De-Mystifying Auto Industry of Pakistan.

Governments the sector as a drain on foreign exchange and treats it as a cash cow for collecting taxes. Presently, taxes range between 37 to 43% on every car being produced in Pakistan while most of the assemblers/manufacturers are more focused on their principal’s bottom lines in short term than to have a long term vision of sustainability and growth.

Since long, auto industry of Pakistan is engulfed in haze. Stakeholders define the purpose and benefit of having auto manufacturing in Pakistan according to their own vested interests. Importers of new and used cars propagate that local manufacturing is not good for the country and we shall be following the import model practiced by oil rich gulf countries.

Governments often regards the industry as a drain on foreign exchange and simultaneously treat it as a cash cow for collecting taxes. Presently taxes ranges between 37 to 43% on every car being produced in Pakistan. Most assemblers/manufacturers too are more focused on their and their principal’s bottom lines in short term than to have a long term vision of sustainability and growth.

Hi-tech components and assemblies like complete Engine including Carburetor, ACG, Front and Rear Shock absorbers, Clutch, Chains, Ignition Coil etc. are few examples where Japan’s leading companies are providing technical support to Pakistani companies.

Another myth surrounding the industry is the overall composition of the auto manufacturing industry. Automobile horizon is not limited to passenger Cars and SUVs only. It also comprises of sectors like Motorcycles and Tractors where we are world competitive in term of value provided to end customer. Main reason for competitiveness in these sectors is the localization achieved in these sectors. 90 to 95 % parts for Tractors and Motorcycles are manufactured in Pakistan, creating jobs in millions, contribute heavily in GDP of the country and pay more than the due share in the taxes of the country.

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Very complex and critical components of motor cycles, especially of Japanese market leader are produced in Pakistan under technical assistance of Japanese companies. Hi-tech components and assemblies like complete Engine including Carburetor, ACG, Front and Rear Shock absorbers, Clutch, Chains, Ignition Coil etc. are few examples where Japan’s leading companies are providing technical support to Pakistani companies.

Manufacturing these critical and costly components in the country is also contributing towards national goal of “Make in Pakistan”. We are thankful to Japan for the transfer of technology for manufacturing these components, resulting in good quality motorcycles at affordable prices to the masses of the country. At the same time, better quality is getting the acknowledgement of the end customer and is resulting in constant gain in market share by Japanese motorcycles.

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Pakistan is producing the cheapest tractors in the world, even cheaper than India and China. Once again the only reason is the far sightedness of Tractor producers to get the components developed and produced in Pakistan. Since long, almost all Engine, Transmission and Suspension parts are manufactured in the country, which are then assembled to form the tractors. Made in Pakistan tractors bring in the benefits to the whole farm community and leading the way for the sustainable growth and food security of the country.

Now the Achilles heel of Automobile industry, passenger Cars and SUV segment. Mostly this sector is framed as the problem child by import lobby due to their vested interest. Often a false perception is generated that world class companies like Toyota, Honda and Suzuki are just assemblers and not manufacturers.

Now the Achilles heel of Automobile industry, passenger Cars and SUV segment. Mostly this sector is framed as the problem child by import lobby due to their vested interest. Often a false perception is generated that world class companies like Toyota, Honda and Suzuki are just assemblers and not manufacturers. Reality though is quite different. There are about 200 companies in Pakistan manufacturing thousands of components for these OEMs, generating sizable employment and contributing heavily in the industrial output of the country.

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Majority of low-tech components and a number of hi-tech components of this segment are made in Pakistan. It doesn’t mean that localization goal is near completion like in Motorcycle and Tractor’s segment. Multiple reasons are hindering the localization progress, such as;

1. Low volumes

Investment feasibility for manufacturing high-tech auto components needs certain volumes. Generally, it is considered that a production volume of half a million cars is needed for any viable investment in manufacturing critical engine and suspension components. Unfortunately, we are still far from achieving this kind of volume. Two-three times in last 15 years our volumes neared 300,000 cars but due to macro level issues, specially devaluation of currency and hike in mark-up rates caused crash like situation in the very next year of achieving higher sales.

• Frequent Model Changes

Unlike motorcycle and tractor segment, Car and SUV buyers desire newer models every 4-5 years. That is why we see change in models much more frequently now. Coupled with low volumes it results in very limited volume for each model thus making investments in dies/molds and technical assistance fee     un-recoverable/feasible.

• Reluctance in Technology Transfer

Over a period of last 10 years or so designing of components especially hi-tech components, is carried out by the part suppliers in Japan and other developed countries. Since design and technology is proprietary property of part maker, it is necessary for Pakistani companies to carry out Technical Assistance (TA) agreements and pay the fee and royalties. Reluctance to provide technical support by overseas companies for various reasons is resulting in very slow development of critical and complex components in Pakistan.

• Lack of Testing Facilities

Due to safety and performance requirements, each car part has to go through various stringent tests. Unfortunately, such testing facilities do not exist in our country. Institutions like PSQA, PCSIR, Universities etc. lack facilities and expertise to carry out some very basic tests. Until funding to such institutions is not directed towards the needs of industry and a check & balance mechanism is not developed, we as a country will keep wasting a major part of the budget allocations to such institutions.

• Lack of Concrete Incentives for Part Manufacturers

Auto Policy 2016-21 gave lot of incentives to car manufacturers. Similarly, few other incentives are being offered in recent policy 2021-26 for entry level car segment. However, despite being part of the auto policy objectives, no significant and tangible incentive has been offered for attracting international components manufacturers for setting up the manufacturing plants in the country in collaboration with local players. Very expensive industrial land and difficulty in obtaining the basic facilities like Electricity, Gas and Water is also a significant hindrance in development of auto part manufacturing industry which being heavy in nature, requires higher land acreage and energy to operate.

• Non-Tariff barriers

Inclination of certain OEMs and their overseas suppliers to book higher profits in their parent organization by selling parts to Pakistan’s subsidiary is also slowing down the development of components in the country. There are non-intentional tariff barriers like event base localization that limits down the volumes to a particular model in already limited volume market, thus feasibility of localization gets curtailed further. Moreover, due to lack of testing facilities coupled with extra ordinary delays in inspections and approvals by overseas parent companies act as a non-tariff barrier.

We are in the middle of catch 22 situation. Whether volumes will surpass half a million cars or international companies will transfer technology to Pakistan’s auto parts manufacturers for production of hi-tech parts in the country, resulting in reduction of car prices and enhance volumes to a feasible level is a dilemma that needs resolution. Deciding factor shall be the massive population and potential of our market.

Car consumption per capita in Pakistan is quite low even if compared with regional under developed countries. OEMs shall give priority to the potential of the market we possess and work on lines of tripartite joint ventures among international part manufacturer, local OEM and auto part manufacturer of Pakistan.

Car consumption per capita in Pakistan is quite low even if compared with regional under developed countries. OEMs shall give priority to the potential of the market we possess and work on lines of tripartite joint ventures among international part manufacturer, local OEM and auto part manufacturer of Pakistan. We have a shining example of hi-tech parts localization in motorcycle segment, where leading Japanese parts manufacturing provided the technological support to Pakistani companies resulting in better control of prices, which acted as stimulus for volume growth. In car segment too such kind of sprit, belief and vision is needed from Hi-tech components manufacturing companies of Japan.

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Government on other hand shall intensify OEMs for their localization efforts by offering reduction in CKD duties upon achieving given localization targets. Formation of auto parts manufacturing clusters with affordable land prices and mark-up rates on fresh investments in auto part manufacturing will be a win-win situation for the whole country. After all, giving equal importance to import substitution will save much more precious foreign exchange than we earn in exports.