Pakistan announces new automotive manufacturing policy

The much awaited Automotive Development Policy 2016‐21 proves to be good for new entrants offering them lucrative incentives. Salient features includes: 1) a 10% customs duty reduction will be offered on CBUs and auto‐parts after for (CY18‐19) ‑ two years 2) restraining the definition of Greenfield investments, now defined to include on "an investor for the production of vehicles of make not already being manufactured in Pakistan" and 3) for existing investors, the duty on spare parts will be slashed by 2.5% to 30% from fiscal year FY17 and import duty of localized parts will be brought down to 45% from 50% currently.

Significant reduction in barriers to entry is envisioned through: 1) a 25% Customs Duty for FY16‐21 on localized parts as aginst 50% now and 45% in the policy for incumbents, 2) a 10% Customs Duty for FY16‐21 on non‐localized parts as compared to 32.5% now and 30% in the policy for incumbents and, 3) Duty free, one‐time import of plant and machinery, including import duty of 100 vehicles at 50% customs duty for test marketing. Additionally, room for new entrants may be furthered by JVs with non‐operational entities that may require fresh equity. 

Apart from this, financially defunct entities (DFML, GHNL) may also benefit from restructured financial arrangements allowing for higher financial leverage. While detrimental impact to cost structure will be there, pricing power and market segmentation are likely. Analysts retain their bullish outlook on INDU, citing: 1) presence of strong after sales service network, dealers, service areas, 2) strong brand equity and product mix with demand for locally produced Corolla, Vigo variants expected to remain buoyant and 3) entry into new segments may be threatened, while lead time of 18 to 24 months for establishing greenfield investments by new entrants offers opportunity to capitalize on reduced duties FY18‐19.