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Published in Jan-Feb 2021

Aurora Editorial: Jan-Feb 2021

Aurora's ed on Pakistan’s automotive industry.

Last year, Pakistan’s automotive industry experienced what was almost certainly the worst year in its history, with the month of April 2020 registering zero sales; a scenario probably replicated in several other markets. The good news for Pakistan was the quick rebound within the industry in the last eight months. There are a number of reasons for this, including the latent demand that manifested itself after the lockdown was lifted, boosted by lower interest rates and attractive auto financing options. However, the underlying reason goes back to the Government of Pakistan’s Automotive Development Policy (ADP) 2016-21 that set out to encourage new entrants with a set of incentives and the granting of Greenfield status. As a result, investments had already been made before the pandemic hit, and by the end of December 2019, several new entrants were in the market, offering customers a wider range of choices at competitive price points.

The question is whether this rebound is sustainable and likely to achieve the target of selling 500,000 units (a target widely held by the industry to be achievable) in the next five to eight years, despite the industry being notorious for its cycles of highs and lows due to the unpredictability of a structurally weak economy.

The reality is that Pakistan, with an estimated 20.2 cars per thousand people, has serious potential for growth. Already, following the ADP 2016-21, six auto manufactures have established operations in Pakistan, breaking the long-standing Japanese car monopoly. The reality is also that until 2017, the industry was dominated by three players – Honda, Indus Motors (Toyota) and Suzuki which were (and largely still are) lagging behind the rest of the world in terms of introducing latest generation models. The entry of new players could see changes here. For example, Master Changan Motors (see our interview with their CEO) are promising to deliver latest generation models for their Alsvin sedan and at price points that currently no other sedan cars are being sold at.

As matters stand, there is a fair degree of optimism regarding the industry and even the established players concede that increased competition benefits all stakeholders. From the government’s perspective, the automotive industry is key to boosting a flagging economy; according to the Pakistan Board of Investment, the automotive industry accounts for 2.8% of the GDP and brings in Rs 30 billion to the treasury in the form of taxes and duties (it is estimated that 40% of the value of a car is attributable to taxes and duties), added to which the industry provides employment to an estimated 1.5 million people. However, both optimism and growth hinge on a number of variables, mostly tied to how the overall economy performs in general and on exchange rate fluctuations in particular. Another significant variable – and within the government’s control – is consistency and transparency in policy. The ADP 2016-21 will expire in June this year and a lot depends on whether the new policy will consolidate and build on the current one (the established players will no doubt be asking for a levelling of the playing field). At the core lies issues of consistency in policy, and sadly this is not a given and an underlying reason why people and businesses in Pakistan prefer to place their money in real estate or some such, rather than commit to any kind of long-term investment. In this case, the next ADP will (in theory) set the framework for the next five years. However, the incumbent government’s term will end in 2023 and the question is not only what the new policy will contain, but if a new government is voted into power, will it commit to the terms of the new policy or reverse it?

Apart from consistency, the new ADP, if it is to provide a truly supporting framework for the industry, will have to address two important areas. The first is to incentivise local spare parts manufacturers. A thriving local assembly sector will not only save foreign exchange, it will create foreign exchange, if the sector can reach export level quantity and quality. So far, governments have chosen to bypass this sector, rather than develop policies to organise and incentivise it to move away from just producing basic parts to parts that require technological knowhow and skill sets. The second is to amplify the current Electric Vehicle (EV) Policy. Notionally, switching to manufacturing EVs is not a big deal, what is required is an ecosystem to enable customers to make a seamless transition. Easier said than done, and this is still a work in progress in advanced markets. Yet, EVs are the future and in the face of climate change data the pressures on governments to go electric are increasing every day. For Pakistan, taking early steps to go electric will help the local industry leapfrog into an advanced state of being (think landlines versus mobiles). The two issues at stake are batteries and charging stations, both of which are no-brainers, provided we have a government willing to adopt the vision and create the frameworks to make EVs a reality.

Consistency in policy, clarity of purpose, an eye to the future and Pakistan’s automotive industry will have much to look forward to.