China has always had an impact on Pakistani lives in one way or another. In the 60s and 70s, it was more business-cum-cultural in nature, what with the large number of Chinese restaurants (some still exist today). Other typically Chinese-owned businesses included dentists (remember the big, red and white toothy grin outside all Chinese dentists’ offices?), movers and packers and bespoke shoemakers. That was in the old days when China’s own economic policies were still fairly insular in nature. However, China was changing from the inside out as a result of socialist economic reforms from 1978 onwards but it took some time for Pakistan and the world to feel the full force of the change.

The world’s second largest economy

Now the world’s second largest economy and the fastest growing one, China also has the distinction of being the most populous country in the world, with a population of 1.3 billion and real GDP growth standing at 9.5% annually. Decades of reforms saw China move from a centrally planned economy to a more market oriented one, making it the world’s largest exporter of goods (Source: CIA World Factbook, 2012). Experts say that this export-led model is one of the reasons underpinning China’s economic success, as it fully capitalises on the concept of division of labour.

Other success factors include high levels of fixed investment ($68 billion in 2012), a socialist market economy where large state-owned enterprises and banks can easily increase levels of investment or borrowing, a high degree of innovation, as well as tremendous manufacturing capabilities.

All this progress has had a huge impact on China itself, where the retail market was worth RMB 9.9 trillion ($1.3 trillion) in 2007 and is growing at over 16% annually (Source: National Bureau of Statistics). In the last year or so, particular attention has been paid to China’s demand for luxury goods, and as China Daily reported, the country is the second largest consumer of luxury goods in the world, with a share of just over 27%.

Pak-Cheen dosti

The Pak-China relationship goes way back to 1950, when Pakistan was the one of the first countries to officially recognise the People’s Republic of China (PRC). This relationship has been extended to cooperation of all kinds, not the least of which is cultural exchange, investment and trade.

Chinese companies have invested heavily in Pakistan, and some sources are putting the total investment figure to-date at $25 billion, with the bulk of the money flowing into infrastructure projects such as roads and ports, oil and gas exploration and mining.

Trade is another important area of cooperation, and following the Pak-China Free Trade Agreement (FTA) in 2006, China has become Pakistan’s second largest partner with bilateral trade currently valued at over eight billion dollars. The balance of trade is of course heavily tilted in China’s favour and the country’s exports to Pakistan include telecom equipment, electronics, motorcycle parts, plastics and many other items by means of the formal and the informal economy.

Although there are many advantages to trading with China, not the least of which is the import of goods that Pakistan is unable to produce, experts say that the influx of cheap Chinese products is driving less competitive local manufacturers out of the market. Regardless of the pros and cons, the impact of Chinese goods on the Pakistan market is inescapable and in this respect, the two areas under the microscope in this issue of Aurora are the telecom sector and the two-wheeler industry.

China calling

According to Khurram Mahboob, the Chinese have invested approximately $10.6 billion in Pakistan’s telecom sector. China’s edge in the production of network technology and handsets has given it a massive leg up in these two crucial areas.

China’s impact on back end telecommunications services (including network core, equipment and network management) is evident from the fact that post 2006 onwards, Chinese companies (Huawei, ZTE, etc.,) have virtually taken over the management of telecom operator networks and are pushing European vendors out of the market. Huawei has been Ufone’s sole vendor for some time and recently Telenor has inked an end to end network contract with ZTE which is reportedly valued at $850 million.

Among the many reasons for the switch from European to Chinese vendors, the key one, says Syed Atif Shah, Deputy Account Director (Ufone account), Huawei Pakistan, is diminishing ARPUs, making it necessary for telecom operators to seek more cost effective solutions from Chinese vendors who “give the same top-class solutions at comparitively reasonable prices.”

A source at ZTE (which also currently handles 50% of PTCL’s network needs) says that Chinese companies are able to offer solutions that are nearly twice as cheap as their European counterparts because employees are paid less than the industry standard. A report by ProPakistani.com (the telecom blog) in November 2011 also pinpointed the same issue, saying that these companies have a high churn rate and employees are not satisfied with their benefits and working environment. Nevertheless, Chinese vendors are flourishing in Pakistan with the benefit being passed on to the end consumer in the form of cheaper call rates and a larger bouquet of services.

In addition to this, both Huawei and ZTE offer handsets, which have to-date only been pushed through the telecom operators. Both vendors plan to offer their branded handsets on the open market soon and thereby join the several branded and unbranded Chinese handset manufacturers who collectively account for 85% of all handsets imported into Pakistan.

Chinese handsets are generally cheap ($15-30) and yet feature-enriched (dual SIM, high megapixel cameras etc.) and it is estimated that Pakistanis spend Rs 1.2 million on low end phones per month (70% of which are Chinese). The proliferation of these handsets has made survival difficult for big players like Nokia and Samsung who have fought back with their own dual SIM, low end handsets. In this struggle, many players who previously imported unbranded sets from China have gone legit. MegaGate and QMobile are two excellent and successful brands to have emerged as a result of this trend (while both companies are 100% Pakistani, their technology is 100% Chinese). According to informed sources, given China’s expertise in telecommunications equipment and electronics, its current influence on Pakistan’s telecom market is merely the tip of the iceberg.

The war on two wheels

In 2003, when Aurora first covered Pakistan’s two-wheeler industry, Japanese motorcycle manufacturers (Honda, Suzuki and Yamaha) were already under pressure from Pakistani assemblers importing cheap Chinese spare parts because of a reduction in import duties in 2001. As a result, the Japanese had to reduce the prices of their motorcycles by Rs 10,000. After the Musharraf era’s FTA with China the competition has only intensified.

The two-wheeler market has expanded with the inclusion of 60-70 registered Chinese assemblers (accounting for 55% of all production) who offer a significantly cheaper product.

A Chinese 70cc motorbike (the most popular category in Pakistan) is priced at Rs 38,000-41,000, whereas the Japanese version costs Rs 65,000. In terms of overall growth, the two-wheeler industry manufactured a record 1.5 million motorbikes in 2011 (a decade ago, the output was 122,000 units), in addition to this, the industry has managed to achieve 85-90% localisation (although this statistic is heavily debated).

The Chinese are able to offer a cheaper product because of lower levels of investment and fewer overhead costs. However, this is not really the problem. The issue is the rampant smuggling and under-invoicing of motorcycle parts. According to an October 2011 report by The News, millions of rupees worth of under-invoiced parts come into the country from China every year. These cheap parts are not only likely to be substandard in nature (Chinese motorbikes are notorious for being of low quality), they are also extremely harmful to the local motorcycle parts industry which has been working hard to achieve higher levels of localisation and provides employment to hundreds of people.

According to Arshad Amin Awan, a member of the managing committee of the Pakistan Association of Automotive Parts Accessories Manufacturers (PAAPAM), in an industry which is highly cost-sensitive and earns profits on volumes, this situation can discourage further investment by the larger, organised sector players. Awan also believes that the reduction of import duties as proposed under the Auto Industry Development Programme (AIDP) will create hindrances in terms of local investment while facilitating importers and Chinese assemblers.

The Chinese assemblers, on the other hand, believe that government policy is strongly in favour of the Japanese players and are lobbying to reduce the import duty on CBU units, which currently stands at 65% in order to encourage localisation and local assembly. The Chinese assemblers argue that if small cars can be imported into Pakistan at a CBU duty of 50%, then duty on motorcycles needs to be reduced so that better technology can be brought into Pakistan. They also point out that since Chinese assemblers are now responsible for producing more motorcycles in Pakistan, they deserve greater government support.

Tying up the camel

In a commercial and economic sense, China is playing an increasingly important role in many Pakistani industries. Although some degree of dependence on other countries lies at the heart of the globalisation phenomenon, there is a need to check China’s impact, especially the influx of cheap, unbranded and smuggled goods, which although they are attractive, are damaging the local economy. Pakistan’s trade policies in relation to China, say experts, could also benefit from a degree of rationalisation in order to protect local manufacturing and right the balance the trade. It is a case of ‘tying up the camel’ before it is too late.