As part of the Competition Commission of Pakistan (CCP)’s on-going programme of sectoral research, initiated by Chairman Khalid Mirza, – titled, competition impact assessment studies – two new sectoral studies covering Automobiles and Polyester Staple Fibre have been released. The primary purpose of CCP’s research programme is to assess the competition vulnerabilities in various sectors. The Automobile Study finds that the Pakistani passenger car market only has three major players, each of which dominates a different segment of the market based on the size of the car. The concern vis-à-vis competition is the neat division of the market among the three players in the passenger car market, the steady market shares each of them enjoyed in the last decade, signifying a lack of competition. Clearly, any loss of competition in the market is bad news for the consumers, who have the same limited choices albeit at rising prices. The absence of competition has let the local industry to dictate the prices. The continuous price increases of local automobiles since 2006 has put new cars out of range of middle-income groups. Statistics depict a fall in sales on year-on-year and on a month-on-month basis but the prices have shown an upward trend - Honda, Indus Motors and Pak Suzuki increased their prices thrice in 2008. It seems that the local assemblers have adopted a strategy of increasing profits on limited production instead of increasing volumes. Most carmakers have been announcing plans to increase production volumes over the next few years but these plans have yet to come to fruition and the problem of late delivery of cars remains unchanged as a source of dissatisfaction among buyers. It has not been uncommon for customers to pay additional money to ensure delivery of their vehicles within a short time period. Alternatively, customers pay the full price of the vehicles months in advance and the assemblers get benefits from their tied investment. In the downstream market, dealers of the manufacturers/assemblers act as mere agents and have no real incentive to compete in the market. Study of the dealership agreements revealed, it is the company that controls the quantity to be sold and the price to be charged. These dealership agreements go on to eliminate intra-brand competition by disallowing discounts. Faced with low volumes, under-utilisation of capacity, high prices, late deliveries, premiums, and slow transfer of technology, effective competition in the automobile sector is much more needed now than ever before to keep the industry afloat. The Report makes the following suggestions to increase both intra- and inter-brand competition in the market and allow for greater market efficiency. Tariff on import of new cars in all segments of the market must be reduced to bring protection to manufacturers down to 5-10 percent: Currently, car imports are subject to excessively high duties. Competition can be improved significantly by allowing import of new cars at lower prices. This should be pursued with the current investment policy of attracting other car manufacturers in the country. Change in market supply chain structure and terms applicable to purchasing vehicles: The industry must move from a reactive demand-based model to a proactive supply based model in order to make it more competitive. As is the case with most manufacturers in developed countries, including Honda, Toyota, and Suzuki, customers place their orders directly with the manufacturers via the Internet. This creates a direct linkage between the two, reducing the role of dealers, and helps the manufacturer in the inventory management and production planning process. Consistent and long-term policies: The policy environment requires continuity, consistency and connectivity. Any change in the policies should be made giving due regard to the consumers and the prompt technology transfer rather than protecting the manufacturers/assemblers. The Polyester Staple Fibre Study noted that textiles consisting of yarn, cloth, knitwear and apparel are amongst the most important sectors in Pakistan’s economy, accounting for 38 percent of total manufacturing value-added and 8 percent of GDP. In aggregate, textiles contributed over 50 per cent of total exports in 2008/09. Polyester staple fibre (PSF) is one of the key sub-sectors within the textile industry as it used by for blending with cotton and viscose to produce value-added blended textiles. Considering its importance, the CCP conducted an in-depth competition impact assessment of the PSF sector. The report has found that the textile industry requires about 454,000 MT of PSF annually, 80 percent of this requirement is currently met by the local PSF industry consisting of five producers. As PSF is a petrochemical-based industry international crude oil prices play a pivotal role in determining PSF prices in the country. The PSF industry claims that about 75 percent of its manufacturing cost depends on its raw materials i.e., PTA and MEG (crude oil by-products). The demand and supply of the downstream industry, business negotiated discounts, credit facilities based on volumes and geographical location of the customer are other major factors in PSF price determination besides power and fuel costs. Generally, the PSF industry is known as an import-led industry where domestic prices are kept marginally higher than imported prices taking advantage of shorter delivery times and the ability of domestic producers to develop long run business relationships with local users of the commodity. Despite being a highly concentrated industry, there do not appear to be any cartelization or abuse of dominance issues but price parallelism prevails for obvious reasons. Another increasingly relevant factor is the demand and supply situation of PSF in China which is rapidly becoming a major source of imports in Pakistan. The CCP report further illustrates that the domestic PSF industry has essentially flourished as a result of the tariff protection provided by the Government and this industry has never been exposed to foreign competition. This is why when the Government reduced the custom duty on PSF imports from 6.5 percent to 4.5 percent in 2008/09, the domestic industry reacted negatively as profitability and capacity utilization declined in the local industry. The report concludes that a comprehensive study of the entire textile value chain needs to be undertaken in order to rationalize the tariff structure of the entire value chain of the industry instead of ad hoc changes in tariffs of individual segments of the industry in response to pressures emanating from particular sub-sectors of the textile industry. The long run future of the PSF industry will be determined by its ability to match international levels of efficiency and not by tariff protection.
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