The Automotive Parts Sector In Pakistan Export Performance - TRTA i

The Automotive Parts Sectorin Pakistan— Export performance and potential— Implications of the WTO AgreementsSeptember 2007

This publication has been produced with the assistance of the European Union (EU) as part of anEU-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 isthe sole responsibility of the consultants. Facts and figures set forth in this publication are theresponsibility of the consultants and should not be considered as reflecting the views or carrying theendorsement of the EC, ITC, UNCTAD, or WTO. The factual details and in-country resources in thepublication have been researched and compiled by the consultants. ITC has not formally edited thisreport.© International Trade Centre (UNCTAD/WTO)Palais des Nations, 1211 Geneva 10, SwitzerlandEmail: itcreg@intracen.orghttp://www.intracen.orgDistribution: UNRESTRICTEDSeptember 2007ITC: Your Development Partner in Export SuccessITC MissionITC enables small business export success in developing countries by providing, with partners, tradedevelopment solutions to the private sector, trade support institutions and policy-makers.ITC strategic objectivesEnterprises – 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.2

AcknowledgementsThe 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, PakistanInputs 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 thePunjab, 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, PakistanThe 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 Enterprisei

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

AbbreviationsACGRAMCBUCIFCKDCNGCSFEDBEMCCFTAGDPGOPGSPIPRITCLCRLCVLDCMFNMPVNOCOEOEMPAAPAMPAMAPKRR&DRTASAARCSAFTASEZSKDSMESMEDASUVTBSTBTTDAPTRIMSTRIPSTRTAUKUSUSAIDWTOAnnual Compound Growth RateAfter MarketCompletely Built UpCost Insurance FreightCompletely Knocked DownCompressed Natural GasCompetitiveness Support FundEngineering Development BoardEuropean Monitoring Centre on ChangeFree Trade AgreementGross Domestic ProductGovernment of PakistanGeneralised System of PreferencesIntellectual Property RightsInternational Trade CentreLocal Content RequirementsLight Commercial VehiclesLeast Developed CountryMost Favoured NationMulti Purpose VehicleNo Objection CertificateOriginal EquipmentOriginal Equipment ManufacturerPakistan Association of Automotive Parts & Accessories ManufacturersPakistan’s Automotive Manufacturers AssociationPakistan RupeesResearch and DevelopmentRegional Trade AgreementsSouth Asian Association for Regional CooperationSouth Asian Free Trade AreaSpecial Economic ZonesSemi Knocked DownSmall and Medium EnterpriseSmall and Medium Enterprise Development AuthoritySports Utility VehicleTariff Based SystemTechnical Barriers to TradeTrade Development Authority of PakistanTrade Related Investment MeasuresTrade Related Agreements on Intellectual PropertyTrade Related Technical AssistanceUnited KingdomUnited StatesUnited States Agency for International DevelopmentWorld Trade Organizationiii

Table of contentsAcknowledgementsAbbreviationsiiiiExecutive summary 1Industry overview 1Findings – recommendations - conclusions 1Implications of the WTO Agreements 41 Background and objectives 71.1 EC TRTA Programme for Pakistan 71.2 Five sector studies 71.3 Methodology 82 Autoparts sector in Pakistan 92.1 The sector in general 92.2 Production process and technologies 162.2 Availability, quality and price of raw materials 192.3 Technology and skilled labour 192.4 Export markets 192.5 Price trends of raw materials and end products 202.6 Growth in the sector 202.7 Exports/imports of autoparts 212.8 Price structure of the industry 212.9 Annual turnover and some projections 212.10 Rules and regulations affecting the sector (non-WTO) 222.11 Six studies on international trends 232.12 Classification and trade of automotive parts 282.13 SWOT analysis of Pakistan’s automotive industry 492.14 The role of associations – PAAPAM and PAMA 513 Implications of WTO Agreements 543.1 Background 543.2 Information on the WTO issues 573.3 Implications of the WTO Agreements 613.4. Trade conditions of the Pakistani automotive parts sector 73v

4 Obstacles and shortcomings to export 774.1 Obstacles and shortcomings – at company level4.2 Obstacles and shortcomings – at country level77775 Export services in Pakistan 795.1 Export service providers 795.2 Export services as they actually are – expressed views5.3 Export services as they should be – expressed views83845.4 Other export services - examples 846 Recommendations 876.1 Overall overview 876.2 Recommendations – at three levels 876.3 The way forward – if we had a million 90Annexes 95Annex A — Competitiveness Support Fund (CSF) 95List of TablesTable 2.1 Automotive assembly production, 2001-02 to 2005-06 ..................................... 12Table 2.2 Capacity of auto assemblers ............................................................................. 12Table 2.3 Present status of automobile assemblers and manufacturers........................... 13Table 2.4 Number of assembler/manufacturing units in automobile sector of Pakistan.... 21Table 2.5 Autoparts from China – Myths and realities........................................................ 24Table 2.6 HS codes for automotive parts .......................................................................... 28Table 2.7 Pakistan’s exports by product and major destination, 2004-2005 ..................... 31Table 2.8 Pakistan’s imports by product and major origin, 2004-2005.............................. 33Table 2.9 Top 10 world importers - Broad categories (US$ million).................................. 37Table 2.10 Top 10 World exporters - Broad categories (US$ million) ............................... 39Table 2.11 World and Pakistan vehicle production figures, 2004-2005 ............................ 40Table 2.12 Tariffs in export markets for autoparts (%) ...................................................... 44Table 2.13 Import tariffs on vehicles.................................................................................. 46Table 2.14 Import tariffs on automotive parts .................................................................... 47Table 2.15 Import tariffs on raw material ........................................................................... 49Table 3.1 Pakistan’s import and exports of automotive parts (US$ million) ...................... 74List of FiguresFigure 2.1 Structure of car assembly in Europe / United States........................................ 10Figure 2.2 Structure of car assembly in Pakistan .............................................................. 10Figure 2.3 Sources of Chinese capital cost advantage ..................................................... 24Figure 2.4 Pakistan’s automotive component exports and imports, 2004-05.................... 30Figure 3.1 Functional scope of the WTO........................................................................... 55Figure 3.2 Upward and downward information flows on the WTO .................................... 58Figure 3.3 Relevance intensity of the WTO Agreements .................................................. 62vi

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

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Executive summaryIndustry overviewThere are around 1,250 units in the auto vendor industry in Pakistan; about 500 are registeredvendors 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 thereplacement market. Through indigenous, technical resources and technical tie-ups with somewell-known global companies, the industry has by and large developed into a well-organisedsector.In the last five years the auto vendor industry had an annual growth rate of almost 35% in thewake of a sharp increase in the demand of automobiles. OEMs and vendors have made a heavyinvestment during the last three years, which has helped them to enhance their productioncapacities as well as achieving progressively higher indigenisation levels. The EngineeringDevelopment Board (EDB) under the Ministry of Industries, Production and Special Initiativeshas set a target for the automotive industry at an annual compound growth rate (ACGR) of20% for the next five years.EDB’s projections indicate that by 2010-11 the production of passenger cars and lightcommercial 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 300,000professionals, engineers, technicians and skilled workers in the automotive sector alone. Theauto vendor industry’s contribution to GDP is projected to increase from 2.8% in 2005-06 to5.6% by 2010-11.At least 78% of the national demand for automotive parts – also called automotive componentsor just autoparts – is being met by imports, while local manufacturers cover about 22%.Motorcycles dominate (60%) the composition of autoparts demanded in Pakistan, with carsmaking up 22%.Pakistan’s exports of automotive parts amounted to US$24 million in 2005. Imports reachedUS$432 million the same year. In 2001 the amounts were US$10 million and US$155 million,respectively.Findings – recommendations - conclusionsThe dominating issue in the industry relates to the absence of economy of scale, which is thecause 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 ofadvanced research and development (R&D) facilities, scarcity of raw material, poordissemination of information on technical and trade-related matters, combined with a countryimage that is not among the best.These and several other issues are discussed in the report based on input from companies andexperts from Pakistan and abroad.International Trade Centre Page 1

RecommendationsChapter 6 of the report includes a number of recommendations for policy-makers, tradesupport institutions, sector associations and companies. Some of the most importantrecommendations 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, processingtechniques, designing criteria and implementation of international quality standards.• Arrange exposure visits to the auto industries in Japan, Germany, Thailand and otherselected 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 assistanceto 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 theworld leading manufacturers at or near the industrial clusters in special economic zonesoperated 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 andmachinery, raw material, parts and components. The zones should offer up to 10 yearstax holiday, develop a world-class infrastructure and make provision of utilities at ratescomparable to those in other countries in the region. The management of these SEZs isto be entrusted to the private sector.Page 2International Trade Centre

Facilitate incentive-based quality and productivity improvements• By means of financial incentives and possibly grants, encourage the establishment ofnew, 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 andcertifications.Establish a technology up-gradation fund• Provide funds at individual firm level for technology transfer and replication of modernmachines.• Develop linkages with international machinery suppliers.• Hire experts/consultants with matching grants on the basis of output, productivity,efficiency and operational performance improvements.Develop skilled labour• Make an assessment of manpower needs and encourage linkages between the industry,engineering universities and technical training institutes to promote demand-driventechnical education and vocational training.• Set up vocational training centres meeting the demands and needs of the industry inprivate-public partnerships. The Zakat Fund and other funds available for povertyalleviation 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 StatesAgency for International Development (USAID) and the International Trade Centre(ITC) for training of workers and for other assistance.ConclusionsConsistent government policies and transfer of technical know-how are on target in thebroadest sense. In other words, they are where Pakistan needs guidance and assistance forachieving growth and progress.In this situation, larger external investments based on joint investments with multinationalcompanies could give a boost to the auto vendor industry. They would enable the industry tocapture a significant share of the export potential and to appear as a global autoparts supplier inthe world market.The most important challenge is to build a policy on the belief that the strength lies at the firmlevel. The role of the Government should be restricted to be only that of a facilitator andsupporter.International Trade Centre Page 3

Implications of the WTO AgreementsThe implications of the World Trade Organization (WTO) Agreements have been looked atfrom 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 sectorWTO Agreements relevant to the autoparts sectorThe agreements of direct relevance to the automotive parts sector are the General Agreementon Tariff and Trade (GATT 94) and Trade Related Investment Measures (TRIMs). Otheragreements having high level of relevance are the Trade Related Agreements on IntellectualProperty (TRIPs), Technical Barriers to Trade (TBT), Rules of Origin and the CustomsValuation.Information flows on WTO issuesThe information flow on WTO issues is not satisfactory; neither for information from WTO viathe Government and associations to companies (downwards), nor from companies viaassociations and the Government to WTO (upwards). A proactive role is indicated on the partof the Ministry of Commerce and the Trade Development Authority of Pakistan (TDAP). Theyshould provide leadership in this regard and collaborate efforts with Small Medium Enterpriseand Development Authority (SMEDA), provincial government’s WTO cells, the Chamber ofCommerce and Industry and trade associations.Trade conditions for the automotive parts sectorImprovement in market access for automotive parts manufactured in Pakistan has taken placein the industrial countries’ markets. This has happened as a result of the WTO agreementsbringing down tariffs worldwide.Pakistan has also opened its market, among others, in respect of autoparts. Since 1998, theimport regime of Pakistan has been significantly liberalised through reduction in tariffs,rationalisation, and removal of import quotas, import surcharges and regulatory duties. Theunweighted (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 thanmultilaterally required in the WTO agreements. Some experts are of the view that Pakistanshould not have unilaterally reduced tariffs to such a steep extent.Threats and opportunities for the sectorThe central objective of the WTO is to help international trade flow smoothly, freely, fairlyand predictably. The WTO rules, with their trade liberalisation orientation, have indeed led to arapid expansion of world trade. Under this liberal international trade regime, there are boththreats and opportunities for Pakistan.Page 4International Trade Centre

If a proper strategy is adopted and the Government plays a supportive and facilitative role, itcan lead to a significant increase in international trade and substantially contribute to economicgrowth. Action is to be taken by government agencies, trade bodies and, above all, byentrepreneurs themselves. The business community has the primary responsibility forconverting tariff reductions and liberalisation commitments into opportunities for trade byadopting appropriate export promotion and development strategies.There is, prima facie, no serious threat to this industry in Pakistan. However, with greaterliberalisation in the future, imports of automotive parts may increase further. In order to copewith this emerging situation, Pakistan’s automotive parts industry will have to improve pricecompetitiveness and quality of its products.In terms of opportunities, market access is not a problem for Pakistan’s automotive parts. Themain problem faced by Pakistani exporters is that of the supply side which needs to beaddressed. Pakistan has to improve the capacity to meet international demand by producingautomotive parts of good quality and standard at competitive prices. Under the WTO’sliberalised import regime, Pakistani exporters should, in particular, take full advantage ofmarkets where tariffs are very low.International Trade Centre Page 5

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1 Background and objectives1.1 EC TRTA Programme for PakistanThe International Trade Centre (ITC) is implementing, on behalf of the European Union (EU),a Trade-Related Technical Assistance (TRTA) programme in Pakistan. The overall objectiveof 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-relatedconditions for sustained and stable economic growth.More specifically, the programme aims to enhance awareness among government officials, thebusiness 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 thenecessary capacity to address issues resulting from its participation in WTO.1.2 Five sector studiesWithin this framework, the programme has undertaken five studies on sectors selected by theMinistry of Commerce in Pakistan: automotive parts, footwear, furniture, pharmaceuticals andsports goods.The studies have been undertaken by national consultants working in cooperation with therespective business associations, national and international experts and ITC.The studies identify export opportunities and threats in each sector and look at the implicationsof 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 recentyears for the sector.• An overview of the sector’s trading performance for key products, including the sector’sglobal 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 theirimplications for the sector globally and in Pakistan, both currently and in the future. Thisincludes analysis of changed or new market threats or opportunities arising out of theemerging 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 exportperformance and provision of proposals for improvement or rectification.• An assessment of the current export support services provided by the Government andsuggestions on how these could improve the export performance in the relevant sector.International Trade Centre Page 7

• Recommendations aimed at individual companies, business associations and relevantgovernment authorities – including some hands-on suggestions in the form of scenarioswith proposed partners and estimates of costs.1.3 MethodologyAs part of the study, the lead consultant in Pakistan, Aftab Associates (Pvt.) Ltd (AAL) carriedout a series of interviews with several senior staff members of autoparts manufacturers andexporters of Pakistan. Six representatives of AAL interviewed five manufacturers-cumexportersand thirteen manufacturers between March 28 and May 02, 2006. The interviewswere 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 and22% 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 shaftassembly, 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 threecompanies had around 700 to 1,100 employees.The main export markets of the manufacturers-cum-exporters are Sri Lanka, Malaysia, GulfEstates, USA, Germany, Spain, Italy, England, Brazil and Singapore.Page 8International Trade Centre

2 Autoparts sector in Pakistan2.1 The sector in general2.1.1 Review of the autoparts industry in PakistanThe Pakistan automotive industry dates back to 1953 when National Motors Limitedestablished the country’s first assembly plant in Karachi to assemble Bedford trucks. This plantlater also housed the assembly of light trucks and cars. The industry remained extremelyprotected till the early 1990s after which a policy of major deregulation was adopted thatallowed an influx of Japanese manufacturers to enter into the industry. This allowed the marketto 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 anddevelopment, it continued to remain relatively protected and immature. It wasn’t until 2001-02that the auto industry entered a rapid growth phase. The developments in the auto industrywere largely triggered as a consequence of the high growth in the economy as a whole. ThePakistan economy not only experienced an increase in the purchasing power of consumers butalso a massive increase in the availability of credit and financial options, coupled with lowinterest rates. This change in the economic environment resulted in a major increase indemand, which was unable to be met by supply. This deficit in supply was particularly felt inthe automotive industry, with manufacturers unable to meet the demands for motorcycles, carsand tractors. To tackle this issue, the Government relaxed its import policies and made it easierto import automotives. Despite a massive increase of over 800,000 automotives in the industryin the last four years, coupled with large amounts of imports, Pakistan has been unable to meetits growing demand. Although the situation has improved and continues to improve, the supplyside gap still remains prevalent.Today, the automotive industry on a global level has become one of the most mature industriesin 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 thedemands in East Europe and Asia continue to rise. As competition among car builders istremendous, cost elements and local presence play a crucial role in gaining and maintainingmarket share. Due to these factors there has been a trend for Original EquipmentManufacturers’ (OEM) to expand their capabilities to new markets while capacity in thetraditional market shrinks. Moreover, over 75% of the cost of the car is delivered by the supplychain, which continues to be dominated and controlled by Western suppliers. Although thelocal market of the automotive industry has been growing at a phenomenal speed, Pakistan’scontribution in global terms has been almost non-existent. It is a mere 0.3% of the worldproduction 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 programmemandated a compulsory local component for each model of vehicle to not only promote butalso provide protection to the growing local infant industry. During the deletion programme’simplementation, the industry managed to localise a large number of automotive parts,including sheet metal parts, rubber and plastic parts, aluminium parts such as radiators, wireharnesses, chassis, tyres, tubes, car seats and lights, etc.International Trade Centre Page 9

2.1.2. Structure of the automotive industry in Pakistan and abroadTo fully understand and comprehend the dynamics of Pakistan’s automotive industry, it isessential 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 withthe rest of the world; to analyse the differences and suggest recommendations that may allowPakistan 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 andcooling 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, doorlocks, bolts, nuts and other plastic parts.Figure 2.1 Structure of car assembly in Europe / United StatesCar assemblers(OEM)System/1st tiersuppliers2nd tiersuppliers3rd tiersuppliersFigure 2.2 Structure of car assembly in PakistanCar assemblers(OEM)System/1st tiersuppliers2nd tiersuppliers3rd tiersuppliersPage 10International Trade Centre

As illustrated in Figure 2.2, Pakistan’s supply structure is such that second and third tiersuppliers have direct contact with both the system suppliers, i.e. the first tier suppliers, as wellas the OEMs themselves. Comparatively, in the more developed and mature automotiveindustries around the world, the OEMs have considerably reduced their supply chain (figure2.1). They concentrate primarily on first tier suppliers who then deal with second and third tiersuppliers, respectively. The second and the third tier suppliers have minimum, if any, contactwith the OEMs and deal mainly with the system suppliers, hence creating not only a far moreefficient 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 volumesof production that are essential to be able to compete at international level. It increases thedependency of the OEMs on second and third tier suppliers, and any shortcoming of supply ontheir part completely halts the assembly line. This dependency also makes it difficult forfurther product enhancement; it prevents the OEMs from concentrating on R&D and fromachieving larger volumes, as the OEMs’ top priority becomes its supply chain management. Aleaner supply chain would not only decrease the dependency of the OEM on its suppliers, butwould also ensure a less risky and volatile assembly line, allowing it to achieve greatervolumes and hence reap the benefits of economies of scale, making Pakistan a more prominentplayer in the international market.2.1.3. Pakistan’s automotive sectorPakistan has come a long way since it started its journey in the automotive industry back in1953. The industry has become far more diverse and competitive, new players have andcontinue 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• MotorcyclesManufacturing 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 isestimated that in 2005-06 the production of cars reached 160,642 units, compared to 40,088 in2001-02. Similarly, the production of trucks and buses has increased more than five times since2001-02, reaching a total of 5,343 units in 2005-06. Motorcycle production has also seen asimilar rate of growth, achieving a production level of over 751,667, as illustrated in Table 2.1below.International Trade Centre Page 11

Table 2.1 Automotive assembly production, 2001-02 to 2005-06Auto production 2001-02 2002-03 2003-04 2004-05 2005-06Cars 40,088 61,814 100,240 124, 710 160,642Trucks and buses 1,134 1,929 2,522 4,900 5,343Motorcycles 120,627 165,105 322,816 484,223 751,667Pick ups 9,055 13,371 15,694 21,121 32,053Tractors 23,801 26,240 37,770 39,659 48,887Source: PAMA.Currently there are 93 active assemblers in the following segments, operating below theircapacity.Table 2.2 Capacity of auto assemblersAuto segment Assemblers Capacity (units)Trucks and buses 13 21,400Light commercial vehicles 6 32,500Cars 7 164,000Tractors 6 50,0002/3 wheelers* 61 733,000Total 93* 6 major players onlySource: SMEDA, 2005.2.1.4. Pakistan’s autoparts industryAlong with the automotive industry the autoparts industry of Pakistan has also achieved greatlevels of growth and success. During 2003-04 and 2004-05 the sharp increase in demand forautomotives resulted in a subsequent growth in the autoparts industry, bringing the totalnumber of organised units to about 1,100 by 2004-05. Autoparts manufacturers are generallyregistered vendors to assembler and OEMs. They manufacture elaborate parts, such as pistons,engine valves, gaskets, camshafts, shock observers, brake drums, wheel bumpers and radiatorsto name a few. Along with these organised manufactures in this sector, a number of small andmedium units are also operating. It was estimated that 90% of the autoparts industry comprisedsmall and medium sized enterprises (SMEs), of which at least 95% are self-financed, providinga wide range of parts for the replacement market.The automotive and the autoparts industries have proved to be extremely important players inthe economy of Pakistan. The job multiplier in the automotive industry has been very high, atotal of over 201,000 direct jobs were created by the sector in 2005 compared to about 100,000in 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 industryPage 12International Trade Centre

also increased from PKR 50 billion in 2002 to over PKR 115 billion (almost US$2 billion) in2005.The annual plant capacity and production of autoparts assemblers and manufacturers is givenin the table below.Table 2.3 Present status of automobile assemblers and manufacturersCarsAssemblers*Pak Suzuki Motor Co. LtdIndus Motor Co. Ltd (Toyota)Make and modelSuzuki Mehran, Alto, Cultus,LianaToyota Corolla, Altis andCoureAnnual plantcapacity**Production2005-06**68,000 82,59750,000 38,977Honda Atlas Cars (Pakistan) Ltd Honda Civic, City 30,000 30,464Dewan Farooque Motors Ltd(Hyundai, Kia)Hyundai SantroKia15,00010,0008,604Nexus Automotive (Pvt.) Ltd Chevrolet – Exclusive n/a n/aTransmission Motor Co. (Pvt.) Ltd Alif, Bay n/a n/aAdam Motors Company Limited Revo n/a n/aTotal 160,642Light commercial vehicles and SUVs (Jeep)Pak Suzuki Motor Co. LtdBolan, Ravi, LCV) Potohar(Jeep) (4x4 1,000cc)12,000 17,137Indus Motor Co. Ltd (Toyota) Toyota Hilux (LCV) 8,000 2,575Master Motor Corporation. Foton, yuejin 6,000 1,767Sigma Motors (Pvt.) LtdManufactured at Gandhara NissanPlantLand Rover (Jeep) n/a 1,182Sind Engineering Ltd Dong Feng 3,000 24Delta Innovation (Pvt.) Ltd Star (LCV) n/a n/aDewan Farooque Motors Ltd(Hyundai, Kia)Shehzore n/a 9,368Silver seal International King Star n/a n/aRoma Automobile Company Changgan n/a n/aAdam Motors Company LtdZabardast and B.J.C. Boltoro(Jeep)Total 32,053Trucks and prime movers (Heavy commercial vehicles)Sind Engineering Ltd Dong Feng Trucks n/a 4Karakoram Motors (Pvt.) Ltd King power n/a 0Adam Motors Company Limited Mudan Zabardest n/a n/aHinopak Motors LtdHino Trucks and PrimeMoversn/an/a10,000 1,499International Trade Centre Page 13

Assemblers*Make and modelAnnual plantcapacity**Production2005-06**Gandhara Industries Ltd Isuzu 3,000 897Gandhara Nissan Ltd Nissan 500 1,652Master Motor Corporation. FAW n/a 466Volvo Motor Co Volvo n/a 0Trans mobile Yasoob n/a 0Total 4,518Buses (Chassis/body manufacturers)Hino-Pak Motors Ltd Hino buses and bus chassis 2,400 668Sind Engineering Ltd Dong Feng Busses 1,000 40Gandhara Industries Ltd Isuzu 2,000 63Gandhara Nissan Ltd Nissan n/a 48Master Motor Corporation Ltd Yuejin, Foton and FAW 5,000 6Afzal Motors (Pvt.) Ltd Daewoo - bus chassis 5,000 0Total 825TractorsAl-Ghazi Tractors Ltd (Fiat) Ghazi (65hp-85hp) 25,000 24,574Millat Tractors Ltd Massey Ferguson (50hp-80hp) 25,000 24,313Universal Tractors Pakistan (Pvt.)LtdDewan Automotive EngineeringLimitedUniversal n/a n/aDewan Lifan and, Tumoson n/a n/aInternational tractors (Pvt.) Ltd International n/a n/aFecto Belarus Tractor Ltd Belarus n/a n/aTotal 48,887Motorcycles and auto rickshaws***Atlas Honda Ltd Honda 500,000 360,561Dawood Yamaha Ltd Yamaha 200,000 74,423Suzuki Motorcycles Pakistan Ltd Suzuki 65,000 16,965Plum Qingqi Motors Ltd Qingqi 100,000 16,221Pakistan Cycle IndustrialCooperative Society LtdSohrab 60,000 16,970A.B. Engineering (Pvt.) Ltd Laser 25,000 414A.S Auto Industries Yaqeen n/a n/aAhmed Automobiles (Pvt.) Ltd Safari 10,000 3,890Ali Raza Industries (Pvt.) Ltd Royal Star 6,000 2,800Al-mehran Auto Industries Mehran n/a n/aBabar Auto Trading andManufacturing Co.Asia Hero 4,000 991Baweja Automobiles Challenger 10,000 1,970Page 14International Trade Centre

Assemblers*Make and modelAnnual plantcapacity**Production2005-06**Burraq Motor Company (Pvt.) Ltd Burraq n/a n/aBlue Star Automobiles Blue Star 15,000 2,046Crown Motorcycle Company Crown Lifan 3,000 1,514D. S. Motors Unique 8,000 14,331Dewan Motorcycles Ltd Star Dewan Lifan 35,000 6,351Eagle Industries (Pvt.) Ltd Eagle 6,000 7,704Excel Industries Excel 5,000 2,358Fateh Motors (Pvt.) Ltd Hero 54,000 33,118Ghani Automobile Industries Ltd Ghani n/a n/aHabib Motorcycles (Pvt.) Ltd Habib 40,000 1,873HKF Engineering (Pvt.) Ltd Ravi 30,000 17,418H M S Automotive Industries (Pvt.)LtdHMS n/a n/aKhyber Automobile Industries Khyber n/a n/aKing Hero Motorcycles Industries King Hero 10,000 4,510Master Motorcycles (Pvt.) Ltd Master 30,000 572Master Engineering Company Leader 17,000 0Memon Association Foundry Super Star n/a n/aMetro Hi-Tech (Pvt.) Ltd Metro Hi-Tech 20,000 10,534Moon Traders Moon Star 4,000 294N.J. Auto Industries (Pvt.) Ltd Super Power 25,000 34,997New Asia Automobiles New Asia 15,000 6,513Omega Industries Road Prince 10,000 2,983Pak Hero Industries (Pvt.) Ltd Pak Hero 108,000 31,3995Pak Star Enterprise Pak Star n/a n/aRaazy Motor Industries Hi-Speed 25,000 5,550Rafeeq Engineering (Pvt.) Ltd Royal 15,000 200Raja Auto Cars (Pvt.) Ltd Hawk 18,000 548Sameer Moto Industries Champion 10,000 0Sara Automobile Industries Union Star n/a n/aShafeeq Sons Jinan 30,000 6,000Sitara Auto Impex Sitara Guangta 3,000 919Sonica Auto Industries (Pvt.) Ltd Sonica 10,000 430Specialized Motorcycles (Pvt.) Ltd Hunter 25,000 0Stahlco Automobiles (Pvt.) Ltd Stahlco n/a n/aStar Asia, Lahore Star Asia n/a n/aSuleman Auto Industries (Pvt.) Ltd Geo 10,000 3,434Super Asia Motors (Pvt..) Ltd Super Asia 10,000 9,189International Trade Centre Page 15

Assemblers*Make and modelAnnual plantcapacity**Production2005-06**Toyo International Motorcycles Toyo 10,000 2,736United Sales United 18,000 11,218ZXMCO Pakistan (Pvt.) Ltd ZXMCO 10,000 6,265Total 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 yearsthe autoparts industry has made heavy investments, which have helped them enhance theirproduction capacities and achieve progressively higher indigenisation levels. The economicindicators related to the automotive parts manufacturing industry reveal that in 2004-05 thesector 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$1.7billion).Although the industry has been growing at a phenomenal rate, currently it is still not in aposition to reap the benefits of economies of scale, bringing Pakistan to the level of a matureindustry dealing with mature partners. If the projected levels of growth — a forecast thatPakistan will produce at least 500,000 vehicles by 2012 — are to become a reality, then theindustry 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 theindustry are taken into consideration. The growth expectation requires the industry to put highpressure 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 mustconsider creating closer cooperation and relationships with each other, by sharing facilities andknowledge. It is also of utmost importance to create alliances with foreign automotive systemsand with 1 st tier suppliers. These endeavours and efforts are likely to help bridge the gaps inless time and in a more efficient manner, as investments would be made in areas that have thehighest priority.2.2 Production process and technologiesThe automotive industry is called by some ‘the mother of all industries’. It encompasses almostall types of industry, including steel, plastics, rubber, textile, leather, electrical and electronics,chemicals and so forth. However, this report focuses only on four technologies, whichrepresent almost 95% of the constituents of the entire sector. The technologies are:Page 16International Trade Centre

• Rubber parts• Castings and forgings• Stamping (sheet metal parts) and• Assemblies (components and sub-assemblies).2.2.1 Rubber partsThe rubber technology for the car industry is extremely diverse. It is essential for Pakistan’ssupplier base to have the capabilities to produce:• Injection moulding rubber; this includes 2-compound systems as well as metalreinforcements• 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 theproduction of various types of seals, which include rubber seals, oil seals, pipes, belts, shockabsorbers, window channels and metal/rubber bushings to name a few.The manufacturing process for all these different products is highly complex and requires agreat deal of detail and precision. Depending on the product specification, there is a series ofdifferent 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 oflocal 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 ofrubber. Imported raw materials that are used include smoked rubber, synthetic rubber, sulphur,zinc, aluminium and plastic compound aggregate sheets. Most of the raw materials areimported from Japan, Malaysia, Korea, Thailand, Singapore and Holland.2.2.2 Castings and forgingsThe automotive industry depends on the application of various techniques and all kinds ofalloys. The quality demands are high and for the Pakistan industry it is very difficult to meetthe correct specifications; very often the industry is forced to import expensive raw materialsfrom 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 forgingthe 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 engineparts. 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 thisindustry demand that their suppliers are capable of casting or forging as well as machining ofthese parts, the lack of technological know-how has resulted in over-dependence ontechnologies from the US and Europe.International Trade Centre Page 17

More than 75% of companies use local as well as imported raw materials, while 25% purchasetheir raw materials locally. Local raw materials include silicon, pig iron, and heads. The rawmaterials mostly imported are pig iron, coal, nichol, coke, silicon manganese, aluminium,aluminium alloys and foundry chemicals. China, Russia and Africa were found to be thedominating 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 purchasepullies, round bars, pig iron, alloy steel, carbon steel and engine valves locally. Pins, shockabsorbers, valves, tapers, hammer and steel items are mostly imported. Imports mainly comefrom China, but Italy, India, Korea, the UK, Turkey, South Africa and America are alsorelatively 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 steelsheets in various gauges depending on its use, reliability and safety. Steel sheet is given adesired shape and then welded together to form the shape of the vehicle. The technology isdiverse 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 diesto be used in manufacturing the part and, after considering the specified quantity, material typeand dimensional tolerances, material information is obtained. Most drawings clearly identifythe required material. Some material specifications can be a problem, resulting in productiondelays. These more difficult material specs can involve special types, special tempers, nonstandardthickness and special thickness tolerances.Tolerances vary according to the design of the part, its ultimate use, the size of the part, theoperations to be performed and the material to be used. This means that each part has its ownpractical tolerance. But, generally speaking, the tighter the dimensional tolerance, the higherthe engineering needed. Each basic metal stamping operation is usually done with one hit. Thatmeans the part's entire periphery is cut with one hit (blanking). All holes and openings are donein one operation with punches located at the point of contact. When possible, formingoperations 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 abilityand "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 ofshocks, shaft assemblies, CNG assemblies, duct assemblies, panel assemblies, mufflerassemblies, spindle gear shaft assemblies, air cleaner assemblies, CNG bracket assemblies,wiper assemblies, sound dumping assemblies, dash insulation assemblies, parcel trays, packagetrays, seats, dimmers, stoppers, oil level gauge seals, rings, fuel and water tanks.Page 18International Trade Centre

Companies purchase 40% of their raw materials locally, while 60% use local as well asimported raw materials. The material purchased locally includes MS sheet, hardware, springs,coating material, glass rooftop, carbon rod, local sheet, carbon steel and ball bearing. Theimported material includes steel wires, metal sheets, tools, plastic compound, and differenttypes 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 specification certificatesAlmost 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 aswell as the specifications of the product being supplied.2.2 Availability, quality and price of raw materialsA large number of exporters and manufacturers dealing in rubber and assembly are notsatisfied 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 lastfew years have increased considerably.2.3 Technology and skilled labourNeither local nor imported rubber technology are easily available to new entrants and their costto acquire is very high. Skilled quality labour is also scarce and expensive. Entrepreneurs haveto invest a great deal in training.For casting and forging, local technology is not easily available and the quality of finishedproducts 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 extremelyexpensive. Skilled labour is a major issue; despite being of poor quality, labour rates are veryhigh.Stamping technology is locally available at reasonable cost but the quality of the diesmanufactured as well as their cost is not satisfactory. Skilled labour is available at reasonablecost.Assembly technology is easily available locally and is of good quality. The costs of fabricatingthe equipment for assembly line as well as labour rates are satisfactory.2.4 Export marketsCountries to which companies are exporting autoparts are the USA, Italy, the UAE, Sri Lanka,Spain, Bangladesh, Malaysia, England, Brazil, Germany, Poland, Turkey and Europeancountries.International Trade Centre Page 19

2.5 Price trends of raw materials and end productsThe prices of both local and imported equipment show an upward trend for all technologies inthe last five years.Almost 70% of the exporters/manufacturers dealing in rubber technology said that in the lastfive years the prices of local sales have increased. One of them said prices remained stable andanother said that prices decreased. All said that there was an increase in the prices of exportsales.The prices of local sales of castings have increased, whereas most export prices have remainedstable. The prices of local sales of forging parts remained stable, while the prices of exportsales showed an increase.Prices of sheet metal are very sensitive and largely depend on market demand and suppliesworldwide. Good quality sheets of automobile grade are not being manufactured locally. Thesesheets are generally imported from Japan, Taiwan, Korea, China and South America. Addingheavy freight costs for low volumes, the prices of finished parts become unacceptable to OEMassemblers, 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 saleshave also shown an increasing trend.2.6 Growth in the sectorMarket forecasts show growth for the car industry from 200,000 vehicles in 2005 to around500,000 vehicles in 2010. Beside the projected growth in the domestic market, there are somepossibilities for the supplier industry to grow by means of export. Here one needs to make adistinction 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 stillvery high. The industry is forcing suppliers more and more to implement a global purchase andmarketing 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 2 nd tier to thesystem and the 1 st tier suppliers all over the world. The alternative is to establish alliances withautomotive suppliers from other continents.2.6.2 After Market (AM)Some Pakistani suppliers manufacture wear parts and are not bound to the regulation that theymay not sell on the after-sales (replacement) market. This group has opportunities to startexporting their product (lines) to other parts of the world. Competition in the AM is severe andas long as potential buyers can increase their gross margin considerably, some of them will nothesitate to buy where they can make the best deal. Before embarking on this, intensive marketstudies must be carried out.Page 20International Trade Centre

2.7 Exports/imports of autopartsThe trade deficit in the autoparts sector stands at just over US$400 million, with imports ofUS$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 puta complete ban on the import of second-hand completely built-up unit (CBU) vehicles thathave flooded the local market. The import of second-hand CBU vehicles are not only hurtinglocal assemblers but also badly damaging the autoparts industry.2.8 Price structure of the industryThose suppliers who want to do business with the OEM industry must have an open bookstructure. A complete breakdown of all cost price elements has to be handed over. For this tooccur, 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 acompetitive edge towards the high labour cost countries. The industry, as such, does not allowhigh 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 thedistribution channel, separate price policies/strategies have to be developed.2.9 Annual turnover and some projectionsCar manufacturers have investment plans to enhance their production capacities to 516,000vehicles by 2011-12 and employment opportunities for 13,900 workers. Honda will increase itsinvestment to PKR 13.5 billion to achieve its projected production of 100,000 units. Suzuki isexpanding its production capacity to 250,000 units with an additional investment ofPKR 8 billion. The Dewan Mushtaq Group has earmarked an additional investment ofPKR 1.3 billion and has projected production of 48,000 vehicles, up from the existing level of25,000 units. The Indus Motor Company (Toyota) has projected to invest PKR 10 billion toincrease 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 thecountry.The automobile sector of Pakistan comprises 93 assemblers/manufacturing units.Table 2.4 Number of assembler/manufacturing units in automobile sector of PakistanType of automobileNo. of assemblers/manufacturing unitsCars 7Tractors 6Trucks 13Light commercial vehicles 6Two wheelers 49Auto rickshaws 12Total 93Source: Engineering Development Board, Performance Review 2005-06, www.engineeringpakistan.comInternational Trade Centre Page 21

These units efficiently manufacture sophisticated parts like pistons, engine valves, gaskets,camshafts, shock absorbers, struts, steering mechanism, cylinder heads, wheel hubs, brakedrums, 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 theorganised sector, a good number of small and medium units are also operating. In fact, SMEsform 90% of the automotive parts industry, of which about 95% are self-financed. These unitsproduce 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 asharp increase in the demand for automobiles. It was noted that OEMs and vendors have madea heavy investment during the last three years, which has helped them enhance their productioncapacities 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 byimports, 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 majorfield where it needs guidance and assistance to achieve the required growth rate. Advancementin technology has necessitated the autoparts industry to go for proper development of humanand 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 thefollowing:• 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 LabourOrganisations).• Vendors have to accept product liability.• In some cases vendors must meet European directives, seehttp://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 regulations related to autoparts exports• Government laws and duties.• Government tax.• Sales tax.Page 22International Trade Centre

• Letters of Credit (LC) and other documentary requirements like delivery againstdocuments 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 theform of drawings). Before delivery, the product is tested in their labs and then shipped(assembly, forging).2.10.2 Rules and regulations 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 trendsTo give an overview of the global changes and trends in the automotive industry, the followingstudies 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 bythe 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 StrategyConsultants.• 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 DevelopingCountries (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 EquipmentSuppliers’ Association (OESA) and McKinsey & Company, published 2006 by RussellHensley.China’s automotive market — Myths and realities, by McKinsey & Co.China is seen as a threat to the Pakistan automotive industry. The myths and realities, plus theareas where the Chinese can have great influence on costs (competitiveness), are summarizedin Table 2.5 below.International Trade Centre Page 23

Table 2.5 Autoparts from China – Myths and realitiesMythsWith the recent sales slowdown,China’s automotive bubble hasfinally burstChinese buyers do not care aboutbrands, they just want a cheap carChinese suppliers will flood themarket with cheap partsRealitiesStrong automotive market growth will continue though(most) OEM/supplier price and profitability will comedown to international level.Chinese car buyers respond strongly to emotionalappeals of brands, and place tangiblefeatures/benefits above engineering excellence.Most Chinese suppliers are still subscale, andrealizing the full potential of China sourcing willrequire significant supplier development efforts byglobal OEMs/suppliers.Local champions with low cost and global ambitionare emerging.Figure 2.3 Sources of Chinese capital cost advantageIn summary, one can say:• China will remain one of the few high-growth automotive markets in the foreseeablefuture. Due to strong competition, price and profitability (for most OEM suppliers) willcome down to global mature market level.• Winners in China will be those OEMs/suppliers with distinctive brand attractiveproducts, tailored for local market and competitive structure.Page 24International Trade Centre

• A few Chinese OEM’s/suppliers will emerge as potential global competitors and theirroad to success may differ from their Japanese and Korean counterparts.• German OEMs/suppliers must learn to adapt to local market conditions in order to besuccessful 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 EMCCThis report seeks to provide a general picture of the European automotive industry, coveringall 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 ofchange 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 ResearchDeloitte studied the globalisation efforts of nearly 800 companies around the globe, withcombined revenues of close to US$1 trillion, and found that most organisations fail to capturethe real value of their efforts.Over the last three years, only about one in 10 companies have launched extensive initiatives tooptimise the supply chain network structure. As a result, most companies are struggling tocompete on cost, quality, innovation and customer service offerings against manufacturers thatconstantly redesign their business from a global point of view.The question Deloitte seeks to address is, how can companies facing increasingly complexglobal 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 theassociated risks?Note: For complete report see www.deloitte.com.Supplier of the Future – The CEO Agenda, by Roland BergerRoland Berger is a European automotive strategy consultant. He interviewed 140 executivesfrom 75 supplier firms and 11 vehicle manufacturers across four continents.Financial analysts have been unable to send very positive messages about the automotiveindustry to Wall Street and other major stock markets for some time now. Leaving theexception of excellent performance aside, the industry as a whole has not been among thefavourites of private and institutional investors in recent years. Too much bad news aboutdisappointing results, unmatched forecasts, unsuccessful mergers, huge overcapacities,tremendous price competition in the markets, high investment requirements to get the productInternational Trade Centre Page 25

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 paradigmshifts. His intent is to provide a window into the key strategic decisions that suppliers in NorthAmerica, 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 rosypicture and play down the enormous challenges that lie ahead for OEMs and suppliersalike. Costly and disciplined actions will be necessary to successfully master thesechallenges, and not everybody in the industry will survive. There are still many suppliersin the market that can provide the necessary technology and manufacturing capabilities,but unfortunately for some. With emerging markets like China increasingly coming intothe picture, more will come. Nobody in this industry has a lifetime assignment – noteven the most technologically advanced suppliers. Nobody is indispensable. But, andthis is the good news they submit, suppliers have the opportunity to adapt their businessmodels 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 thevalue chain. Without predicting a new industry boom, suppliers in different regions canexpect to return to the better profitability levels they have experienced in the past byadapting their business model and carrying out the required actions and measuresquickly, consistently and comprehensively.• To return to higher profitability levels, suppliers will need to be more focused andefficient 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 andfocusing on what they do best, i.e., being a system integrator, a technology drivensupplier, 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 otherautomobile equipment, published by CBIThe CBI is an agency of the Dutch Ministry of Foreign Affairs, established in 1971. The CBI’smission is to contribute to the economic development of developing countries by strengtheningthe competitiveness of companies from these countries in the EU market.For those companies who want to export to Europe, this survey is an indispensable instrumentand it guides you to all kinds of market information and market access requirements.Page 26International Trade Centre

Power Buyers: Secrets of the World’s Best Automotive Purchasingand Supply Managers, by Russell HensleyThe article highlights the current challenges faced by global automotive industry suppliers. Thesurvey results paint a bleak picture of the challenges facing the global automotive supplierindustry, 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 purchasingfunction)• Mindset and behaviour (majority of companies interviewed in the survey don’tconsistently engage in role model collaboration. Supplier mindsets toward their ownsupplier tend to be quite narrow; with most indicating that they rarely involve their ownsuppliers 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. Forexample, while suppliers establish cross-functional commodity teams, few such teamsare able to conduct clean-sheet cost build-ups.)• Global sourcing (suppliers should follow steps taken by their OEM customers to reducecosts and capture value)• Integration with product development (purchasing should take place at early stages ofproduct 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 detailedinformation 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 strongpurchasing performance can make the difference between success and failure. Some keycompanies are also making use of bad practices and also have room for improvement.International Trade Centre Page 27

2.12 Classification and trade of automotive parts2.12.1 Product classification — HS codesThe HS classification system for traded goods was introduced in 1988, and has since thenbecome an internationally accepted method of classification wherever products are traded. TheHS classification is "harmonized" in relation to the classifications of the United Nations andthe European Communities. Goods are classified according to simple objective criteria andapplications. 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 precisetagging of products.Many countries that have adopted HS have added one or more digits to further classifyproducts of particular national interest (8-digit or 10-digit level). Pakistan started reporting itsexports categorized according to the HS classification in 2002 up to the 8-digit level.Table 2.6 HS codes for automotive partsCategories and partsBodies and parts of bodies (Body)Windshields; Mirrors; Leaf Springs; HelicalSprings; Bumpers; Body parts; Chassis; Locks;Mountings; Seat belts; SeatsDrive train parts and components (Drive train)Brake Linings; Brake Pads; Mounted Brakes;Servo Brakes; Gears; Driving Axles; Non-DrivingAxles; Road Wheels; Shock Absorbers; Clutches;Steering Wheels; Parts ofTyres and rubber materials (Rubber)Tyres new; Retreaded Tyres; Solid Tyres; Innertubes; Other rubber articlesEngines and engine parts (Engine)V-belts; Engine parts; Engines; Fuel pumps;Cooling and Lubricating Pumps; Air filters; FuelFilters; Oil Filters; Gaskets; Radiators; ExhaustsElectrical 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; Otherparts for electric equipment; Air-conditioning;Alarms; Instruments; Car ClocksHS codes700711, 700721, 700910, 732010,732020, 732090, 830120, 830230,870810, 870821, 870829, 940120681310, 870831, 870839, 870840,870850, 870860, 870870, 870880,870893, 870894, 870899401110, 401120, 401140, 401191,401199, 401210, 401310, 401390,400910, 400950401011, 401012, 840820, 840991,840733, 840734, 841330, 841490,842123, 842131, 842199, 848490,870891, 870892850710, 8511, 851220, 851230,851240, 851290, 852721, 853661,854420, 854430, 841520, 854441,854520, 902920, 910400The automotive parts and components sector is classified under various chapters, not followingthe groupings of the HS. Automotive parts and components can best be re-grouped into bodyparts, drive train parts and components, engines and engine parts, electrical equipment andPage 28International Trade Centre

parts and tyres. Table 2.7 below highlights the product classification according to these fivebroad categories. The rest of this overview adheres to this grouping.2.12.2 Pakistan – Import/export overviewPakistan’s imports of automotive components far outweigh its exports. Total exports in 2005were worth US$24 million while imports reached US$432 million, up significantly fromUS$305 million in the previous year. Exports of automotive parts make up less than 0.2% ofPakistan’s total exports worth US$16 billion – where textiles and clothing are the dominatingproducts.The most valuable exports are in the drive train parts category making up 62% of the value ofexports. 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 in2005. Engine parts exports, the second most important category, have shown a sharperincrease, from US$2.8 million to US$4.2 million, though starting from a very small base. Thishas 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 importcategories are drive train parts and rubber parts (mainly tyres and tubes). Tyre importsconsisted mainly of tyres for trucks and busses. Truck and bus tyre imports in 2005 added up toalmost US$105 million, up from US$75 million in 2004. Drive train parts imports saw astunning 60% increase from 2004 to 2005 while body and electrical parts imports showed avery slight increase over the same period. While imports come from a range of countries, Japanand China are the major sources. It is very likely that the Suzuki and Toyota plants influencethis 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 fromone year to the next suggesting that many export orders are rather sporadic. This is particularlythe case for electrical parts. Rubber and engine part exports show more consistency. Leadingproducts within these categories include oil and fuel filters, pump/compressor/fan partsdestined for Germany, UAE, Bangladesh and Afghanistan and motor cycle tyres destined forSpain and Italy.International Trade Centre Page 29

Figure 2.4 Pakistan’s automotive component exports and imports, 2004-05Rubber33112.5151.1Engine 32.14.22.851.5Electrical1.21.228.826.8Import 05Import 04Export 05Export 04DriveTrain14.812.7114.5185.6Body0.80.91612.20 20 40 60 80 100 120 140 160 180 200US$ millionSource: Calculations from COMTRADEInternational Trade Centre Page 30

Table 2.7 Pakistan’s exports by product and major destination, 2004-2005HScodeCategoryDescriptionValue US$’000Quantity2004 2005 2004 2005UnitMain destination870810 Body Bumpers and parts for motor vehicles 540 411 216 145 Tons UAE, Italy870821 Body Safety seat belts for motor vehicles 2 52 1 7 Tons n/a870829 Body Parts and accessories of bodies nesfor motor vehicles343 362 60 63 Tons Hungary,Afghanistan885 825870840 Drive Train Transmissions for motor vehicles 1 77 2,000 n/a Units Germany870850 Drive Train Drive axles with differential for motorvehicles870870 Drive Train Wheels including parts andaccessories for motor vehicles1,136 2,351 407 n/a Units USA, Italy44 174 2 25 Tons UK870899 Drive Train Motor vehicle parts nes 11,522 12,169 6,262 4,695 Tons Afghanistan, USA12,703 14,771841520 Electrical Air conditioners used in vehicles 0 73 0 4 Tons n/a850710 Electrical Lead-acid electric accumulators usedfor starting piston engines488 972 25,216 n/a Units Afghanistan, Saudi851110 Electrical Spark plugs 519 6 995,118 n/a Units UAE851150 Electrical Generators and alternators 77 0 597 0 Units Afghanistan851180 Electrical Glow plugs and other ignition orstarting equipment nes853661 Electrical Electrical lamp-holders, for a voltagenot exceeding 1,000 volts854420 Electrical Co-axial cable and other co-axialelectric conductors840991 Engine Parts for spark-ignition type enginesnes54 131 n/a n/a n/a UK64 53 504,900 n/a Units Yemen21 0 11 0 Tons Afghanistan1,223 1,23515 104 2 14 Tons UK, AfghanistanInternational Trade Centre Page 31

HScodeCategoryDescription841330 Engine Fuel, lubricating or cooling mediumpumps for int comb piston engines841490 Engine Parts of vacuum pumps,compressors, fans, blowers, hoods842123 Engine Oil or petrol-filters for internalcombustion engines842131 Engine Intake air filters for internalcombustion engines842199 Engine Parts for filterg or purifyg mchy andapparatus for liquids or gases, nes848490 Engine Gasket sets consisting of gaskets ofdifferent materialsValue US$’000Quantity2004 2005 2004 2005UnitMain destination345 43 137 n/a Tons UAE, Sweden1,648 3,087 259 436 Tons Germany,Bangladesh550 667 581,613 n/a Units UAE, Afghanistan22 50 n/a n/a n/a n/a125 76 21 17 Tons UK, UAE26 86 n/a n/a Tons Iran870891 Engine Radiators for motor vehicles 64 64 3,845 n/a Units USA, Bangladesh401110 Rubber Pneumatic tyre new of rubber formotor car401120 Rubber Pneumatic tyre new of rubber forbuses or lorries401140 Rubber Pneumatic tyre new of rubber formotorcycles2,795 4,1775 641 270 n/a Units UAE, Afghanistan93 390 4,530 n/a Units Saudi, UAE1,385 1,257 571,780 n/a Units Italy, Spain401199 Rubber Pneumatic tyre new of rubber nes 1,075 212 192,874 n/a Units Afghanistan, Syria401210 Rubber Retreaded tyre 249 458 7,931 n/a Units Syria, Hong Kong401310 Rubber Inner tubes of rubber for motor carsetc buses or lorries68 6 5,508 n/a Units Italy401390 Rubber Inner tubes of rubber nes 166 18 40,116 n/a Units South Africa3,041 2,982 823,009Source: Calculations from COMTRADE.International Trade Centre Page 32

Table 2.8 Pakistan’s imports by product and major origin, 2004-2005HScodeCategoryDescription700711 Body Safety glass toughened (tempered) forvehiclesValue US$’000Quantity2004 2005 2004 2005UnitMain origin1,713 3,811 2,300 4,387 Tons China, Taiwan700721 Body Safety glass laminated for vehicles 662 440 683 314 Tons Taiwan, China700910 Body Rear-view mirrors for vehicles 999 1,289 106 130 Tons Spain, China732010 Body Springs, leaf and leaves therefor, ironor steel186 189 53 39 Tons Japan, UK732020 Body Springs, helical, iron or steel 119 772 28 157 Tons USA, Japan732090 Body Springs, iron or steel, nes 1,487 2,049 367 458 Tons Japan, USA830120 Body Locks of a kind used for motorvehicles of base metal373 276 196 141 Tons China, Japan870810 Body Bumpers and parts for motor vehicles 635 1,014 147 234 Tons Taiwan, Japan870821 Body Safety seat belts for motor vehicles 842 1,044 207 131 Tons Australia, Taiwan870829 Body Parts and accessories of bodies nesfor motor vehicles5,054 5,039 1,727 1,353 Tons Japan, China940120 Body Seats, motor vehicles 156 127 8,248 n/a Units Thailand, China12,226 16,050681310 Drive Train Asbestos brake linings and pads 715 414 606 79 Tons Malaysia, USA870831 Drive Train Mounted brake linings for motorvehicles870839 Drive Train Brake system parts nes for motorvehicles870850 Drive Train Drive axles with differential for motorvehicles870860 Drive Train Non-driving axles and parts for motorvehicles870870 Drive Train Wheels including parts andaccessories for motor vehicles87 78 11,168 n/a Units Japan1,106 907 4,03,604 n/a Units Japan, China318 251 73,588 n/a Units Japan119 187 n/a n/a n/a Japan2,652 4,225 194 370 Tons China, TaiwanInternational Trade Centre Page 33

HScodeCategoryDescriptionValue US$’000Quantity2004 2005 2004 2005UnitMain origin870880 Drive Train Shock absorbers for motor vehicles 617 382 77,113 n/a Units Japan, China870893 Drive Train Clutches and parts for motor vehicles 494 970 93,755 n/a Units China, Singapore870894 Drive Train Steering wheels, steering columnsand steering boxes for motor vehicles662 391 1,09,820 n/a Units Japan, Turkey870899 Drive Train Motor vehicle parts nes 1,07,732 1,77,755 4,01,08,348 29,947 Tons Japan, Thailand1,14,502 1,85,560841520 Electrical Air conditioners used in vehicles 9,709 7,385 80,150 n/a Units Japan, Thailand850710 Electrical Lead-acid electric accumulators usedfor starting piston engines449 301 10,797 n/a Units Sweden, Singapore851110 Electrical Spark plugs 1,146 1,235 17,78,219 n/a Units Japan, USA851120 Electrical Ignition magnetos, magnetogeneratorsand magnetic flywheels107 46 14,849 n/a Units Japan851130 Electrical Distributors and ignition coils 242 163 3,02,192 n/a Units China, Japan851140 Electrical Starter motors 492 690 54,762 n/a Units USA, China851150 Electrical Generators and alternators 254 63 1,758 n/a Units USA, France851180 Electrical Glow plugs and other ignition orstarting equipment nes851190 Electrical Parts of electrical ignition or startingequipment851220 Electrical Lighting or visual signalling equipmentnes346 267 89,082 n/a Units Singapore, USA447 542 95 75 Tons Malaysia, Japan3,899 5,543 9,52,037 n/a Units Thailand, Japan851230 Electrical Sound signalling equipment 567 787 6,15,765 n/a Units China, Taiwan851240 Electrical Windscreen wipes, defrosters anddemisters851290 Electrical Parts of electrical lighting, signallingand defrosting equipment91 217 62,302 n/a Units UK310 128 31 19 Tons Thailand, China852721 Electrical Car radio 1,153 1,935 60,285 n/a Units UAE, Malaysia853661 Electrical Electrical lamp-holders, for a voltagenot exceeding 1,000 volts331 417 24,52,973 n/a Units Germany, ChinaInternational Trade Centre Page 34

HScodeCategoryDescription854420 Electrical Co-axial cable and other co-axialelectric conductors854430 Electrical Ignition wiring sets& other wiring setsused in vehicles, aircraft etc854441 Electrical Electric conductors, for a voltage notexceeding 80 V fitted w connectorsValue US$’000Quantity2004 2005 2004 2005UnitMain origin3,164 5,218 802 1,329 Tons China, Turkey625 267 99 51 Tons Japan, USA2,815 3,009 927 684 Tons Japan, China854520 Electrical Carbon or graphite brushes 402 444 1,29,701 n/a Units USA, Germany902920 Electrical Speed indicators and tachometers;stroboscopes401011 Engine Conveyor belt metal reinforcedvulcanised rubber401012 Engine Conveyor belt textile reinforcedvulcanised rubber840733 Engine Engines, spark-ignition reciprocatingdisplacing > 250 cc to 1000 cc840734 Engine Engines, spark-ignition reciprocatingdisplacing more than 1000 cc840820 Engine Engines, diesel, for the vehicles ofChapter 87840991 Engine Parts for spark-ignition type enginesnes841330 Engine Fuel, lubricating or cooling mediumpumps for internal combustion pistonengines841490 Engine Parts of vacuum pumps, compressors,fans, blowers, hoods842123 Engine Oil or petrol-filters for internalcombustion engines842131 Engine Intake air filters for internalcombustion engines231 123 6,781 n/a Units Japan26,780 28,780116 985 49 320 Tons Germany, China1,641 3,242 1,184 2,412 Tons Italy, UK0 356 n/a n/a Tons Japan2 255 n/a n/a n/a Japan184 217 187 n/a Units China9,685 18,129 3,166 2,645 Tons Japan, Italy3,912 3,792 8,46,42,064 n/a Units Turkey, UK9,109 14,072 321 768 Tons Belgium, USA1,363 1,660 4,16,539 n/a Units Japan, USA768 1,427 65,686 n/a Units USA, UAEInternational Trade Centre Page 35

HScodeCategoryDescription842199 Engine Parts for filter or purifying machinery &apparatus for liquids or gases, nes848490 Engine Gasket sets consisting of gaskets ofdifferent materialsValue US$’000Quantity2004 2005 2004 2005UnitMain origin2,694 3,077 156 153 Tons USA, Germany2,516 4,089 3,96,001 n/a Units USA, Germany870891 Engine Radiators for motor vehicles 128 191 13,325 n/a Units Korea, Japan400910 Rubber Tubes, pipes & hoses vulcanisedrubber not reinforced etc, withoutfittings400950 Rubber Tubes, pipes & hoses vulcanisedrubber reinforced or not, with fittings401110 Rubber Pneumatic tyre new of rubber formotor car401120 Rubber Pneumatic tyres new of rubber forbuses or lorries401140 Rubber Pneumatic tyres new of rubber formotorcycles401191 Rubber Pneumatic tyres new of rubber withherringbone or lug treads32,118 51,4921,053 1,313 587 699 Tons Japan, China1,338 1,063 513 453 Tons Hungary, Japan14,706 17,890 8,17,995 n/a Units Japan, Korea75,443 1,04,901 14,59,235 n/a Units China, India1,838 2,589 4,40,492 n/a Units China, India4,685 11,186 54,900 n/a Units China, India401199 Rubber Pneumatic tyres new of rubber nes 10,646 7,120 2,26,773 n/a Units China, India401210 Rubber Retreaded tyres 216 232 744 n/a Units UK, Japan401310 Rubber Inner tubes of rubber for motor carsetc buses or lorries941 1,761 5,04,139 n/a Units China, Korea401390 Rubber Inner tubes of rubber nes 1,620 3,027 6,40,644 n/a Units Korea, China1,12,486 1,51,082Source: Calculations from COMTRADE.International Trade Centre Page 36

2.12.3 Global trade overviewTable 2.9 Top 10 world importers - Broad categories (US$ million)Body 2001 2002 2003 2004 2005World Total 39,610 44,054 51,468 60,712 64,362USA, PR, USVI 9,505 10,465 11,393 12,146 13,464Canada 7,009 7,513 7,516 7,902 7,877Germany 3,473 4,130 5,214 6,637 7,010Mexico 3,640 3,728 3,442 3,453 3,750Belgium 2,501 2,581 2,935 3,613 3,882France 1,551 1,876 2,599 3,267 3,373United Kingdom 1,346 1,712 2,276 2,938 2,969China 686 1,219 2,558 3,117 2,901Spain 1,181 1,364 1,693 1,942 1,855Japan 891 1,034 1,220 1,338 1,377Drive Train 2001 2002 2003 2004 2005World Total 94,354 104,013 120,480 142,225 152,119USA, PR, USVI 19,243 21,410 23,545 28,144 31,180Canada 10,037 10,803 10,776 12,430 12,942Spain 7,970 8,741 11,606 13,359 12,957Germany 7,214 8,198 10,191 12,273 13,045United Kingdom 7,335 8,336 9,573 10,571 10,525France 5,656 6,124 7,656 9,390 9,786Mexico 6,674 6,280 5,548 6,225 7,297Belgium 3,931 3,967 4,457 5,421 5,411Italy 2,960 3,310 4,053 4,470 4,737China 1,997 2,049 4,020 4,634 4,151Tyres/Rubber 2001 2002 2003 2004 2005World Total 22,727 24,728 29,602 35,563 40,474USA, PR, USVI 4,541 5,149 5,743 6,907 8,413Germany 2,287 2,310 3,029 3,636 3,917United Kingdom 1,303 1,526 1,815 2,192 2,290Canada 1,514 1,546 1,557 1,853 2,138France 1,241 1,317 1,702 2,005 2,180Italy 1,093 1,161 1,389 1,732 1,770International Trade Centre Page 37

Tyres/Rubber 2001 2002 2003 2004 2005Belgium 909 953 1,242 1,597 1,723Netherlands 884 1,009 1,247 1,598 1,541Spain 895 1,003 1,319 1,479 1,308Mexico 1,042 1,101 1,063 1,136 1,354Engine 2001 2002 2003 2004 2005World Total 66,363 72,036 82,918 98,025 106,125USA, PR, USVI 14,231 15,157 16,093 18,190 19,874Germany 8,198 8,832 10,796 13,080 13,879Canada 7,683 7,601 7,706 8,620 9,409France 3,600 4,246 4,803 5,373 5,940Mexico 3,915 4,516 4,564 4,899 5,317United Kingdom 3,172 3,746 4,137 4,616 5,086Belgium 3,625 3,569 4,033 4,469 4,474Spain 2,850 3,132 4,100 4,837 3,752China 1,295 1,694 2,840 3,791 3,648Italy 1,816 1,893 2,518 3,032 3,093Electrical 2001 2002 2003 2004 2005World Total 41,962 44,874 50,015 57,496 60,994USA, PR, USVI 12,564 13,514 13,994 14,863 16,026Germany 5,178 5,237 6,258 7,265 6,857Canada 3,315 3,402 3,227 3,619 3,714France 1,754 2,022 2,508 3,197 3,601Japan 1,909 2,206 2,468 2,898 3,346Mexico 2,269 2,286 2,103 2,217 2,521United Kingdom 1,670 1,874 2,221 2,588 2,603Belgium 1,755 1,725 1,838 2,194 2,242Spain 1,224 1,540 2,011 2,088 1,885Italy 979 1,018 1,277 1,425 1,444Source: Calculations from COMTRADEPage 38International Trade Centre

Table 2.10 Top 10 World exporters - Broad categories (US$ million)Body 2001 2002 2003 2004 2005World Total 40,613 45,144 50,918 58,174 61,019USA, PR, USVI 11,119 11,542 10,858 11,283 11,891Germany 5,378 6,113 7,730 9,983 9,476Canada 4,242 4,797 5,508 5,262 5,723Japan 3,607 3,718 4,379 4,908 4,880Mexico 3,416 3,867 4,033 4,351 4,907France 2,549 2,792 2,439 2,901 3,007Italy 1,239 1,395 1,812 2,217 2,293Belgium 1,164 1,367 1,626 2,098 2,079United Kingdom 1,137 1,208 1,683 1,968 1,918Spain 953 1,122 1,351 1,674 1,839Drive Train 2001 2002 2003 2004 2005World Total 91,730 100,660 119,798 144,361 157,615USA, PR,USVI 18,321 18,221 17,833 20,149 20,355Germany 11,824 13,626 17,842 22,040 23,038Japan 11,896 13,308 15,690 18,961 20,707France 8,234 8,808 11,152 12,315 12,305Italy 5,858 6,242 8,076 9,772 10,097Canada 6,203 6,686 7,037 7,843 8,491Spain 5,007 5,742 7,406 8,594 8,872United Kingdom 4,723 4,777 5,153 5,693 5,587Mexico 2,817 3,419 3,484 4,533 5,518Korea Republic 1,628 2,003 3,400 4,855 7,141Tyres/Rubber 2001 2002 2003 2004 2005World Total 23,163 24,846 29,660 36,252 41,011Japan 3,081 3,455 4,153 4,680 5,201Germany 2,230 2,498 3,145 4,127 4,070USA, PR, USVI 2,545 2,465 2,397 2,780 3,090France 2,032 2,049 2,543 2,973 3,056China 1,003 1,224 1,618 2,526 3,873Korea Rep. 1,396 1,486 1,686 2,065 2,411Spain 1,367 1,333 1,607 1,811 1,902Canada 1,316 1,319 1,358 1,510 1,669International Trade Centre Page 39

Tyres/Rubber 2001 2002 2003 2004 2005Italy 1,142 1,196 1,369 1,680 1,612United Kingdom 869 811 920 1,024 1,026Engine 2001 2002 2003 2004 2005World Total 66,535 70,563 82,500 98,514 106,604USA, PR, USVI 13,344 13,544 13,366 14,036 15,776Germany 9,431 10,219 12,712 16,568 17,559Japan 8,748 8,976 9,903 11,232 11,876France 4,199 4,239 5,965 7,262 7,672Canada 4,133 4,322 4,597 5,106 5,133United Kingdom 3,758 4,300 4,894 5,215 4,993Hungary 2,967 3,277 4,298 5,382 6,304Austria 2,888 3,072 3,744 4,240 4,619Mexico 3,142 3,201 3,271 4,224 4,718Italy 2,309 2,426 3,045 4,090 4,073Electrical 2001 2002 2003 2004 2005World Total 37,380 40,380 45,697 53,306 57,054Mexico 7,183 7,999 7,960 8,453 9,097Germany 4,197 4,687 5,971 6,946 6,747USA, PR, USVI 5,612 5,583 5,293 5,702 5,975Japan 3,146 3,373 3,429 3,901 4,260France 2,144 2,361 2,704 2,985 2,988China 1,154 1,487 2,010 2,684 3,470Spain 1,176 1,259 1,558 1,908 1,883Italy 1,033 1,095 1,330 1,670 1,792Belgium 1,057 1,141 1,328 1,526 1,579Korea Republic 1,008 1,020 1,213 1,423 1,802Source: Calculations from COMTRADETable 2.11 World and Pakistan vehicle production figures, 2004-20052004 2005 % changePassenger carsEurope 17,829,721 17,636,131 -1America 8,566,853 8,956,858 5South America 2,098,399 2,289,548 9Page 40International Trade Centre

2004 2005 % changeAsia 17,870,039 19,096,260 7Africa 287,655 319,598 11Total 44,554,268 46,008,847 3.3Pakistan 76,456 133,998 75Light trucksEurope 2,290,405 2,405,212 5America 9,722,868 9,608,904 -1Asia 4,718,386 5,030,279 7Africa 113 175 55Total 16,844,759 17,219,185 2.2Pakistan 16,716 22,224 33Heavy trucksEurope 642,332 684,362 7America 597,713 686,815 15Asia 1,592,012 1,582,715 -1Africa 20,807 26,727 28Total 2,852,864 2,980,619 4.5Pakistan 2,022* 3,204* 58BusesEurope 72,242 75,763 5America 60 71,914 20Asia 111 107,934 -3Africa 1,105 1,147 4Total 244,329 256,758 5.1Pakistan 1,380* 1,762* 28* Source: OICA, SMEDA, 2003/4 and 2004/52.12.4 World trade of key Pakistani export products 1Fuel and oil filtersThe global market for fuel and oil filters is estimated at US$3.3 billion with growth averaging18% 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 isimportant for this product, judging by the long list of importing countries that all haveautomotive assembly plants. Non-assembly countries — UAE, Saudi Arabia and Denmark — are1Source: ITC Trade Map www.trademap.org.International Trade Centre Page 41

the 21 st , 24 th and 32 nd respectively on the list of world importers. Therefore, without lookinginto the exact details of OE markets vs. after markets, OE for auto assembly is clearlyimportant. Nevertheless, filters need to be changed regularly when cars are serviced, so theafter market has also to be important. The US total servicing market was estimated to be worthUS$142 billion in 2005. 2The 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 anupward 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, togethermaking up a 47% share of world exports. Germany and the US are net exporters, exporting farmore than they import, likely to be adding value to the filters in the process. Developingcountry 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% and10%. Bangladesh (25%), Sri Lanka (28%), Iran (25%) and Jordan (30%) apply high-end tariffsto Pakistan.Engine pumps for fuel, oil and cooling fluidGlobal imports of this product in 2005 are estimated to be worth US$7 billion. The majorbuyers are the US, France, Germany, UK and Korea. Germany and, less so, France and US aretop exporters. Japan and the Czech Republic are also key exporters. The Czech Republic isperforming 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 arezero 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%.BumpersThe US had a 24% share of the US$3.7 billion worth of bumpers and parts imported in theworld 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 intobumpers, 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 keysuppliers of bumpers and parts, while stampings are supplied mainly by Canada, Taiwan andMexico.2Datamonitor.Page 42International Trade Centre

Besides being the major supplier to the US, Canada in turn is the second largest globalimporter; 8% of world imports. However, 81% is supplied by the US. Trade flows wouldsuggest 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 bewitnessed 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 chargeno tariff for bumpers and parts. Canada applies between 0% and 6% and Saudi Arabia andRussia both apply a tariff of 5%.The UK is world’s top exporter of bumpers and parts, reporting a major portion headed forTurkey and South Africa. However, there is a major discrepancy with what South Africa andTurkey report in terms of imports from the UK; further investigation into intra firm shipmentsis 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 batteriesWorld total imports of lead acid batteries in 2005 are estimated to be worth US$3.4 billion andgrowing at an impressive average rate of 14% per annum over 2001-05. As with mostautoparts, 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 biggestconsumer of automobiles, be third in the world? Looking more carefully at Canada’s importfigures, we can see that only 68% of Canada’s 120,000 tons of lead acid batteries imported in2005 are 12V, i.e. for a regular car. It is likely that an important share of the remaining 32% isfor vehicles such as snowmobiles. Nevertheless, the very cold winters are likely to create moredependence 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 sameperiod. Saudi Arabia and Afghanistan are Pakistan’s most important buyers of lead acidbatteries. As both countries are non-car producers it is likely that Pakistani exports havetargeted them for their large after market value. Nevertheless, Pakistani exporters may wish toexplore growing markets elsewhere such as Kuwait, Iraq, Kazakhstan, India and Ghana.Tariffs applied for this product in major markets and the fastest growing markets mentionedabove are minimal and generally 0% under GSP, Canada and Mexico being exceptionsapplying 7% and 15%, respectively, to imports of this product from Pakistan. Looking furtherat other developing country markets, tariffs range upward to 20% (Malaysia), 30% (Algeria)and 40% (Iran).International Trade Centre Page 43

Table 2.12 Tariffs in export markets for autoparts (%)Selected importers401110401140401199401210401310401390840991841330841490842123842199850710851110851150853661854420870810870829870840870850Argentina 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%International Trade Centre Page 44

Selected importers401110401140401199401210401310401390840991841330841490842123842199850710851110851150853661854420870810870829870840870850New 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 AgreementSource: ITC Market Access Map, www.macmap.orgInternational Trade Centre Page 45

Korea, Germany, Spain and US are the world’s leading exporters of lead acid batteries. Thelatter three are at the same time key importers, adding value in the process. For example, theUS imports 362,222 tons at US$1,410 per ton (CIF) and exports 127,299 tons at US$2,226 perton (FOB). Indonesia, Czech Republic, China and Brazil are up and coming suppliers in theworld showing rapid gains in market share. Indonesia was quick to capture 70% ofAfghanistan’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 asignificant portion of Indonesia’s share.Motor cycle tyresGlobal imports of motorcycle tyres totalled US$781 million in 2005, 58% imported by theEU27 and 15% by the US, and 5% by Japan. Other notable importers include Switzerland,Nigeria, Colombia, Malaysia, Taiwan, Brazil, Argentina and South Africa. EU countriesclassify their import data in more detail to reflect scooter tyre imports and larger wheel tyreimports. 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 conditions (tariffs)Tariffs in the traditional largest markets are favourable for autoparts; Pakistan frequentlybenefits from GSP status and in general, access to EU, US and Japan is entirely open in termsof tariff barriers.Pakistan’s tariffs on importsImports of raw materials are not necessarily being constrained by import duties, as tariff arereasonably low, though additional taxes incurred make the overall cost significantly higher.Tariffs imposed on autoparts currently being exported enjoy a reasonable level of protectionranging from 20-35%. It is understandable that this protection cannot be too high because ofthe larger quantity of imports of autoparts.Looking at the assembled vehicle import tariffs, ironically, cars of less than 1500cc, which arethe 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 vehiclesCategoryMFN dutyCars, 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%Page 46International Trade Centre

CategoryMFN dutyLight 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 partsHS code Product description MFN duty40111000 Of a kind used on motor cars (including station wagons andracing cars)40112010 New pneumatic tyres, of rubber, of a kind used for buses andlorries (excl. tyres with lug, corner or similar treads): Of a kindused in light trucks40112090 New pneumatic tyres, of rubber, of a kind used for buses andlorries (excl. tyres with lug, corner or similar treads): Other40114000 Of a kind used on motorcycles 25%40119900 Other 15%40131010 Inner tubes, of rubber, of a kind used on motor cars, incl. stationwagons and racing cars, buses and lorries: Of a kind used onbuses, lorries or trucks40131020 Inner tubes, of rubber, of a kind used on motor cars, incl. stationwagons and racing cars, buses and lorries: Of a kind used onmotor cars40131090 Inner tubes, of rubber, of a kind used on motor cars, incl. stationwagons and racing cars, buses and lorries: Other40139010 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 tractors40139020 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 cycles40139030 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 jeeps40139090 Inner tubes, of rubber (excl. those of a kind used on motor cars,incl. station wagons and racing cars, buses, lorries and bicycles):Other84099110 Parts suitable for use solely or principally with spark-ignitioninternal combustion piston engine, n.e.s.: Rings for pistons ofvehicles of Chapter 8784099120 Parts suitable for use solely or principally with spark-ignitioninternal combustion piston engine, nes.: Cylinders for vehicles ofChapter 8725%20%5%25%25%25%20%25%25%25%35%35%International Trade Centre Page 47

HS code Product description MFN duty84099130 Parts suitable for use solely or principally with spark-ignitioninternal combustion piston engine, nes: Cylinder blocks forvehicles of Chapter 8784099140 Parts suitable for use solely or principally with spark-ignitioninternal combustion piston engine, nes: Cylinder heads forvehicles of Chapter 8784099150 Parts suitable for use solely or principally with spark-ignitioninternal combustion piston engine, nes: Cylinder liners forvehicles of Chapter 8784099160 Parts suitable for use solely or principally with spark-ignitioninternal combustion piston engine, nes: Inlet or exhaust valvesfor vehicles of Chapter 8784099170 Parts suitable for use solely or principally with spark-ignitioninternal combustion piston engine, nes: Other parts of enginesfor vehicles of Chapter 8784099180 Parts suitable for use solely or principally with spark-ignitioninternal combustion piston engine, nes: Parts for marine engines84099190 Parts suitable for use solely or principally with spark-ignitioninternal combustion piston engine, nes: Other84149010 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 8414.301084149020 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 8414.309084149090 Parts of : air or vacuum pumps, air or other gas compressors,fans and ventilating or recycling hoods incorporating a fan, nes:Other84212300 Oil or petrol filters for internal combustion engines 35%84219910 Parts of machinery and apparatus for filtering or purifying liquidsor gases, nes: Of machine of heading 8421.3910, 8421.3920 and8421.393084219990 Parts of machinery and apparatus for filtering or purifying liquidsor gases, nes: Other85071000 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 othertransmission components35%35%35%35%35%5%20%5%10%20%5%20%35%Source: ITC Market Access Map, www.macmap.orgPage 48International Trade Centre

Table 2.15 Import tariffs on raw materialCategoryMFN dutyMineral ores 5%Coal 5%Sulphur 5%Rubber5%Primary forms products15-25%Plastic5-20%Primary forms products20-25%MetalPig iron and ferro compounds5%Non-alloy steel10-25%Flat rolled alloy steel5%Stainless steel5%Pins, screws, springs5-25%Source: ITC Market Access Map, www.macmap.org2.13 SWOT analysis of Pakistan’s automotive industryThe following SWOT analysis is based on interviews with manufacturers, exporters andassociations, as well as the views and observations of the national and internationalconsultants.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-financedWeaknesses (*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 scarceInternational Trade Centre Page 49

• 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 chargesOpportunities (*means most important)• Clustering offers better chances on more business*• Automotive supply chain in Europe and USA is forced to buy in low labour costcountries*• 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 cancompete with India and China.*• Using the unbalance in container shipments (now more full containers coming in thangoing 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 arecontrolled• Many opportunities in automation and spare parts• 0% duties on exports• High growth in industryThreats (*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 makingthe same products as Pakistan is making; but their quality as well as costs are better*• Unavailability of latest machinery*• Rapid improvements in technology*Page 50International Trade Centre

• 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 topurchase• Import policies regarding cars• Lack of government support• Increase in taxation2.14 The role of associations – PAAPAM and PAMA2.14.1 Pakistan Association of Automotive Parts and AccessoriesManufacturers — PAAPAMPakistan Association of Automotive Parts and Accessories Manufacturers (PAAPAM)(www.paapam.com) was established in 1988 to represent and to provide technical andmanagement cooperation to its members. PAAPAM, with it’s almost a decade old history, hasattained an indispensable and extremely effective link between the policy-making echelons ofgovernment and the entity of its member firms.The association achieved recognition from the Government of Pakistan in 1999 and today isrepresented in many government and semi government, as well as private, institutions by itsmembers. PAAPAM is a member of the Federation of Pakistan Chamber of Commerce andIndustry (FPCCI).Aims and objectives• To encourage, promote, stimulate and protect the business interest of PakistanAssociation of Automotive Parts and Accessories manufacturers.• To create a spirit of co-operation, goodwill and unity amongst the members of thePAAPAM.• To represent the Association’s point of view to the local, provincial, central or othergovernment authorities.• To endeavour to eradicate all sorts of malpractices wherever these are found and to makeevery effort for honest and fair dealings amongst the members of PAAPAM.• To co-operate with government organizations, other associations and Chambers ofCommerce and Industry of Pakistan.• To assist members to resolve their disputes and to arbitrate for settlement of disputesamongst parties.International Trade Centre Page 51

• To represent the members and all for promotion of the automotive parts and accessoriesmanufacturers in Pakistan.Services offeredThe 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 20062.14.2 Pakistan’s Automotive Manufacturers Association — PAMAPakistan Automotive Manufacturers’ Association (PAMA) (www.pama.org.pk) wasestablished in 1982. It has a permanent secretariat with a full time Chairman and staff locatedin Karachi. PAMA supports the OEMs in presenting their views before the Government and itsdifferent agencies.Its membership includes assemblers of four wheelers, buses, commercial vehicles and threewheelers. 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 LtdMost of Chinese motor cycle manufacturers who are not members of PAMA have set upanother trade body Association of Pakistan Motorcycle Assemblers (APMA). This associationis not registered with the Directorate of Trade Organizations (DTO) of Federal GovernmentPage 52International Trade Centre

and as such, it is not a recognized trade body. It has a Chairman, two Vice Chairmen, one forSouth and one for North along with a General Secretary.The services offered by PAMA are similar to those offered by PAAPAM.International Trade Centre Page 53

3 Implications of WTO Agreements3.1 Background3.1.1 Multilateral discipline of trade rulesInternational trade for nearly six decades has been subject to the discipline of multilaterallyagreed trade rules by which “countries are required to abide in their trade relations with oneanother”. 3 The institution responsible for overseeing this rules-based system is the WorldTrade Organisation (WTO, www.wto.org) established on January 01, 1995. The WTO is thesuccessor to the General Agreement on Tariffs and Trade (GATT) which had been performinga 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 whichcountries are required to comply with in their trade relations with one another.• The World Trade Organization (WTO) oversees this multilateral system. ItsAgreements aim to help international trade flow smoothly, freely, fairly andpredictably.• Under the WTO trade regime there are both opportunities and challenges forPakistan.• It is for business community supported by the Government to convert tariff reductionsand liberalization commitments into opportunities for trade.• Likewise concerted action needs to be taken by both the public and private sectors toadequately meet challenges.Source: WTO Cell, Planning & Development Department, Government of the PunjabThis 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 WTOThe WTO purview encompasses management of three trade agreements, relating to: (1)Goods; (2) Services; and (3) Trade-Related Intellectual Property Rights. In addition, there are12 associated agreements relevant to trade in goods.3ITC; Business Guide to the World Trading System (1999), p.3.Page 54International Trade Centre

3.1.3 Functional scopeThe functional scope of the WTO is depicted below.Figure 3.1 Functional scope of the WTOWTOTrade in goodsTrade in servicesIntellectual property rightsGeneral Agreement onTariffs and Trade(GATT 1994)General Agreement onTrade in Services(GATS)Trade Related Aspects ofIntellectual PropertyRights (TRIPS)These Agreements seek to establish a trading system, which is non-discriminatory, freer, predictable,more competitive and arguably more beneficial to developing countriesAssociate Agreements on:• Agriculture• Application of Sanitary &Phytosanitary Measures(SPS)• Product standards (TBT)• Trade-related investmentmeasures (TRIMs)• Anti-dumping• Customs valuation• Pre- shipment inspection• Rules of origin• Import licensing• Subsidies• Countervailing measures• Measures for safeguards• Business and professionalservices• Communication• Distribution services• Educational services• Environmental services• Construction and relatedengineering services• Financial services• Health services tourism andtravel-related services• Recreational, cultural andsporting related services• Transport services• Other services• Patents• Copyrights• Trademarks• Industrial designs• Geographical Indications• Undisclosed informationSource: WTO Cell, Planning & Development Department, Government of the Punjab3.1.4 Dispute resolutionFor disputes arising under GATT 94, GATS and TRIPs, there is a common dispute resolutionmechanism embodied in the WTO Disputes Settlement Understanding (DSU).International Trade Centre Page 55

3.1.5 Focus on trade in goodsIn this report focus is on trade in goods. Hence, further reference will not be made to GATSwhile TRIPs will be referred to wherever it is relevant.3.1.6 Obligation of conformityEach member country of WTO is obliged to ensure the conformity of its laws regulations andadministrative procedures with the agreements of the Organisation (Article XVI (4) of theMarrakech Agreement Establishing the WTO).3.1.7 Threats and opportunities under the WTO regimeThe central objective of WTO is to help international trade flow smoothly, freely, fairly andpredictably. The WTO rules, with their trade liberalisation orientation, have indeed led to arapid expansion of the world trade.In ranking many achievements of the GATT-WTO system, among the most significant is thesignificant reduction in developed-country tariffs from high double-digit figures in 1947 to lowsingle-digit numbers today. 4 There have been also significant reductions in other barriers totrade.Under this liberal international trade regime there are both opportunities and challenges forPakistan. No doubt Pakistan faces many challenges. At the same time, the multilateral tradedispensation has created many opportunities. If a proper strategy is adopted and thegovernment plays a supportive and facilitative role, it can lead to a significant increase ininternational trade and substantially contribute to the economic growth. Hopefully the ongoingtrade negotiations would add to these opportunities. However, “the WTO is about providingopportunities -- it does not provide guarantees nor does it provide all the conditions forparticipation in the global economy” 5 . In short, Pakistan has to get its act together to realise thepotential that has become available due to the trade liberalisation. Action is to be taken bygovernment agencies, trade bodies and, above all, by entrepreneurs themselves. As it has beenaptly observed “the business community has the primary responsibility for converting tariffreductions and liberalisation commitments into opportunities for trade by adopting appropriateexport promotion and development strategies”.Current status of efforts to liberalise tradeCurrently (late 2006), the ninth (and the first under the WTO) Multilateral Round ofNegotiations called the Doha Development Agenda (DDA) is in progress (some call it a stateof suspended animation). 6 Earlier rounds have given a great impetus to the growth ofinternational trade by slashing tariffs mostly in industrial countries as well as elimination ofnon-tariff barriers such as quantitative restrictions. Following the Uruguay Round (the mostimportant Multinational Trade Negotiations held so far), average tariff rates in developed456See 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.See WTO “The Future of the WTO” (2004), p.16.See Hong Kong Ministerial Declaration, WT/Min (05), Dec 22, 2005 and for update on the latestdevelopments and pending issues visit www.wto.org.Page 56International Trade Centre

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 exportinterest to developing countries still remain relatively high 7 e.g. on clothing and footwear.DDA has been launched to improve the situation of developing countries in the multilateraltrading system through focusing on issues of principal concern to them. The progress onnegotiations has been so far very slow and deadlines for reaching agreement have beenrepeatedly missed. The meeting to take forward the DDA process held in late June and on1 July 2006 turned out to be inconclusive. As a matter of fact, negotiations were temporarilysuspended in August 2006 as the major participants had failed to show flexibility. Onecomment from an influential periodical graphically describes the situation as the Doha roundlying “comatose after five years of fruitless negotiations”. 8Negotiations under the DDA on Non-Agriculture Market Access (NAMA) cover the sectorunder study. Modalities are yet to be finalised on a Swiss formula (i.e. envisaging the rate ofreduction 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 issues3.2.1 Information flowsFigure 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 lotto be desired. There are markedly divergent perceptions among entrepreneurs about the natureand frequency of such flows. Despite contrary claims made by individual entrepreneurs, onecannot help reaching the conclusion that flows are erratic in both directions.78See I. Haque, Doha Development Agenda: Recapturing the momentum of multilateralism anddeveloping 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 PostDoha Agenda, Nov. 2001, at 2.The Economist, 4 November 2006, p.40.International Trade Centre Page 57

Figure 3.2 Upward and downward information flows on the WTOWTOWTO Mission of Pakistan, GenevajMinistry of Commerce/TDAPMinistry of IndustriesChamber of Commerce andIndustry/PAAPAMEntrepreneursSource: WTO Cell, Planning & Development Department, Government of the Punjab3.2.2 Information flows – upwards: From companies via government toWTOGovernment driven flows – UpwardsThere is no problem in respect of information transmitted by the Government of Pakistan to theWTO as an obligation of membership of the organisation. Regularly, the Ministry ofCommerce sends necessary information about notifications to the WTO as agreed in thePage 58International Trade Centre

Ministerial Decision on Notification Procedure. 9 Some of the items that are notifiable are:Tariffs, Generalised System of Preferences (GSP) provisions, customs valuation, rules oforigin, safeguard actions, details regarding exports subsidies and concessionary exportfinancing.Trade statisticsAs regards trade statistics, the Government of Pakistan is obliged to furnish data for theintegrated database of WTO. These figures are based on the data of the customs stations andare reliable. However, there has been a lag in furnishing these statistics. The problem is beingsorted out.Another compulsory upward information flow is generated from the Census of ManufacturingIndustries (CMI) – conducted every five years. 10 Results of CMI suffer from problems ofcoverage, from the industry, research design and lack of adequate response. Furthermore,these at best are historical data.Information through consultative meetingsThe Government of Pakistan informs itself about problems faced by the industry andsuggestions made by the private sector at meetings preceding the formulation of each year’sTrade Policy. Apart from the Federation of Pakistan Chambers of Commerce and Industries(FPCCI), the regional Chambers of Commerce and sectoral associations, which are registeredwith the Government, are invited. As regards associations, some selection is made to ensurethat representation is adequate in terms of both sectors and regions.Information flow – Upwards: exporters’ opinionSemi voluntary and sporadicIn interviews, automotive parts exporters claimed that the upward flow of information, by andlarge, 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 ofCommerce 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.Information about government agencies/departments concernedA majority of exporters generally had an idea that complaints/suggestions about WTO can bemade to the Ministry of Commerce, the Ministry of Industries or TDAP. They were also awareof the websites of the government organizations concerned. According to them, they had notmade complaints/suggestions to any body/institution so far. However, a few had consulted theChamber to find answers to their queries.910WTO: Decision on Notification Procedures, Ministerial Decisions and Declaration adopted by the TradeNegotiations Committee on 15 December 1993.The census is undertaken under the Industrial Statistics Act, 1942 for those industrial units employing10 and above workers registered or qualifying for registration. Information is treated confidential.International Trade Centre Page 59

On the other hand, some entrepreneurs thought that there was no organisation to which theycould make complaints, nor were they aware of any procedure for making their voices heard bythe relevant government authorities. In short, information among entrepreneurs aboutapproaching government authorities or trade bodies is not even. More enlightenedentrepreneurs were aware of what to do while others remained ignorant of the avenues ofarticulation available to them.3.2.3 Information flow – downwards: From WTO via government tocompaniesComplaints about the lack of information about WTOAll exporters interviewed claimed that no information related to WTO issues was readilyavailable. A few were not even familiar with the term WTO. When asked whether they wereaware of the WTO Cells in the Ministry of Commerce, TDAP, planning and developmentdepartments of provincial governments, or Chambers of Commerce and Industry, they repliedin the negative.However, one exporter reported getting information on WTO through newspapers, associationmeetings and websites. He normally checked the websites of the association every two to threemonths.Knowledge about implications of the WTO AgreementsVery few exporters were aware of the specific WTO trade agreements and their implicationsfor Pakistan’s automotive parts industry. Those who claimed to be knowledgeable about theagreements said that they were generally aware of decreasing tariffs and increasing prospectsof imports. They recognised that markets under the WTO trading dispensation would becomeeven more open in the days to come.This vague notion about WTO does not suffice. The advice given by experts is that: “Detailedknowledge of the concessions obtained on goods and services products of actual and potentialinterest to the community would be necessary for evolving trade promotion strategies”.Downward flowsThe 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 foundthat various notifications issued by the WTO Secretariat and which are regularly sent to theMinistry of Commerce are not put on their website. The plea taken in this regard was that thisinformation was available from the WTO website. However, it is felt that the Government ofPakistan and its export/trade development organisations must play a more proactive role. WTOhas also, in collaboration with the ITC and the European Commission, established WTOReference Centres in the Ministry of Commerce, TDAP, and the Lahore Chamber ofCommerce & Industry. Other such centres have also been established b y FPCCI, selectedChambers of Commerce and Industries and the Planning and Development Department ofPunjab. These should be fully utilised by exporters and policy-makers.Page 60International Trade Centre

Demand for proactive supportive role of the GovernmentAutomotive parts entrepreneurs were of the firm view that the Government should creategreater awareness about WTO issues by regularly organising focused seminars, workshops anddiscussions, circulating newsletters, magazines and creating websites. TDAP, Chambers ofCommerce and Industry and PAAPAM should also come forward in creating awareness. TheGovernment should compile a mailing list and regularly circulate updates on the WTOagreements to exporters/manufacturers.RecommendationsThe situation as to information flows is not satisfactory. A proactive role is required on the partof the Ministry of Commerce and TDAP. This organisation should provide leadership in thisregard and collaborate efforts with SMEDA, the provincial government WTO Cells, theChambers of Commerce and Industry and trade associations. Funds are not an insurmountableproblem because the Ministry of Commerce and TDAP have ample resources in the form ofthe Export Development Fund (EDF). The real challenge is to organise a system that is userfriendly and available in virtual real time. Technical assistance from ITC to set up/improvesuch an information system should be very much welcome. TDAP should intensify itsactivities for capacity building specifically for the better use of opportunities and coping withchallenges emanating from the WTO system. Among other things, it is recommended that:• The present generalised, marginally focused system of information on WTO should bechanged to a sector-specific one, disseminating information regularly for instant use byentrepreneurs.• A comprehensive plan for dissemination of sector-specific information may be preparedby 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 issuesshould be organised by TDAP, preferably in partnership with the trade associationsconcerned, 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 Agreements3.3.1. WTO Agreements relevant to the autoparts industryThe WTO agreements not only influence the volume of trade but also affect the operationalspace 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 theautomotive parts sector: high intensity relevance, low intensity relevance and contingentrelevance. Agreements possessing contingent relevance refer to those that come into effect inInternational Trade Centre Page 61

certain situations only. The degree of relevance of these agreements for the automotive partssector 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 Agreementon Tariffs and Trade (GATT 94) and Trade Related Investment Measures (TRIMs). Otheragreements having high relevance are Trade Related Intellectual Property (TRIPs), TechnicalBarriers to Trade (TBT), Rules of Origin and the Customs Valuation. Agreements of lesserrelevance are: Sanitary and Phytosanitary Measures (SPS), Pre-Shipment Inspection andImport Licensing Procedures. The category of contingent relevance consists of agreements onAnti-Dumping, Subsidies, Countervailing, Safeguards and the Dispute SettlementUnderstanding (DSU).A diagrammatic representation of the degree of relevance of the WTO agreements to theautomotive parts sector is given below.Figure 3.3 Relevance intensity of the WTO AgreementsTBTTRIPSRules ofOrigin*TRIMsCustomValuationGATT1994AutomotivePartsPreshipmentInspectionDSUAgreementon SCMAntidumpingSPSImportLicensingProcedureHigh intensity relevanceLow intensity relevanceContingent relevance* Acquires high intensity relevance in the context of Regional Trading Arrangements and or where anyscheme of preferential tariffs has been adopted.Source: WTO Cell, Planning & Development Department, Government of the Punjab.Page 62International Trade Centre

3.3.2 Specific WTO Agreements of relevance to the autoparts sectorGeneral Agreement on Tariffs and Trade 1994The structure of GATT 1994, which lays down the framework within which the internationaltrade of goods takes place, rests upon five pillars that constitute the core of the legalobligations of the member countries.The unconditional Most-Favoured-Nation (MFN) obligation (Article l)Every member of WTO is required to treat imports from all other members “on an equal, nondiscriminatorybasis vis-à-vis all other members imports”. Thus if a country grants a specialfavour to another country (e.g. lower customs duty) the same treatment has to be extended toall other WTO member countries.Implications for the automotive parts sectorImportsPakistan or any other WTO member country while importing automotive parts has to extendthe same treatment to the same product of all the member countries. They are not allowed togive a differential treatment to any trading partner who is a member of WTO. This obligationleads to non-discriminatory trade and provides a level playing field to every member of WTO.ExportsFor 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, exportswill be adversely affected if importing countries are using non-tariff barriers.Exception to the principleSome exceptions are permitted such as:• Preferential tariff rates given to countries that are members of a free trade area/regionaltrading arrangements under Article XXIV of GATT as well as those arrangementsamong developing countries permitted under the Enabling Clause 11 (See Box.3.2).• Special access to markets of industrial countries at lower tariff rates granted todeveloping countries, e.g. Generalised System of Preferences (GSP). 12• Member countries are allowed to introduce trade restriction in case of balance ofpayment difficulties.• The exceptions are, however, only allowed under strict conditionalities.1112WTO, Guide to the Uruguay Agreements (1999) p.40GSP was proposed at UNCTAD II in 1968. Entered into force in 1971. It gives developing countries amargin of preference in the tariff rates their goods face in the markets of developed countries and in thisway increases their competitiveness vis-à-vis those countries whose goods enter these markets onMFN rates.International Trade Centre Page 63

Box 3.2 Regional Trade Agreements (RTAs)Governments often take action to liberalize trade on a regional level through formation offree trade areas or preferential trade areas. Under these arrangements, goods can entereach other’s country market either without payment of any tariff or on some preferentialterms and conditions. RTA, which includes bilateral free trade agreements betweencountries that are not in the same region, have become so widespread that all but one WTOmember are now parties to one or more of them. It is estimated that more than half of worldtrade is now conducted under RTAs. Some 197 such agreements in force have beennotified to the GATT/WTO.Many experts regard these arrangements as building blocks for a freer non-discriminatorymultilateral trading system. However, many other experts perceive these arrangements tobe obstacles to the growth of a multilateral system. Regional arrangements are allowed (asexception to the Most Favoured Nation principle) under Article XXIV of the GATT 94 as wellas 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 atransformation of the SAARC Preferential Trading Arrangement (SAPTA, operational albeithalf-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 removingquantitative barriers to trade (a) within 10 years by its LDCs members — Nepal, Bhutan andMaldives, 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 agreementshave been signed with China and Malaysia. Besides this a FTA agreement has been signedwith China in November 2006. Negotiations are ongoing for signing FTA with Bangladesh,Turkey and Kenya. Discussions are also ongoing with Indonesia, Laos, Singapore andThailand for exploring the possibility of entering into FTAs.Source: WTO Cell, Planning & Development Department, Government of the PunjabNational treatment obligation (Article III)Once foreign goods have entered a country’s market, these and locally produced goods are tobe 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 MFNcommitment. It also establishes the principle that no tax will be imposed on imports in excessof the amount of the indirect taxes levied on the similar domestic products.Reduction and bindings of national tariffs (Articles II and XI)In order to make trade predictable, WTO Member countries are generally binding theircommitments (Article Xl), i.e. ceilings are imposed on tariff rates that can be charged by acountry. 13 Under the WTO system, tariffs (i.e. customs duties) are the only permissiblemeasure for trade protection (Article II and Article XI). The bound tariffs cannot be increasedabove the bound rates unless compensation is paid to other adversely affected WTOMembers.13Pakistan has bound more than 99% of tariff lines.Page 64International Trade Centre

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 consultationwith anyone.Reduction of tariffs is an important aspect of trade liberalisation. Tariff rates have beenconstantly coming down since GATT became operational. Industrial countries’ tariffs in mosttraded items have fallen to less than 4%. Such a significant reduction in tariff barriers has beenvery helpful in increasing trade. However, as stated above, on many items of interest todeveloping countries, tariff rates remain relatively high.Elimination of quantitative restrictions (Article Xl)The domestic industry can be protected through tariffs only. Thus each Member of WTO isobliged not to erect any non-tariff barrier, such as quantitative restrictions. However, there area number of exceptions to this rule. For example, export restrictions can be applied to preventor relieve critical shortages (Article XI-2 (a)).Implications for the automotive parts sectorExportsAs tariff barriers have been substantially decreased all over the world, for the automotive partssector market access is not a problem as such. Thus Pakistan enjoys better opportunities in themarkets of industrial countries' trading partners on account of their low tariffs.ImportsThe combined effect of Articles II and Xl is that foreign automotive parts enjoy fair access toPakistan’s market. Market access would have been easier had the tariff not been relativelyhigh, i.e. 35%.Transparency of Government Regulations Affecting TradeMembers are obliged to publish relevant laws, regulations, administrative rulings of generalapplication, 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 thecountry as well as by notifying the WTO. With a view to ensuring that Members adhere totheir obligation, their trade policies are examined through a surveillance mechanism called theTrade Policy Review Mechanism. This also encourages transparency.Implications for the automotive parts sectorTransparency in government regulations, in Pakistan and abroad, helps in the smoother flow oftrade. It is “in essence due process guarantees and a partial shield against arbitrary governmentaction”.Trade Related Aspects of Intellectual Property Rights (TRIPS)Many countries entered into international agreements (non-WTO) to protect creative ideas andnew knowledge by giving the creators of these knowledge-based assets certain rights (calledintellectual property rights - IPRs), which are the following:International Trade Centre Page 65

• The right to prevent others from “using their inventions, designs or other creations” 14and• The ability to negotiate payment for intellectual property (IP) rights.However, protection given to IPRs (by several international agreements) was found to beinadequate. This was particularly true as to the level of protection, implementation andenforcement. Therefore, it was agreed to develop new internationally agreed rules. The resultwas the agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs)negotiated in the Uruguay Round, which sought to reduce distortions and impediments tointernational trade through promoting effective and adequate protection of intellectual propertyrights. The functional purview of the TRIPs agreement extends to patents, copyrights,trademarks, industrial designs, geographical indications and undisclosed information.The agreement spells out the way that basic principles of trading order and other intellectualproperty agreements should be applied. The MFN and national treatment requirements haveconstituted key elements of the architecture of the agreement on TRIPs. This agreement alsorequired members to comply with pre-existing agreements governing IPRs. It was explicitlyprovided that nothing in the TRIPs agreement shall derogate from existing obligations asspelled out in the Paris Convention, the Berne Convention, the Rome Convention and theTreaty in respect of Integrated Circuits.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 disputesthrough the WTO dispute settlement system. Pakistan, in compliance with the TRIPsagreement, has enacted new legislation (IPO law) as well as effected amendments in theexisting laws relating to patents, copyrights and trademarks.Relevance to the automotive parts sectorThe TRIPs agreement is directly relevant to the automotive parts sector. As the sector becomesmore sophisticated, its relevance will increase further.Protection of designs and trademarks• Innovations incorporated in an auto part can be protected through getting a patent.• Automotive parts’ designs can now be protected through getting them registered underthe Industrial Designs Ordinance (2000). The automotive parts industry should thereforeseriously consider registering any innovative and special design so these be fullyprotected.• Well-established companies are advised to get their trademarks protected.14This Agreement fixed minimum levels of protection that each member of the WTO is required toprovide to the intellectual property of other members.Page 66International Trade Centre

• The quality of protection has significantly improved. By the same token the automotiveparts industry in Pakistan cannot copy someone else’s designs or trademarks. Strictcompliance 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 ofprotection 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 asindustrialisation, import-substitution and export growth. Such requirements can affectinternational trade. For example, a requirement of local content in a product may prevent orlimit the use of imported inputs. Any investment-related measure of this type has been nowprohibited as a trade distorting measure.The agreement on Trade Related Investment Measures (TRIMs) specifically prohibitsinvestment measures that are inconsistent with the provision of Articles III or XI of GATT1994. The agreement provides an illustrative list that explicitly prohibits local contentrequirements, trade balancing requirements, foreign exchange restrictions and exportrestrictions that would violate Article III:4 or XI:1 or GATT 1994. It has identified suchmeasures, which had previously been widely tolerated as being contrary to existing GATT. 15 Italso sent out a clear signal for phasing out existing measures. It clearly prohibits such tradedistortinginvestment measures, even those that are mandatory or enforceable under domesticlaw 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 lastapplication for further extension was turned down. The government of Pakistan hasaccordingly announced to replace the deletion programme by the new Tariff Based System(TBS), which is fully in compliance with the TRIMs agreement.Under the new system, import duty at the rate of 50% would be applicable to suchcomponents/parts which are manufactured locally and are either (a) imported for the assemblyby the Original Equipment Manufacturer (OEM) or (b) imported by the commercial importersas replacement parts for vehicle plying in the country including such motor vehicles whichwere not manufactured locally. 25% duties would be levied on all other indigenisedreplacement parts, irrespective of the type and category of the vehicle.Relevance to the automotive parts sectorThe TRIMs agreement is directly relevant to the automotive parts sector. The demand forprohibiting TRIMs has emanated from developed countries. These have made huge investmentin the developing countries and keep on looking for investment opportunities. They feelinhibited in their decision-making on account of conditions imposed by the host governmentson investments.15See WTO Guide to the Uruguay Round Agreements p.78International Trade Centre Page 67

As the LCR has been withdrawn, the downstream vendor industry of automotive parts has toface foreign competition. This sector has lost exceptional protection enjoyed by it due to LCRconditionality. However, if the domestic manufacturers find that the foreign supplies have beenindulging in unfair trade practices, e.g. dumping, they can have recourse to trade remedialmeasures. The domestic manufacturers should also carefully watch, and take action ifnecessary, in cases of under-invoicing of imported automotive parts.(Action: Entrepreneurs/Association and GOP)Agreement on Technical Barriers to Trade (TBT)Every WTO Member while allowing imports has the right to adopt standards considered by itto be appropriate for human, animal or plant life or health or for the protection of theenvironment 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 touse international standards where these are appropriate but it does not oblige them to change(i.e. lower) their levels of protection in the process.The TBT contains a code of good practice for the preparation, adoption and application ofstandards. It lays down that the procedures used to determine whether a product conforms withthe national standards have to be fair and equitable. It does not approve of any methods thatwould give domestically produced products an unfair advantage. It also encourages countriesto accord recognition to each other’s testing procedures. To help the stakeholders to knowabout the latest standards in the prospective markets, all WTO members are required toestablish 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 technologiesand do follow more rigorous and higher standards. On the contrary, Pakistan being adeveloping country has yet to progress to those relatively sophisticated standards. Among otherthings, Pakistan does not have sufficient number of high standard laboratories, which puts thecountry at a disadvantage.Relevance to the automotive parts sectorThere is also a possibility that importing countries may practice disguised protectionism bylaying down unrealistic standards that might have the effect of obstructing trade. For example,a country may restrict automotive parts by arguing that these parts are causing environmentalpollution. In such cases, Pakistani exporters may be well advised to plead that the arbitrarystandards have been creating unnecessary hurdles to trade and constitute a violation of the TBTagreement. If relief is not expected to be given by authorities in importing countries, exportersshould request the GOP to take up the matter in the WTO dispute settlement system.(Action: Entrepreneurs/Associations and GOP)Customs Valuation under GATTThe provision regarding customs valuation under GATT seeks to establish a fair and uniformsystem for the valuation of goods that provides protection to international traders from fixationof arbitrary values by customs authorities of importing countries. The agreement lays downthat the customs value of the imported goods in the case of unrelated parties will be thePage 68International Trade Centre

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 ofworking out customs value. The agreement, however, excludes items that are regardedirrelevant to fixing customs value, e.g. the price of goods on domestic market of the exportingcountry. If the customs authorities of a country have doubts about the declared value, they maydetermine the value by sequentially adopting one of the five options: (a) the value of identicalgoods, (b) the value of similar goods, (c) the imported price of identical or similar goods lessapplicable deductions for costs, (d) computed value and (e) if none of these methods work,reasonable means may be used for determining value.Relevance to the automotive parts sectorSerious problems can arise if customs authorities of a country choose to fix arbitrary values. Ifthe values fixed are excessive, the trade liberalisation policy can be effectively negated. In casevalues are on the low side, the tariff protection given to domestic manufactures will cease to beeffective. Under invoicing, if not rectified by proper customs valuation, can turn out to be amajor threat to the domestic industry. If automotive parts manufacturers or importers are facedwith the misuse of customs processes, they can agitate the matter with the relevant revenueauthority (Central Board of Revenue).Rules of OriginThe WTO agreement on Rules of Origin contains a work-programme seeking to bring aboutharmonisation of these rules in the long run. The issue of Rules of Origin does not arise incases where import and export take place on the MFN basis. It is relevant in cases where acountry is to benefit from the lower tariff available through GSP or under a regional tradingarrangement. Such concessional arrangement rightly requires the scrutiny of imported goods toensure that they are coming from eligible sources.Relevance to the automotive parts sectorRules of Origin acquire a special importance where automotive parts exports are destined for acountry granting GSP or for a member of a regional arrangement of which Pakistan is amember. Exporters will be advised in these cases to obtain complete documentation, certifyingthe Pakistani origin of the concerned articles. Importers should likewise in such cases insist ongetting proper documentation from the importing country. Certificate as to origin are issued byTDAP. Exports are advised to approach the local office of the bureau.(Action: Entrepreneurs/ Associations and GOP)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 aview to protecting human, animal or plant life or health. Under the agreement on Sanitary andPhytosanitary Measures (SPS), WTO has disciplined the exercise of discretion by membercountries by disallowing them to discriminate or misuse this authority serving as a form ofdisguised protectionism.Members of WTO are allowed to establish their own standards but it is stipulated that therelevant regulations must be based on science and applied only to the extent necessary toInternational Trade Centre Page 69

protect human, animal or plant life or health. They are not allowed to arbitrarily orunjustifiably discriminate between countries, where identical or similar conditions prevail.Member countries are encouraged to use international standards, guidelines andrecommendations if these are available.In order to make the process fair from the perspective of exporters, standards different fromthose already prescribed, can be applied. Similarly, different methods of inspecting productscan be adopted. In order to make this happen exporters demonstrate that the measures whichexporting countries have applied are at the same level of health protection as adopted byimporting countries. Once that is done, an importing country is expected to accept theexporting country’s standards and methods. This agreement also lays down that governmentsmust provide advance notice of new or changed SPS regulations. They are also required to seta national enquiry point to provide up-to-date information.Relevance to the autoparts sectorApparently, the agreement on SPS should not be relevant to the automotive parts sector.However, protectionist interests can assume any garb and come up with objections as to theimported 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, animaland plant life. In such a situation, it would be open for Pakistani exporters to press into serviceprovisions in the agreement against untenable standards.(Action: Entrepreneur/Association and GOP)Anti-dumping AgreementArticle VI of GATT 94 finds the practice of sale of products of a foreign country at less thanthe 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 importingcountry or (b) materially retards the establishment of a domestic industry. Article VI (2) of theagreement permits a country to offset or prevent dumping by levying on the concerned productanti-dumping duty not greater in amount than the margin of dumping. The margin of thedumping 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 normallyinfringe the GATT principles of binding a tariff on an MFN basis because anti-dumping actionmeans “charging extra import duty” on a particular product from a particular exportingcountry. Detailed procedures have been laid down on how anti-dumping cases are to beinitiated, how investigations are to be conducted and the conditions for ensuring that allinterested parties get an opportunity to present evidence.Normally, anti-dumping measures expire five years after the date of imposition, unless aninvestigation 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 determinedthat the margin of dumping is insignificantly small (defined as less than 2% of the export priceof the product). Likewise, proceedings must end if the volume of dumped imports is negligible.The agreement lays down that the member countries must inform WTO about all preliminaryand final anti-dumping actions promptly as well as report on investigations twice a year.Page 70International Trade Centre

Relevance to the automotive parts sectorThis agreement is important both for importers and exporters of automotive parts. If actionabledumping takes place in the Pakistani market, one can have recourse to the National TariffCommission (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 SettlementMechanism of WTO. The Ministry of Commerce is the concerned agency.(Action: Entrepreneurs/Associations and GOP)In case export of automotive parts from Pakistan faces anti-dumping proceedings in animporting country or before the Dispute Settlement Mechanism, it has to be shown thatdumping has not taken place or the margin of dumping is insignificantly small. Given theextremely small quantum of automotive parts exported from Pakistan, there is a littlelikelihood of anti-dumping action against Pakistan in the near future. Action against anunjustified anti-dumping proceeding is to be taken at the instance of the automotive partsindustry by the Ministry of Commerce. Eventually complaint will be filed before the WTOdispute settlement system. In case Pakistan is disturbed by the dumping by others, recourseshould be to the National Tariff Commission.(Action: Entrepreneurs/Associations and Ministry of Commerce)Agreement on Subsidies and Countervailing MeasuresThis agreement disciplines the use of subsidies and also regulates the actions that can be takenby the countries to counter the effects of subsidies. A country can have recourse to the WTOdispute settlement mechanism and seek the withdrawal of the subsidy or the removal of itsadverse 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 subsidygiven by its trading partners. The agreement defines a subsidy and also introduces the conceptof a specific subsidy, i.e. a subsidy available only to an enterprise/group of enterprises. Thediscipline 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 exportstargets, or to use domestic goods instead of imported goods in their manufacture. Suchsubsidies (trade distorting) can be challenged in the WTO dispute settlement mechanism.In case, it is found that the prohibited subsidies have been given, the respondent countrywill be ordered to withdraw it immediately. In case the order is not complied with thenthe complaining country can levy countervailing duty on such subsidised products.• Actionable subsidies: This category is less objectionable than prohibited subsides. Herea complaining country has to demonstrate that the subsidy has an adverse effect on itsinterests. The agreement defines three types of damage that can be caused by this classof subsidies (i) The domestic industry of the importing country is being hurt (ii) Rivalexporters 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 thesubsidising countries’ domestic market.• Exception: Subsidies given by LDCs/developing countries with a GNP of less thanUS$1,000 per capita per year are exempted from the subsidy regime.International Trade Centre Page 71

Relevance to the automotive parts sectorIn case the subsidies of any kind, described above, are given to promote the export ofautomotive parts, affected interests can use this agreement to get an order for countervailingduties. They would be well advised to take the matter with the National Tariff Commission. Onthe other hand, if allegations about subsidies (trade distorting) on the part of Pakistan are madeby an importing country, this agreement provides the exporter with wherewithal to show thatcountervailing duty should not be imposed. Should the matter require reference to WTO, theMinistry of Commerce would have to be approached.(Action: Entrepreneurs/Associations and GOP)Agreement on SafeguardsThis agreement disciplines the initiation of emergency safeguard measures by laying downrequirements for safeguard investigations. These have to be transparent as well as oblige themember countries to follow the established rules and practices. The criteria for serious injurycaused or threatened to be caused have also been laid down. The agreement also sets time limiton all safeguard actions (4 years) and addresses grey area measures by providing that themembers must not seek/take or maintain any voluntary export restraints, orderly marketingarrangements or any other similar measures. An import surge that triggers action under thisagreement is defined to be a real increase in imports, i.e. an absolute increase or an increase inthe import share of a shrinking market (even if the import quantity has not increased.)Relevance to the automotive parts sectorThis agreement can be used wherever any importing country finds that there has been a surgein imports causing injury to the domestic industry. Affected parties are well advised toapproach the government of Pakistan for remedial steps in such a case.By th e same token, the exporting country can always show that action under safeguardprovisions is not transparent or does not meet the criteria of serious injury or threat of seriousinjury.(Action: Entrepreneurs/Associations and GOP)Box 3.3 WTO Agreements in a nutshell• General Agreement on Tariffs and Trade (GATT 94) regulates the international tradein goods and rests on five pillars: Most-Favoured-Nation (MFN) Obligation, NationalTreatment Obligation, Elimination of Quantitative Restrictions, Transparency ofGovernment Regulations Affecting Trade and Tariff Bindings.• Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) seeksto reduce impediments to international trade through promoting adequate protectionof intellectual property rights. TRIPS Agreement is especially relevant for thepharmaceutical 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 Phytosanitary Measures (SPS) disciplines exercise ofdiscretion when a country wishes to disallow import of any item on the ground that itwould be hazardous to life or health of human being or disallowing import to protectPage 72International Trade Centre

human, animals or plants.• Customs Valuation under GATT – Implementation of Article VII. This agreementseeks to establish a fair and uniform system for the valuation of goods that providesprotection to international traders from fixation of arbitrary values by customsauthorities of importing countries.• Agreement on Rules of Origin seeks to clarify and harmonize rules of origin inmember countries and in particular requires members to ensure that such rules donot create distorting or disruptive effects on trade. The rules of origin are of specialrelevance in cases where a country is to benefit from the lower tariff available throughGSP or under a regional trading arrangement.• Agreement on Trade-Related Investment Measures (TRIMs) seeks to prohibitinvestment related measures that are trade distorting e.g. local content requirementsand performance requirements. It is of special relevance for automotive parts sector.• Agreement on Implementation of Article VI of the GATT 1994 (Anti-dumping)regulates 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 country if the price level causesor threatens to cause material injury to an established industry in the importingcountry.• Agreement on Subsidies and Countervailing Measures disciplines the use ofsubsidies and also regulates the actions that can be taken by the countries to counterthe effects of subsidies.• Agreement on Safeguards disciplines initiation of emergency safeguards measuresby laying down requirements for safeguard investigations.3.4. Trade conditions of the Pakistani automotive parts sectorImprovement of the market access for automotive parts manufactured in Pakistan has takenplace in the industrial countries’ markets. This has happened as a result of the WTOagreements bringing down tariffs worldwide.Box 3.4 Automotive parts – Pakistan’s exports and imports profileExports• 2005: US$24 million•Rank as exporter in the world trade: 75 th• Major export destinations: USA, Germany, Poland, Afghanistan and BangladeshImports• 2005: US$433 million• Rank as importer in the world trade: 58 th• Major import sources: Japan, Thailand, China, Turkey and UK• Applied tariffs: 35 % (50 % in some cases)Source: WTO Cell, Planning & Development Department, Government of the PunjabPakistan has also opened its market, among others, in respect of automotive parts. Since 1998the import regime of Pakistan has been significantly liberalised through reduction in tariffs,rationalisation, removal of import quotas, import surcharges and regulatory duties. TheInternational Trade Centre Page 73

unweighted (i.e. simple) average statutory tariff has come down from 47.1% in 1997-1998 to14.4% in 2006-2007. The process in fact started in 1988 after the agreement on StructuralAdjustment Programme was concluded with the International Monetary Fund (IMF). In thecase of Pakistan, unilateral liberalisation has been the principal avenue of liberalisation oftrade. Pakistan has been complying with all its commitments under WTO. The net actualliberalisation on the part of Pakistan has been much more than multilaterally required in theWTO agreements. Some experts are of the view that we should not have unilaterally reducedto such a steep extent.Pakistan has also opened its automotive parts market substantially for foreign suppliers, albeiton a higher rate of 35% (and in some cases at 50%) as compared to other countries. Secondly,the increasing competition in the world has helped in reducing prices and improving thequality of inputs, i.e. improve the import sourcing.The WTO system is dynamically evolving. The WTO regime is not static but is dynamicallyevolving. The way negotiations on DDA proceed and the ultimate agreements reached willhave an impact on international trade.3.4.1 Other countries’ access to Pakistan (threats)Rapid growth of importsPakistan’s imports of automotive parts are many times larger th an its exports at this point intime. A few figures for comparison are:Table 3.1 Pakistan’s import and exports of automotive parts (US$ million)Year Exports Imports Trade imbalance2001 10 155 -1452005 24 433 -409As stated above, the tariff duty applied by Pakistan to the import of different automotive partsproducts generally is 35%, 16 which is relatively high compared to a large number of othercountries.Due to increasing needs of autoparts in the country, a rapid growth of imports under the WTOliberalised import regime has taken place. The market share of the main automotive partsexporting countries has been increasing at a rapid pace, e.g. US and Japan. Other countries likeThailand, Turkey and Germany are also exporting more and more to Pakistan as their productsare found attractive in respect of quality and price.Has liberalisation of trade posed a threat to the automotive parts industry of Pakistan? In theliberalised world under WTO, one cannot expect to have a closed economy. Hence one shouldnot be upset by the flow of imports. The rate of growth of imports should, however, be a matterof concern and constitute a potential threat. Effectiveness of the system can be greatly nullifiedif the malpractice of under-invoicing is not checked.16Market Access Map, ITC.Page 74International Trade Centre

Pakistan’s tariff rates are relatively high. The interest of domestic producers has been dulytaken into consideration in the new Tariff Based System (TBS), which has replaced the WTOnon-complaint (TRIMs) deletion (LCR) programme. Under the new system, as mentionedearlier, import duty at 50% is leviable on some of the components/parts while in case of allother parts the rate of customs duty is 35%.There is, prima facie, no serious threat to this industry at present. However, with greaterliberalisation in the future, the import of automotive parts may increase further. In order tocope with this emerging situation, Pakistan’s automotive parts industry will have to improveprice competitiveness and quality of its products. In appropriate cases the affected industriescan approach the National Tariff Commission, which provides an institutional mechanism fortrade remedial action.In addition to the above, the Pakistani domestic industry should keep a watch on customsvaluation and in case of under-invoicing seek redress from the Central Board of Revenue. As amatter of fact, under-invoicing/mis-declaration and smuggling constitute far graver threats tothe domestic industry than the liberal import regime.3.4.2. Pakistan’s access to other markets (opportunities)Improved market accessSustained growth in export earnings has taken place. In year 2001, the export earningsamounted to US$9.8 million. There has been a sustained growth in export earnings e.g. for theyear 2005, these reached US$24 million. Though it cannot be claimed that WTO is the onlyfactor underlying this growth, yet it can be inferred that the liberalised WTO regime has madean important contribution to the better export performance as the market access for Pakistan’sindustry has improved under the WTO regime. A study of various tariff structures in severalcountries has shown that a large number of countries have either lower tariff rates or even zerotariff. See Table 2.12 for details.Market access is not a problem as such for Pakistan’s automotive parts. The main problemfaced by Pakistani exporters is that of the supply side which needs to be addressed. Pakistanhas to improve the capacity to meet international demand by producing automotive parts ofgood quality and standard at competitive prices. Under the WTO liberalised import regime,Pakistani exporters should, in particular, take full advantage of markets where tariffs are verylow.3.4.3. Third parties’/countries’ access to other markets (threats/competition)Competition/potentialThere is a great potential for increasing exports. Pakistani automotive parts exports represent anominal share in world exports. There is a great potential for an increase of Pakistan’s sharegiven the duty-free access in many markets. Pakistan has a potentially satisfactory supplycapacity, e.g. good engineering skills, lower wages and cheaper raw materials. After enteringinto 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 forInternational Trade Centre Page 75

the member countries. The Government should, however, facilitate imports at internationallyneutral prices for components and parts that are required for manufacturing finished products.Need for greater complianceThere is a clear need to improve compliance with the WTO agreements. To compete ininternational markets Pakistani exporters will have to become more careful about compliancein particular with TBT. Pakistan has to meet emerging stringent safety requirements.Box 3.5 At a glance - Impact of the WTO Agreements on Pakistan’s autoparts sectorExports• Better market access for Pakistan in the industrial countries.• Tariff rates have been drastically reduced in developed countries’ markets (very lowor even zero).• Sustained growth of export earnings has taken place.• Great potential for increasing exports but supply side problems must be tackled.• Manufacturers must learn to produce what is liked and required abroad and oncompetitive prices.Imports• Substantial opening of Pakistan’s market albeit on relatively higher duty.• No serious threat at present but problem is caused by malpractice of under-invoicingand misdeclaration.• Trend of import growth increasing – potential threat.Source: WTO Cell, Planning & Development Department, Government of the PunjabPage 76International Trade Centre

4 Obstacles and shortcomings to exportThis is a list of the most important obstacles and shortcomings mentioned by companiesinterviewed 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 clientson time• Lack of market information resulting in low level of awareness, which is affecting theexports 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 veryexpensive 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, thequality of work produced is low. In-house training is one way of improving the qualityof 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 andclearance department) (some parties mentioned corruption and bribery). Time is wastedand profitability of the business is badly affected.• Poor infrastructure, e.g. power failure and lack of resources. It is the government’sresponsibility to provide these facilities. Without a No Objection Certificate (NOC), theGovernment does not allow putting up generators• The Government offers no incentives for the use of latest technology, resulting inwastage of time. The image of Pakistani products therefore goes down.• Import duties on imported raw material are very high. This increases the cost ofproduction.• Sales tax procedure is very lengthy and cumbersome.• The Government should give proper financial incentives. Procedures for taking loansshould be made easy.• The Government should show interest in this sector• Image of Pakistan is very bad. Companies are exporting substandard products. Poorquality goods are made and as a result they end up getting fewer orders.International Trade Centre Page 77

• The Government should make policies for the sector by taking into account the problemsof exporters, e.g. by including a representative from the sector in the policy-makingcommittee.Page 78International Trade Centre

5 Export services in Pakistan5.1 Export service providers5.1.1 Trade Development Authority of Pakistan — TDAPIn 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 thepromotion and boosting of export. Since EPB's inception in 1963 as an attached department ofthe Ministry of Commerce, it has facilitated exporters in overcoming difficulties faced by themon the supply and demand side of exports.On the demand side, TDAP helps exporters to participate in exhibitions abroad and sendsdelegations to export markets with a view to exploring new markets and developing thetraditional markets. On the supply side, TDAP has established over 32 training institutes andprojects in various export sectors to train necessary manpower that can manage the export tradeand industry professionally, meeting the requirements of the export markets. Exportpromotional activities are carried out in co-ordination with trade bodies at home and Pakistan'strade missions abroad.TDAP has its head office in Karachi, the main industrial and commercial centre and a majorexport outlet of the country. TDAP has a staff of around 800 of which close to 600 arepermanent.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 disputesRegulatory 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 certificatesFunctions of TDAP are listed below.International Trade Centre Page 79

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/workshopsCommunication• Publication of trade inquiries/opportunities• Library• Export intelligence bulletin• Counselling• Year Book - statisticsHuman resource development• Training institutes• Seminars on ISO 9000 and 14000• TQM• Social sector concerns• Environmental concerns5.1.2 Small and Medium Enterprise Development Authority — SMEDAThe premier institution of the government of Pakistan under the Ministry of Industries,Production and Special initiative, SMEDA (www.smeda.org.pk) was established in October1998 to take on the challenge of developing small and medium enterprises (SMEs). With afuturistic approach and professional management structure it has its focus on providing anenabling 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 alsofacilitates other stakeholders in addressing their SME development agendas.SMEDA has its head office in Lahore and regional offices in Lahore, Karachi, Peshawar andQuetta.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 developmentPage 80International Trade Centre

• Information services (library, databases, project briefs, pre-feasibilities)• Business matchmaking5.1.3 Federation of Pakistan Chambers of Commerce & Industry —FPCCIMr. 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 limitednumber of bodies. The FPCCI is the supreme trade and industrial body in the country. Itenfolds all chambers and national associations representing specific trades and/or industries.Indeed, it is compulsory for all chambers and associations of commerce and industry tobecome members of the federation.Being federal in its constitution, the federation takes up only such issues and matters asconcern the country's trade and industry as a whole; in other words, the interests of allchambers and associations together, e.g. economic planning, investment schedules, tax policy,money and credit transport and communication, export promotion, organisation of generaltrade missions to foreign countries, receiving general trade missions form abroad etc. Mattersconcerning specific trades and/or industries (e.g. cotton or steel) or individual firms andcompanies are left to associations and local and regional chambers.The head office of FPCCI is based in its own building, Federation House, in Karachi. FPCCIhas 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 promotionFPCCI acts as a forward post of Pakistan's private sector abroad. In the first place, it maintainsconstant liaison with the diplomatic and commercial missions abroad and takes special care todevelop, promote and strengthen cooperation and contacts with its counterpart bodies abroadthrough exchange of delegations, literature, directory(ies), business information, etcCooperation agreementsFPCCI has signed cooperation agreements with a number of foreign counterpart chambers ofcommerce including those of Japan, South Korea, France, Netherlands, Germany, Turkey,Bangladesh, Hungary, Romania, Malaysia, Philippines, Singapore, Oman, Australia, BruneiDarussalam, Indonesia and Syria. These agreements envisage a regular exchange of data andinformation on trade and investment opportunities, visits of trade and investment delegationsand participation in trade fairs and exhibitions.With the signing of cooperation agreements, joint business councils/economic cooperationcommittees have been set up in FPCCI and its counterpart chambers, which keep constantliaison with each other throughout the year. They have obligation to meet alternately once ayear to dispose of agreed agenda, which pre-dominantly relates to the promotion of two-waytrade, narrowing down trade gaps, identification of new commodities for mutual exchange, etc.Investment affairs, transfer of technology and training of personnel are the other areasnormally deliberated on.International Trade Centre Page 81

Bilateral trade committeesA large number of bilateral trade and industry committees have been set up with severalcountries of the world for the promotion of trade, joint ventures and economic ties. Thesecommittees invite trade missions, trade officials and diplomats of the countries concerned forexchange of views and review of difficulties in the fields of trade, joint venture, investment,etc.Standing committeesFPCCI has constituted a number of standing committees, which deliberate intensively ondifferent 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 thegovernment for consideration. These standing committees have been established on theimportant 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.ExhibitionsFPCCI also undertakes the responsibility to organise, in consultation with Export PromotionBureau, Pakistan's participation in international trade fairs and holds single country exhibitionsof Pakistani goods and services in selected countries. At home, it also organises internationaltrade fairs (such as PITF-84) and national industrial exhibitions and fairs of specialised singlecommodities.Export trophy awardsTo encourage the export of Pakistan's goods and technical/ consultative services, FPCCIinstituted export trophy awards in 1976-77. The awards are given every year to those whoexcel in promoting the export of goods and services both in quantum, value and to newdirections. In addition, the federation has instituted a 'Businessman of The Year’ award, whichis conferred on a businessman/industrialist who, in the judgment of FPCCI, has made anoutstanding contribution to the growth of national economy. A 'President of Pakistan' trophy isalso conferred on a business house has made the overall best and highest performance inexports. FPCCI has also instituted a ‘Best Lady Exporter’ gold medal, which is conferred on alady who, in the judgment of FPCCI, has made the best export performance during the year.ArbitrationFPCCI has set up arbitration machinery under Section 12 of the Trade OrganisationsOrdinance, 1961, to arbitrate in matters of disputes arising between member bodies of FPCCIand its members.Pakistan Shippers’ Council (PSC)The Pakistan Shippers’ Council, having the status of a Standing Committee of FPCCI, worksfor the protection and furtherance of the interests of exporters and importers in Pakistan inrelation to the transportation of goods by sea, land and air, and undertakes studies on problemsPage 82International Trade Centre

affecting shippers in Pakistan. PSC is affiliated to the Association of Shippers’ Councils ofBangladesh, 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 freightforwarders who facilitate the transportation of import and export cargo of Pakistan. PIFFC isaffiliated with the International Federation of Freight Forwarders Association (FIATA).Trade delegationsFPCCI sponsors general and specialised trade delegations to various destinations in the worldto promote export of goods and services and to locate most competitive sources of imports tosave foreign exchange. Public sector industries and business houses’ representatives are alsoassociated with such missions. Similarly, buyers and sellers missions from abroad are invitedby FPCCI besides investment and joint venture delegations.Pakistan's trade missions abroadBriefing of Pakistan's trade officials abroad and an exchange of information, country profileswith them is the hallmark of FPCCI on this front. Since economic considerations haveovertaken political considerations in the present world environment, even ambassadors/highcommissioners and commercial counsellors of Pakistan posted abroad visit FPCCI forindividual or collective briefing on economic and trade ties/issues before taking up assignmentand during the course of assignment.International symposia/seminars/workshopsHolding of international seminars/workshops/symposia in cooperation with internationalagencies in the fields of trade, industry, joint venture, training of manpower, etc is a regularfeature of FPCCI. The programmes familiarise participants from business and industry with thelatest market trends, the state of competitiveness, trade regulations, customs procedure, dutystructure, port facilities, containerisation system, incentives offered by competitors, etc.5.2 Export services as they actually are – expressed viewsMost interviewees were of the view that SMEDA is offering no export services. Very fewmentioned that SMEDA has provided facilities like training programmes, subsidies, loan, and0% export duties, which according to them are effective as it really helps in giving a boost toexports. According to 53% of the exporters, TDAP has done a lot to promote this sector. Thebody frequently organises conferences, exhibitions and seminars, but according to theinterviewed exporters they produce no concrete results. Recommendations by the exporters areignored completely. Most of the exporters felt that all these efforts made by SMEDA andTDAP are only for big companies and there are no appropriate facilities for smallexporters/companies.International Trade Centre Page 83

5.3 Export services as they should be – expressed views• Exhibitions, seminars and trade fairs should be organised at international and local levelon a regular basis. Every exporter should take part in it. SMEDA should arrange one-ononemeetings with experts in this field. TDAP should not charge anything for putting upstalls 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 aswell as global market situation;- Abandon deletion programme as it is costing thousands of jobs and incurring loss ongovernment revenue;- The export procedure and policies are very lengthy and complicated. The governmentshould 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 - examplesUnder the flag of development aid, some European countries took the initiative many years agoto establish agencies that sustainably and effectively promote the competitiveness of emergingmarkets and markets in transition. Two major organisations are leading in this field.5.4.1 CBI – The NetherlandsThe Centre for the Promotion of Imports from Developing Countries (CBI) offers thefollowing services:Market informationA variety of tools to keep exporters and Business Support Organisations (BSOs) in developingcountries in stride with the very latest developments on the EU market. Market surveys arepublished on a regular basis.Company matchingAn on-line facility that links well-versed suppliers in developing countries eligible for CBIassistance to reliable importing companies in the EU and vice versa.Page 84International Trade Centre

Export developmentExport development activities are designed to assist entrepreneurs in developing countries inentering and succeeding in the EU market and/or consolidating or expanding their existingmarket share.TrainingTraining 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 developmentInstitutional 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 MediumSeized Companies. For more information the CBI website can be visited. This website givesthe 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 10suppliers are participating in the Mobile Equipment Programme. This programme started in2006 and continues until 2009. Also Pakistani companies have been selected for the Castingsand Forgings Programme, which starts in 2007.CBI (Centre for the Promotion of Imports from Developing Countries)Beurs-WTCBeursplein 373011 AA RotterdamThe NetherlandsWebsite: www.cbi.nl5.4.2 SIPPO - SwitzerlandSIPPO is using trade promotion programmes and associated matchmaking instruments forsmall and medium sized enterprises in emerging markets to enter Switzerland and theEuropean Union market.International Trade Centre Page 85

The services offered by SIPPO are very similar to those from CBI, and the two organisationscooperate closely.SIPPO (Swiss Import Promotion Programme)Stampfenbachstrasse 85P.O. Box 4928035 ZürichSwitzerlandWebsite: www.sippo.chPage 86International Trade Centre

6 Recommendations6.1 Overall overviewThis chapter summarizes the most important SWOT issues as well as obstacles andshortcomings at the company and country levels. Also listed are suggestions on who shouldtake 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 inPakistan, one might conclude that there are many gaps to close and that a lot of investment isnecessary for Pakistan to play a global role. Many processes require different technologies andit 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 shouldbe in the coming 10 years.Also, close cooperation or making clusters with colleagues in branches can strengthenindividual competitiveness as well as the supply chain.Instead of investing in a range of R&D facilities, it makes sense to investigate whichinvestments need to be done at company level and which could be shared by the industry. InEurope, this facility sharing is practised by many SMEs.It should also be borne in mind that development of the autoparts sector will have a significantinfluence on Pakistan’s trade balance through import substitution: A dollar saved is usuallyworth more than a dollar earned.6.2 Recommendations – at three levels6.2.1. Individual companiesOEMs and Vendors are the most influential players in the automotive industry as it is throughthem that changes and improvements can be implemented. When these companies becomemore efficient and profitable, the industry as a whole will reap the benefits. The individualcompanies must partner up with other parties, like trade associations, unions, government andbanks, etc in an effort to improve and expand the industry. The following are a fewrecommendations, which if implemented would benefit both the individual companies and theindustry.• A major drawback in the automotive industry has been the lack of skilled labour and theabsence of proper training facilities. An in-house training facility is much needed withinthe local companies. It would perhaps be beneficial in the short term if a cluster ofcompanies entered into joint ventures to provide in-house training for their particularservices. For the individual companies to actually invest in such a programme these inhousetraining facility centres should be heavily subsidised by both governmentministries and trading associations. For a long-term venture, the companies within theautomotive industry should enter into an association with the government, schools anduniversities to establish a sustainable school or university which will specialise intraining and educate students in both technical as well as management skills pertaining tothe automotive industry.International Trade Centre Page 87

• Individual companies need to make a very detailed inventory regarding the specificproduct needs and requirements of the automotive industry. This would help inestablishing the much needed research and development capabilities and facilitiesthat are severely lacking within the industry. Such information should be shared withinthe industry, hence benefiting the industry as a whole.• The industry is suffering from limited production capacity, despite the investmentsmade in capacity enlargement. Teamed with unions as well as the government,individual companies should attempt to introduce more shifts and attempt to make theirassembly lines more efficient and productive.• Although the automotive industry has come a long way since its birth in 1955 andcontinues to grow at a phenomenal rate, there still remains a dearth of export knowledgeand market information with the industry. Companies should take the help ofmarketing offices, support organisations like CBI (The Netherlands) and SIPPO(Switzerland), the government and trade associations to conduct frequent marketsurveys, 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 importingmore expensive material. It must be realised that although it may seem as if their costsare increasing, in the long term it will be more profitable as it would reduce the rejectionrates during the various process steps. Furthermore, to ensure quality standards, aquality system like the ISO 16949 should be implemented and strictly followed.• Pakistan’s automotive industry still remains highly dependant on labour and has not yetbeen able to use the latest technologies and machinery. With the forecasted rise inquantities it is essential for investments to be made in the latest and most moderntechnologies. However, the balance between the machine hourly costs and the operatorcost must be closely guarded in order to maintain the available competitive edge of lowlabour costs.6.2.2 Trade associationsTrade 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 andGujranwala). The role of these chambers, in addition to their regular function, should be to setup business support centres that should provide the following services:• The centres should be equipped with R&D facilities for entrepreneurs with the latestprototype equipment to be used as laboratory projects. For instance, if an entrepreneurwishes to invest in an innovative product, he/she should have the opportunity to testwhether the idea is feasible, and whether it has a high rate of success or not. Thisresearch facility should be made available to entrepreneurs at a subsidised cost. Suchcentres are already well established in Japan and other developed countries in order topromote the industry.• The centres should set up a modernised technical computer library that is easilyaccessible and free of cost. This library should be equipped with latest resources from allover the world, up-to-date technology, latest market information, supply sources,Page 88International Trade Centre

available management and technical skills and other conveniences and concessions tohelp them become globally competent.• They should offer feasibilities for different business proposals as well as forinnovative projects relatively free of cost. They should also provide management andfinancial assistance for these projects from the feasibility stage right up till thecommercialisation of the project.• These centres should set up warehouses for imported raw materials, parts andcomponents. The centre should assess the total volumes needed in the country andnegotiate discounted rates from large international suppliers. This implies that importedraw materials be bought by the centres in bulk at wholesale discounts and then sold tolocal entrepreneurs when needed on a no-profit basis. This will help the localbusinessman to be more competitive.• Management skills and entrepreneurial skills should be taught and discussed at thecentres. Workshops, forums, discussions, etc. should be held on issues confrontedlocally, and to upgrade competitive competencies at the global level.6.2.3 Government supportThe Ministry of Industry needs to initiate programmes that are aimed at developing theautomotive industry and assisting it in reaching that level of maturity, which will allow it to bea 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, andenhance innovation and investment through various government programmes and policychanges. The government must focus on areas that will lead to competitive and sustainabledevelopment of the industry. R&D, human resource development and testing facilities are oftop 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 supporthas 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 knowledgeinstitutes, 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 draftedby 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 asincome tax, sales tax and social security in order to overcome their inability to set up anInternational Trade Centre Page 89

effective networking at their individual level. This would facilitate the industry toconcentrate on the modernisation, expansion and globalisation of their businesses, ratherthan developing networking with the 101 different regulating agencies.• Introduction of a development-banking concept for new business, where failures areconsidered acceptable. Not only would this enable entrepreneurs to feel less intimidatedwhen starting a new business idea, but also it would ensure that if a business fails, theowners would not be left in disarray and thrown behind bars. Tax credits/exemptionsshould be granted to entrepreneurs starting with new innovative ventures until the equitycontribution and loan of the development bank is repaid in full.• A development fund is to be created and loans or grants given out for developmentalpurposes or for seeking the technical know-how/collaborations. These loans should bemade available at considerably lower rates (~50% less than the normal rate) and shouldbe payable over a longer period of time, even 20 years or more). This would encouragepeople to invest in projects that have a much longer pay back period. Furthermore, thiswould 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, thedevelopment bank should finance the project through refundable equity contribution(repayable at the option of the entrepreneur). This suggests that the bank should share apartnership with the business owner, thus sharing the profits and losses of the businesson an equal basis. This relationship should be continued until the entrepreneur is able torepay the entire amount of the banks equity contribution. Management experts, hired bythe bank, should review the projects on a periodical basis, until the project starts makingprofit and repayment of equity/loan is made in full.• Pakistan’s levels of maturity in the automotive industry have largely been dwarfed due toits poor human resource development coupled with a barely existent R & D sector. Thegovernment must initiate programmes that will help develop these two segments of theindustry. The skill levels in the automotive industry especially in the vending sector areat alarmingly low levels. Skilled human resource is of huge significance to theautomotive industry. An effective approach to improve the levels of skills in theautomotive industry is for the government to establish or promote in-house factoryschools for the training of the employees from within the automotive industry. Thegovernment should provide vendors with tax incentives as well as funds to encourage thevendors and OEMs to set up such institutions. These schools and institutions should bemanaged by the industry, with minimum interference from other governmentdepartments.6.3 The way forward – if we had a millionHere is a list of hands-on projects that could improve the conditions for production and trade inthe sector. It is a wish list based on meetings with parties who assisted in the preparation of thestudy. Most of the project proposals are related to some of the conclusions and suggestions inthe study.All costs are early-stage estimates inserted as magnitudes for the ease of discussion of followupfrom the study. The project proposals are independent of each other (unless otherwiseindicated) and are listed in no order of priority.Page 90International Trade Centre

The study does not speculate on possible funding for the implementation of the projectsproposed. 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-generatedfunds (selling services).The project proposals are listed in no order of priority.6.3.1 If we had US$60,000Organise trade missions to PakistanProposalThe best method to take away the prejudice against Pakistan and toimprove its total image is to invite potential export customers to visit thePakistan automotive industry and to show the capabilities, including apresentation from the Government on how they stimulate and support theindustry in their export activities.Costs Organisation costs US$ 20,000Lodging and transport costs US$ 40,000Total costs per mission US$ 60,000PartiesThis activity can be executed by TDAP in close cooperation withPAAPAM and their affiliated counterparts abroad.6.3.2. If we had US$300,000Establish a national automotive knowledge/information centreProposalThe industry is having difficulty in hiring skilled labour and is facing alack of training. As improvement in knowledge transfer between theindustry and knowledge institutes needs time, it might be considered thatthe sector sets up its own Automotive Centre that could facilitate theautomotive industry as a whole. The activities can have a multi-functionalcharacter, for instance:• Management skills and entrepreneurial skills should be taught anddiscussed at the centres. Workshops, forums, discussions, etc.should be held on issues confronted locally and to upgradecompetitive competencies at the global level.• They should offer feasibilities for different business proposals aswell as for innovative and technology projects at nominal cost. Theyshould also provide management and financial assistance for theseprojects from the feasibility stage right up to the commercialisationof the project.• Mediating between the SMEs and the knowledge institutes.• Match-making between the SMEs for establishing clusters.International Trade Centre Page 91

• Giving specific training for the suppliers to the automotive industry.NeedsPhysical resources• Building with 2 offices, meeting room and training room, includingfurniture for max. 70 students• 3 personal computers, including network access• 1 laptop• Training methods, like PowerPoint software, overheadprojector/beamer• Copier machine, etc.Human resources• One office manager• Two assistants• Temporary trainers, depending on the kind of training sessions.Costs Basic capital US$200,000Investments US$ 30,000Salaries US$ 50,000Rental costs (building) US$ 20,000Total cost for first 2 yearsUS$300,000It is supposed that the industry pays for the training courses initially tocover the trainers’ costs/fees when they participate.The final aim is that the centre will be self-financed after three years.PartiesInitiative and responsibility for organising and control: PAAPAM incollaboration with EDB and TDAP.6.3.3 If we had US$1,000,000 or moreA central R&D laboratoryProposalAs investment in a central laboratory with design and test equipment iscrucial for SMEs, it would be of great help in keeping the costscompetitive if a pilot production laboratory could be set up where anentrepreneur could develop a product and do a test and trial run. Thecentre should be equipped with R&D facilities for entrepreneurs with thelatest prototype equipment to be used as laboratory projects. For instance,if an entrepreneur wishes to invest in an innovative product, he/she shouldhave the opportunity to test whether the idea is feasible, and whether it hasa high rate of success or not. This research facility should be madeavailable to entrepreneurs at a subsidised cost. Such centres are alreadywell established in Japan and other developed countries in order topromote the industry.The centre should set up a modernised technical computer library that iseasily accessible and free of cost. This library should be equipped withPage 92International Trade Centre

latest resources from all over the world, up-to-date technology, latestmarket information, supply sources, available management and technicalskills and other conveniences and concessions to help them becomeglobally competent.NeedsThe indication has to come from the industry. Below just a few examplesare 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$ 300,000Road simulator US$ 400,000Corrosion tester US$ 50,000Finite element method station US$ 100,000Noise test chamber US$ 400,000Total costsUS$1,250,000PartiesSponsored by a university and supported by incentives from thegovernment, this laboratory based on pilot-type equipment could be set upnear an automotive cluster in close cooperation with the associations andthe industry.6.3.4 If we had a further US$1,000,000 or moreInstall consolidated warehouseProposalNeedsA consolidated warehouse of imported raw materials, parts andcomponents should be set up. The warehouse should assess the totalvolumes needed in the country/cluster and negotiate discounted rates fromlarge international suppliers. This implies that imported raw materials bebought by the consolidated warehouse in bulk at wholesale discounts andthen sold to local entrepreneurs when needed on a no-profit basis. Thiswill help the local businessman to be more competitive.The indication has to come from the industry. Below just a few examplesare 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.International Trade Centre Page 93

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AnnexesAnnex A — Competitiveness Support Fund (CSF)BackgroundThe 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 policyframework need for innovation-based competitiveness.CSF will support Pakistan’s goal of a more competitive economy by providing input intopolicy decisions, working to improve regulatory and administrative frameworks and workingto enhance public-private partnership within the country. CSF will also provide technicalassistance and co-financing for initiatives related to entrepreneurship, business incubators andprivate sector-led initiatives with research institutes and universities that contribute to creatinga knowledge-driven economy. CSF activities will help all producers along the value chain thatcontribute to ultimate product quality. By obtaining better value and better prices for qualityproducts, and improving cooperation throughout the Pakistani economy, CSF will contribute topoverty alleviation by providing more income for producers and better employment prospectsfor employees.ObjectiveThe Competitive Support Fund (CSF) has been set up with the sponsorship/financial assistanceof USAID and the Ministry of Finance, Government of Pakistan. CSF plans to conduct anumber of studies to determine the existing competitiveness of selected industrial sectors as tohow their competitiveness can be improved in the international markets through exports. CSFwill use these studies to make recommendations to the highest level of the government forpolicy-level intervention to make selected sectors internationally competitive. One of thesectors 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 competitivenessadvantage of the local auto vendor industry along with identification of the problems beingfaced by the sector and recommending solutions for the same both at policy and programmelevel.There are a number of government agencies that are involved in regulating, controlling andmonitoring the auto vendor industry. These are TDAP, Pakistan Quality Control Authority(PSQCA), Ministry of Industries, Production and Special Incentives (MOIPSI) and CentralBoard of Revenue (CBR), etc.Scope of workIn order to assist the CSF activities, it is planned to carry out this study ‘Policy Analysis on theCompetitive Advantage of Auto Vendor Industry in Pakistan - Problems and Prospects’, withthe following terms of reference:International Trade Centre Page 95

The study will conduct a comprehensive survey as part of policy analysis on the competitiveadvantage of the local auto vendor industry. It will also identify the problems faced by thesector 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, andmachined 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 studywill identify issues relating to the overall competitiveness of the auto vendor industry forthe local market as well as for exports.• Develop recommendations for improving competitiveness of the auto vendor industry interms of policy measures (tariff and non-tariff measures), marketing of the locallyproduced parts in the international markets, development of human resources and theneeded physical infrastructure, etc.Page 96International Trade Centre