The last 25 years of Pakistan’s automobile industry have borne witness to momentous developments that have seen the industry take on the mantle of progress and modernity, cracking on, while other sectors were weaving their sob stories. It proposed hope for the nation’s aspirations for economic prosperity, syncing with changing demographics and rising disposable incomes.
• Back in the Day: Pakistan had rolled out its first automobile in 1953 and, barring a ‘Yellow Cab’ scheme in the mid-nineties that spiked sales temporarily (albeit with disastrous effects after it was curtailed unceremoniously in 1996), there was little change thereafter. Despite the potential, the industry did not progress, staying small and underdeveloped compared to other countries. It faced limited production capacity, outdated technology with a limited range of vehicles, and more importantly, a lack of competition. A regime of government-imposed high import tariffs and taxes on imported vehicles prevailed to protect the local industry, making imported cars expensive and hardly accessible to the general public. Limited production capacity led to long waiting periods for customers who wanted to purchase new cars, and the lack of competition meant that Pakistan languished in an era of outdated, even unsafe, technology with little comfort or fuel efficiency at hand.
• The Industry Bucks Up: It was not until the shift from a protected, closed market to a more open and competitive one that matters began to change – albeit in baby steps. Initially, the government cut through lobbies and allowed foreign automakers to enter Pakistan, breaking the near-monopoly of the Big 3 local manufacturers – Toyota, Honda, and Suzuki. And although the latter did expand their operations, a slew of new entrants, such as Hyundai, Kia, MG, Changan, Oshan and Haval gave them a run for their money, providing customers with a bigger, more varied slate to satisfy families dreaming of owning their first, or a bigger, vehicle. While Pakistan finally waved a fond goodbye to its beloved best-selling Suzuki Mehran 800cc in 2019, the availability of other options made this loss a distant memory.
The Big 3 had to up their game in a bigger competitive market, introducing more technological advancements in terms of comfort, fuel efficiency, infotainment, communication and safety. CPEC in 2015 brought significant investment in the automobile sector, leading to the introduction of Chinese brands and technology. For the first time, in 2016, an elaborate five-year strategy policy document was hammered out with input from all stakeholders. Cutting-edge technologies introduced fuel efficiency, eco-friendly technologies were introduced, and amidst rising global fuel prices, electric vehicles made a strong appearance. The manufacturing sector saw a surge in investments, generating employment and fostering skill development. A vibrant second-hand car market emerged with entrepreneurs, buoyed by encouraging government policies, investing in three to five-year-old refurbished Japanese vehicles, opening up more choices for customers.
• Sales Climb: The demand for cars was now not merely a desire but a societal need. Families dreamt of owning their vehicles, entrepreneurs envisioned a thriving market and policymakers saw it as a testament to a growing, self-reliant nation. Pakistan rose to rank as the 15th largest automobile manufacturer-assembler worldwide, and is looking to rise further, triggering a jump in GDP and higher employment. As a direct consequence of these initiatives and improved economic conditions, car sales in Pakistan peaked at their highest ever, at over 246,000 units sold during 2018-19.
• Economic Shakedown: However, the tides of fortune began to change, casting a shadow over a once-thriving industry. While the industry was impacted by Covid, it did make a recovery. However, worse was to come. The abrupt depreciation of the rupee against the US dollar sent shockwaves through the market. As the value of the rupee dwindled, the cost of importing essential components and raw materials soared, squeezing profit margins and making operations increasingly challenging for manufacturers. The government, faced with depleting foreign exchange reserves, imposed stringent regulations on imports to salvage dwindling funds. These regulations, while aimed at stabilising the economy, inadvertently choked the life out of local industries. Plants fell silent, assembly lines gathered dust, and dreams of progress began to fade.
The repercussions were swift and profound. Production numbers, once a source of pride, became a testament to the industry’s struggles. In FY-2022-23, production plummeted by 55%. The statistics painted a grim picture – a mere 101,984 units rolled out, a stark contrast to the 226,433 assembled in 2021-22. The rupee’s freefall led to exorbitant prices, effectively pricing out a significant portion of the population. Economic tremors, exacerbated by inflation running rampant, discouraged consumers from making significant purchases, leading to a sharp decline in car sales. Once-flourishing car showrooms echoed with the footsteps of a handful of customers rather than the once excited chatter of eager buyers.
• The Budget 2023-24 disappoints: As the industry reeled, it dared hope for some relief in the upcoming budget. The fear of increased taxation loomed large – Advance Income Tax, Capital Value Tax, Custom Duty on new cars and Withholding Tax based on the invoice price were all subjects of concern. Eventually, the relief given was far from substantial. Vehicles with engine capacities of 2000cc and above bore the brunt of the new policies. A fixed tax regime was introduced, ranging from six percent for engine capacities from 2001cc to 2500cc, eight percent for 2501cc to 3000cc to 10% for engines exceeding 3000cc. The Customs Department assumed the responsibility of evaluating vehicle values, factoring in authentic import values to calculate applicable Customs Duty, Federal Excise Duty (FED), and Sales tax. The aftermath was swift – passenger car prices in these categories skyrocketed, and any aspirations for healthy sales volumes were dashed.
Simultaneously, a flat 35% Customs Duty rate was imposed on specified car components, a move that was met with vehement criticism. The lack of discrimination between critical and non-critical parts irked industry experts who argued for nuanced rates that considered the importance of components – bumpers, spare tyres, suspension and brake components, protective strips, luggage compartments and more. However, the government’s decision, seemingly made in haste, created a ripple effect. Assemblers found themselves caught between rising production costs and a market unable to bear the burden of inflated prices. The consequence was a support industry on the verge of a precipice, grappling with the dilemma of survival amidst adverse economic conditions.
• Signs of Recovery? As 2023 advances, there are a few signs of salvage. Rather, the further slippage is alarming. During July-September 2023, only 16,021 cars have been sold as against 28,571 in an already impacted same period last year – a decline of a further 44%. New investment is all but stifled with manufacturers, such as Toyota, scampering to preserve their current investment of Rs 2.5 billion in the assembly of Pakistan’s first hybrid EV vehicle.
Industry analysts believe that the industry requires more than just temporary relief measures; it requires a comprehensive, well-thought-out strategy. Policymakers must consider the industry’s core needs – accessible financing options, streamlined import regulations and incentives for innovation and technological advancement. A coming together of minds between the government, industry players, and financial institutions is imperative to provide the much-needed stimulus.
In summary, one can only hope that government support, improving economic factors, the resilience of manufacturers and aspirations of the workforce, and the latent demand that still simmers beneath the surface will jumpstart this now sputtering industry.
Mazhar M. Chinoy has led the marketing services function for a leading multinational automobile company and is currently a director at LUMS. firstname.lastname@example.org