to local entrepreneurs when needed on a no-profit basis. This will help the local businessman to be more competitive.

Needs The indication has to come from the industry. Below just a few examples are given which might meet this demand:

• Machining centre • Pilot casting and forging equipment • Moulding and die-making equipment • Surface treatment equipment • Plastic and rubber injection moulding equipment.



Annexes

Annex A — Competitiveness Support Fund (CSF)

Background

The Competitiveness Support Fund (CSF) is a joint initiative of the Ministry of Finance, GOP, and USAID. CSF is based on international best practices such as India, Thailand, Turkey, Ireland, Finland and Israel, etc., and has been tailored to the current Pakistan economic policy framework need for innovation-based competitiveness.

CSF will support Pakistan’s goal of a more competitive economy by providing input into policy decisions, working to improve regulatory and administrative frameworks and working to enhance public-private partnership within the country. CSF will also provide technical assistance and co-financing for initiatives related to entrepreneurship, business incubators and private sector-led initiatives with research institutes and universities that contribute to creating a knowledge-driven economy. CSF activities will help all producers along the value chain that contribute to ultimate product quality. By obtaining better value and better prices for quality products, and improving cooperation throughout the Pakistani economy, CSF will contribute to poverty alleviation by providing more income for producers and better employment prospects for employees.

Objective

The Competitive Support Fund (CSF) has been set up with the sponsorship/financial assistance of USAID and the Ministry of Finance, Government of Pakistan. CSF plans to conduct a number of studies to determine the existing competitiveness of selected industrial sectors as to how their competitiveness can be improved in the international markets through exports. CSF will use these studies to make recommendations to the highest level of the government for policy-level intervention to make selected sectors internationally competitive. One of the sectors selected by CSF is the auto vendor industry of the country.

The primary objective of this study is to carry out a policy analysis of the competitiveness advantage of the local auto vendor industry along with identification of the problems being faced by the sector and recommending solutions for the same both at policy and programme level.

There are a number of government agencies that are involved in regulating, controlling and monitoring the auto vendor industry. These are TDAP, Pakistan Quality Control Authority (PSQCA), Ministry of Industries, Production and Special Incentives (MOIPSI) and Central Board of Revenue (CBR), etc.

Scope of work

In order to assist the CSF activities, it is planned to carry out this study ‘Policy Analysis on the Competitive Advantage of Auto Vendor Industry in Pakistan - Problems and Prospects’, with the following terms of reference:


The study will conduct a comprehensive survey as part of policy analysis on the competitive advantage of the local auto vendor industry. It will also identify the problems faced by the sector and recommend solutions. The analysis will include:

• Vendors – producing different types/classes of components and parts such as casting, forgings, plastic parts, rubber parts, trim, electrical parts assemblies, sub-assemblies, and machined parts for both assemblers as well as replacement market.

• Vendors – Large, medium and small.

• Cover Karachi and Lahore.

• Have meeting with key government agencies such as TDAP, PSQCA, CBR, etc.

• Tabulate and analyse the data.

• Based on the above survey and a review of the secondary and primary data, the study will identify issues relating to the overall competitiveness of the auto vendor industry for the local market as well as for exports.

• Develop recommendations for improving competitiveness of the auto vendor industry in terms of policy measures (tariff and non-tariff measures), marketing of the locally produced parts in the international markets, development of human resources and the needed physical infrastructure, etc.
