The Effect of Imported Trucks on Pakistan's Local Trucking Industry and the Local Trucking Market - Essay Example

EXTENDED ESSAY – 2nd Draft AN ASSESMENT OF THE EFFECT OF IMPORTED USED TRUCKS ON PAKISTAN’S LOCAL TRUCKING INDUSTRY AND THE LOCAL TRUCKING INTRODUCTION – address nature of the research question The trucking industry of Pakistan is fairly new and can easily be considered as a Sunrise Industry. In the last few years this industry has neared collapse and has been debated in the highest levels of the government. The heated debates led to a number of changes in the import policy rules of Pakistan. The new import policy rules almost destroyed the trucking industry as it came under direct competition from second hand trucks, which proved to be very cheap and popular amongst the local consumers. The destruction of such a large and vital industry in Pakistan could have proven to be devastating, especially in terms of unemployment and Pakistan’s future growth. What makes Pakistan’s transport industry even more vital is that at present it is used to transport goods to and from Karachi, Pakistan’s only port city. With the development of the new port in Gawadar the trucking industry will hold great significance in transporting cargo for the Central Asian landlocked states. Pakistan’s trucking industry will not only hold great economic importance at this stage but will develop a very strategic significance. Trucks & buses were allowed under the gift, personal baggage & TR Scheme since 1993. This did not hurt the local industry as there were stringent rules in place. However this changed when in July 2005 the import policy rule was introduced which allowed import of vehicles of any age under the TR scheme as long importers could prove: I. The condition of registration in name of applicant at least one year prior to departure II. The requirement of registration documents dully attested by Pakistan Embassy. To add fuel to the fire, SRO 574 (2005) was also issued effective 1/6/2005, allowing clearance of used vehicles on payment of 30% fines. This fine was put in place because earlier under the changes made in July 2005 used trucks were illegal to import. This fine was created with the intention of being a deterrent, but proved in the end to be ineffective as the trucks being imported were so cheap that even after paying the fine it was feasible for the importers to sell them in Pakistan for a profit. As result of the above measures the import of used trucks shot up in huge numbers, heavily capturing the OEM (Original Equipment Manufacturer) market share with the number of used imported trucks exceeding the number of trucks produced by all OEMs. Although in July 2006 the import policy was modified not to allow import of used vehicle of more than 5 years old, the import of trucks and buses older than 5 years continue due to the SRO 574 (2005). The import of used vehicles for construction purpose under SRO 567 (2006) is also hitting the industry as there is no control on quantity. Used dump trucks are converted into rigid trucks at a low cost and then sold into the market. These large numbers of imported used trucks not only affected the sales and production of local OEM’s, but has also greatly attributed in the shutdown of Adam Motors, the first company to manufacture a Pakistani car. The large number of imports also hit the countries balance of payments due to the increasing rate of unemployment in the local trucking and vending industry. Another issue was the large negative rise of pollution which severely affected the local environment. HISTORIC OVERVIEW OF RECENT CHANGES IN THE TRUCKING INDUSTRY IN REALATION TO THE IMPORT POLICIES The first company to set up an auto plant and start the production of trucks in Pakistan was General Motors in 1954. Pakistan had adopted strict import polices which served as protectionism for the local trucking industry. From 1954 until 1993 the import of trucks under the law considered gifts was restricted to only one vehicle with the condition that it should not be more than two years old. The importer was required to present documents such as an earning certificate and registration book of the imported vehicle to determine the age of the vehicle. Since this industry in Pakistan is relatively new it is considered a Sunrise Industry. A Sunrise Industry is an industry growing quickly and expected to be increasingly important in the future. With these strict barriers concerning the import of trucks, many truck manufacturing companies entered the local market, this included Mazda which began producing light duty trucks. Soon Mazda had a monopoly over the light duty truck market and experienced increasing sales. From 1997 to 2000 it had an average market share of 71.67%1 in light duty trucks which it was bringing in as CKDs (Completely Knocked Down). Companies such as Nissan and Hino also entered into Pakistan bringing in heavy duty trucks in the form of CKDs. Nissan was brought into the country in 19812 and was soon followed by Hino in 19853, both began to see increasing sales. In 1993 minor changes were made in the import policy that led to further changes made again in 2000 in which the import conditions were slightly modified, waiving the two year- old condition under the ‘Transfer of Residence’ (TR) Scheme, but it required the vehicle to be registered in the name of the importer one year before their departure to Pakistan. This again proved to be a deterrent as importers could not import in huge quantities due to the costs of storage for one year were high. This made the trucks more expensive and in turn less competitive in Pakistan. When Mazda Japan introduced its new light duty Truck model, the Pakistani producers Sind Engineering decided against producing the new Mazda model as they felt it would be too expensive to compete effectively against its rivals. Instead Sind Engineering opted to produce Chinese trucks with the Chinese company Dong Feng in 19954. By using the Chinese company the Pakistani producers experienced increasing sales. Other companies also entered the industry such as Hyundai with its light duty truck Shezore in 19995, along with Adam Motor Company which started producing light duty trucks in 20016. Both companies competed with Dong – Feng and helped to fill up the vacuum that had been created when the production of Mazda had stopped. Both Hyundai and Adam experience rising sales and continued to increase investment into their projects. With the strict import policy in place and by looking at the performance of the existing truck manufacturers, more companies entered the market. Master Motors entered the market in 20047 which brought in Chinese light duty trucks. The producers of Nissan trucks also realized the increasing scope of the industry and brought in Isuzu in 20048 as another light duty truck. However in July 2005, to the disappointment of local manufacturers, the rules for the import of vehicles were changed with the issuing of SRO 574(1)/2005. This caused the import of used trucks to be allowed and the condition for registration of the vehicle in the name of the applicant for one year before departure for Pakistan was waived. The requirement of a registration document of vehicles to be attested by the Pakistan embassy was also withdrawn. This led to an open passage for importers who now began importing used trucks in bulk, the age of these trucks were older than 20 years at times. The importers looked to sell these trucks in Pakistan’s price conscious trucking market. Then they could make huge profits as the imported trucks were very old and not even allowed to be driven in some countries, because their engines did not meet the Euro requirements, hence reducing their already low price significantly. Following this the local manufacturers saw a decrease in sales while the others experienced a decrease in the rate at which their sales and production had been increasing. At the time Pakistan was experiencing High Economic Growth and was seeing the automobile industry growing rapidly. The future expectations for the industry were great and moving forward quickly. This shock to the industry caused Adam Motors and Dong - Feng to experience minimal truck sales and this inevitably led to them stopping the production of their trucks. In a domino effect, unemployment in this sector rose, due to layoffs and wage reduction. The local manufacturers lobbied tirelessly to bring about a change in the import policies and were successful to an extent when the government issued the SRO 255(1)/2007 in 2007, “saving the local industry from total disaster”9. The reasons given by the government for the new importing laws included the need to please consumers and the great amount of say that Pakistani importers living abroad had on the government. The government hoped to increase consumer choice; hence they would have a huge range of tucks with many different prices and characteristics to choose from. They also aimed to create competition for local manufacturers in order to encourage them into improving efficiency, reducing prices and satisfying the customer further. The government also looked to provide the average Pakistani truck driver with something a little more affordable. BRIEF DISCRIPTION OF THE IMPORTANCE OF PAKISTAN’S LOCAL TRUCKING MARKET The local trucking market of Pakistan can be described as extremely price conscious and resistant towards change. Its price conscious nature can be further described as being elastic, hence a small change in price leads to a much greater change in quantity demanded. This makes Pakistani consumers look for a truck which is affordable. Truck drivers in the country tend to buy trucks which can be easily overloaded due to a large deck, even if this means that its speed will be reduced significantly. Since Japanese trucks have dominated the Pakistani trucking market for the most part, it has developed a good reputation especially in the aspect of quality. Pakistanis have also over the years developed a loyalty towards Japanese companies such as Mazda, Hino and Nissan. These companies took the initiative early on to make a strong base and reputation for themselves from which they are reaping good sales today. The easy availability of spare parts, the great after sales service and the possibility to even repair the trucks on the road side makes them very popular amongst truck drivers. Chinese trucks in Pakistan at this point are considered relatively poor and are considered to be inferior to Japanese products in general. Even though Chinese trucks are a little cheaper, their spare parts are not easily available and do tend to suffer from minor quality problems. Pakistan’s trucking industry is very vital as it keeps the economy and businesses ticking by transporting goods to and from Karachi to the rest of Pakistan. This is especially important since Karachi has Pakistan’s only two sea ports. With the development of Gawadar as a deepwater sea port, the importance of the industry is very likely to sky rocket. This port is aimed towards carrying high volume cargo to and from the land locked central Asian states. As this port becomes functional it will greatly increase the demand for trucks to help serve this purpose. This will cause consumers to look into buying trucks with reliability and good fuel efficiency since loads will be traveling much further into the land locked central Asian states. The Pakistanis who generally buy trucks are considered to be very conservative and loyal to their brand, since the beginning they had not been exposed to many different products. The consumer loyalty however is slowly beginning to change now with a number of new companies marketing their products. An example of this consumers brand loyalty is evident when the consumer chooses the Hino DUTRO over the ISUZU NPR even though both trucks have extremely similar specifications. It is also surprising considering the fact that the ISUZU has 15 more horse power and is Isuzu considerably cheaper than the Hino by. Although in this case both products are Japanese, there is a consumer loyalty towards Hino. Another important factor to keep in mind when evaluating the effect of changes in the import policy has had on the local trucking industry is that the government and multinational companies always look to buy new trucks. This is the policy because of company and government policy of buying quality. This means truck manufacturers were not highly affected when it comes to their sales towards multinationals and the government; however they were affected when it comes to individuals and private companies buying their trucks. This is because both individuals and private companies opted for the cheaper alternative. Another important factor to take into account is that maintenance of trucks in Pakistan is extremely cheap and easy, as there are thousands of roadside mechanics who repair the trucks at very low prices. If a consumer buys a more commonly found truck, they benefit from much cheaper repairs. Hence when buying a used truck the individual does not really worry too much about the maintenance aspect, but does keep in mind the fact that one truck might be cheaper to fix than the other especially in the long run. PAKISTANS PRESENT TRUCKING INDUSTRY (2000 – 2006) –COMPARING ITS SALES FIGURES TO ITS INSTALLED CAPACITY At present Pakistan’s trucking industry is made up of five major heavy and light duty truck manufactures which include Hinopak Motors Ltd., which manufactures Hino trucks; Ghandara Nissan Ltd., which manufactures Nissan trucks; Ghandara industries Ltd. which produces Isuzu trucks; Master Motor Corporation Ltd., which manufactures Chinese trucks; and Sind Engineering which produces Chinese Dong – Feng trucks. Afzal motors have also recently brought in Daewoo trucks and will be starting production in the near future. Volvo Pakistan Ltd. also has a plant in Pakistan; however this plant is not producing at the moment, but could be easily considered as a future capacity. Figures tend to indicate that in total Pakistan’s trucking industry has an installed capacity to produce 19200 per anum, however the OEM’s sales are not even a quarter of that and was at 4273 trucks at the end of the fiscal year 2005-2006. This indicates that Pakistan’s local OEM’s are clearly and easily capable of meeting the growing demand for trucks in the country. The trucking industry is made up of the five main OEMs’ and hundreds of vendors in a vendor industry which are directly affected by the sales of the trucks since they are producing parts for them. The chart below shows a comparison between the Installed Capacity of trucks in the country in relation to the sales of the trucks in the country between 2001 and 2006. Chart 1 THE SRO ISSUED IN 2005 EFFECTS ON THE LOCAL TRUCKING MARKET IN DETAIL Despite the fact that import policy disallows import of old and used vehicles, the government through SRO 574(1)/2005 issued on June 6, 2005 states:   In exercise of the powers conferred by section 181 of the Customs Act, 1969 (IV of 1969), and in supersession of the Notification S.R.O. No. 374(I)/2002 dated the 15th June, 2002, the Central Board of Revenue is pleased to order that,-   (a)        no option shall be given to pay fine in lieu of confiscation in respect of the following goods or classes of goods, namely:-   (i)                   Smuggled goods falling under clause (s) of section 2 of the Customs Act, 1969 (IV of 1969); or (ii)                 Conveyance including packages and containers found carrying offending goods of section 2(s) of the Customs Act, 1969; or (iii)                goods imported in violation of section 15 of the Customs Act, 1969 (IV of 1969); or (iv)                banned items, goods of Israel origin and goods of India origin other than those importable from India in the Import Trade and Procedure Order; or (v)                  job lot and stock lot goods; or (vi)                restricted and other items which are subject to procedural requirements under Import Trade and Procedure Order unless such condition and procedural requirements are fulfilled; or (vii)               vehicles imported in violation of Import Trade and Procedure Order and in violation of Import of Vehicles Rules under the personal Baggage, Transfer of Residence and Gift Scheme; or  (viii)             commodities which are not importable in used or second hand condition under the Import Trade and Procedure Order.  (b)        Subject to the provisions of clause (1), where an option is given to pay fine in lieu of confiscation, the quantum of fine in lieu of confiscation in respect of offences specified in column (2) of the Table below shall not be at a rate less than that specified in column (3) of the Table below and shall be over and above the Customs Duties and other taxes and penalties imposed under the relevant law:-   S.No. Description Minimum redemption fine on customs value. (1) (2) (3)   (a) Offences related to misdeclaration of,-   (i) difference between ascertained and declared weight or quantity subject to the condition that the percentage difference is more than 5%.   30% (ii) origin;   30% (iii) physical description.   50% (iv) value with difference of more than 20% in declared viz determined value.                                                             50%   (b) Other offences related to,-   (i) offending goods imported in the bales of second hand clothing in violation of provisions of Imports and Exports (Control) Act, 1950 (XXXIX of 1950).   50% (ii) goods not covered under clause (b) of rule 4 of sub-Chapter 1 of Chapter II of the Customs Rules, 2001 brought by incoming passengers (accompanied or unaccompanied) in non-commercial quantities for actual use and not intended for sale in market.   30% (iii) old and used machinery parts or components imported by the industrial importers for their plants, if not importable in terms of relevant Import Trade Procedure.   30% (iv) old and used spare parts and accessories, if imported along with the second hand plant and machinery used in manufacturing of goods.   30% (v) imported scrap items which contain old and used or serviceable components such as auto parts, compressors and re-rollable iron and steel etc., if the same are allowed release after cutting, pressing, piercing, breaking or otherwise de-shaping to the satisfaction of the customs authorities on specific request of the importer subject to the condition that expenses incurred on such processes are paid by the importer. 30% __________________________________________________________________10 This law allowed the import of used trucks in a CBU (complete built unit) older than 5 years to be cleared, if a 30% fine was paid. “ This opened flood gates for import of very old trucks with all types, descriptions and models with no guarantee of availability of parts and service facilities”11, Mr. Salar of Master Motors said. This resulted in the total imports between 2005 and 2006 to rise to 5415 trucks from the previous year’s imports of 1005. During the fiscal year 2005 – 2006, the number of imported trucks overtook the sales of the local OEM’s trucks which only sold 4273 trucks. The increase in used imported trucks is shown by the orange line in Graph 1 below, with the OEM’s sales for that period indicated by the green line. Chart 2 The Chairman of the Pakistan Automobile Manufacturers Association Mr. Kunwar Idrees said “Scrap is being imported in the name of used trucks and busses from Japan.”12 To this the vehicle assemblers added that these imports included 15 year old trucks, which were obviously sold at a much lower price than the new ones. This makes the older imported trucks in greater demand than OEMs, which is affecting their sales, hurting the industry and the country’s economy in several ways. Possible reasons for the government to issue this SRO include the strong lobbying by importers of Pakistani origin in Japan, Dubai and Singapore. These importers are working overtime to influence the government into adopting an ultra liberal import policy. The importers did have an influence because their contacts and lobbying were extremely strong. Another reason for the government to issue the SRO could be that they wanted to provide the consumer with more choice and create competition for the existing assemblers in order to force them into becoming more efficient. The third factor that might have influenced the government is the argument of the Pakistan Goods Transport Association which blames the assemblers for “charging high prices, and arguing that a used Japanese truck would be half that price and also be relatively more durable and road worthy.”13 However the government’s decision was not very successful as it brought the industry to the brink of ‘Total Disaster.’”14 The pictures below show yards where second hand trucks wait to be sold. Most of these trucks are Japanese, especially Hino and Mazda, two of the favorites amongst the consumers. With the markets flooded with second hand trucks, it will take some time for Pakistan’s trucking industry to recover from the damaging effects it directly faces today. Second Hand Hino Trucks – up to 15 years old Second Hand Mazda Tucks In a booming economy, growing industrial and agricultural production, expanding domestic and international trade and above all an $8 billion National Trade Corridor Plan under implementation, the demand for heavy vehicles is growing fast.15 While the small, but influential, Pakistani importers want liberal import policies to take advantage of the growing trucking industry, the assemblers want a secure market so that they can expand production and help increase economic growth. The assemblers argue that the government does not realize that an “efficient, economical, safe, environmentally friendly and quick and smooth logistics, is an integral part of the trucking and transport system, is a prerequisite for economic growth and trade expansion.”16 Also “according to truck manufacturers, the policy announced in July 2005 – 06 for liberal imports of trucks and busses has caused loss of sales revenues to the tune of Rs 16 million to local manufacturers and Rs 8 billion to vendors. In addition, 0.3 million new job opportunities with the manufacturers and vendors were lost.”17 Assemblers do feel that if the import of trucks should be allowed, the trucks should not be more than two years old. Table 1 Table 2 Period Jul-05 Aug-05 Sep-05 Oct-05 Nov-05 Dec-05 Jan-06 Feb-06 Mar-06 Apr-06 Month Wise Used Truck Imports 279 323 344 379 103 220 236 422 740 759 May-06 Jun-06 Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 1775 1370 547 574 437 300 448 394 772 422 417 15 578 391 Tables 1 and 2 above show the month wise imports of used imported trucks into Pakistan from July 2005 until June 2007. Chart 3 suggests that the import of used trucks began to rise during February 2006, from then on the numbers increased till they soared to 1775 units in May 2006. Chart 3 Even though the numbers of imported trucks began to fall they still remained higher than usual until March 2007, when the SRO 255(1)/2007 became law. THE EFFECTS OF SRO 255(1)/2007 IN 2007 Upon constant protest by the assemblers, a new SRO was issued on March 17, 200718, this disallowed the import of vehicles more than 5 years old, and stated that such vehicles cannot be imported even after the payment of a 30% fine which was previously allowed. Assemblers appealed that the current policy must continue and improve to save the truck industry. The assemblers felt that to encourage them would play an important role in meeting the needs of a growing economy. Assemblers also argued that the world is heading towards a friendlier environment, which means newly imported vehicles are produced with euro compliant engines. It is only a matter of time that Pakistan will have to someday comply with environmental concerns. This would mean the import of 10 to 15 year old used vehicles with non-euro compliant engines is a step in the reverse direction. The operation of such vehicle would create pollution and cause serious health risks. Manufacturers also stated that euro standard vehicles and multi-axel trucks were necessary to meet the demands of the new trade corridors which the local trucking industry will require support to expand, increase investment in machinery and equipment and to provide massive training skills for technology transfer. Many feel the government should come up with a long duration firm policy so that the investors’ confidence is reinforced. This would lead to local manufacturers’ determination to be boosted into building up and supporting efforts to modernize the trucking sector. The SRO 255(1)/2007 banned the import of more than 5 year old vehicles even after paying a 30% fine. Following this import figures dropped to 15 units in April 2007, as importers feared their trucks might be withheld by customs. However importers still had hundreds of trucks lined up to be sent to Pakistan, and through unofficial and illegal channels are managing to smuggle these trucks illegally into the country. The government has turned a blind eye to this at present as they realize that many importers will suffer greatly if they enforce the rules in an extreme manner. However the government has promised that they will crack down on the smuggling. The government is waiting to crack down on the illegal smuggling with the belief that the practice will become minimal once the stocks awaiting abroad finish. Pakistan is a developing country, which must be taken into account. Due to skirmishes between Pakistan, India, and Bangladesh since the British left, Pakistan has dealt with more serious issues than the trucking industry. It must be kept in mind that the government is working towards a beneficial balance between the local trucking industry and the importing industry. CONCLUSION The above suggests that when the government decided to allow the import of second hand trucks into the country, they formed their decision in a naive manner and did not take into consideration the future of the trucking industry. Since Pakistan is a developing country, it is important for it to use Protectionist measures to assist its sunrise industries in order to help them become efficient and competitive. The trucking industry is going to not only be a vital industry, but a strategic one. It is important that the Pakistani government look to strengthen it and use it to their advantage; especially in light of the opening of the Gawadar sea port. After considering the fact that the Pakistani truck companies are not even producing at one third of their capacity, the government should first look to utilize the installed capacity in the country before encouraging imports. The companies can hence benefit from economies of scale, the benefits of which they can pass on to the consumer. Pakistan can also look to develop its own truck, as with the Potential future market growing the benefits can be great. Read More