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Overview of auto sector of Pakistan

Transportation plays a very important role in the development of a society as the demand for transportation increases along with development. It is one of the major industrial sectors of an economy. Over the years, Pakistan has achieved reasonable economic growth with the stable unemployment rate and a rise in foreign investments in recent years (though results of last one year is not so encouraging). As a result, the purchasing power of individuals has risen along with the demand for cars, motorbikes and commercial vehicles. The demand ranges from luxury buses to small carriers. To meet these demands, Pakistan depends on imported new and reconditioned vehicles as car are not manufactured in Pakistan but assembled only. A huge number of vehicles and auto parts are imported every year, which includes reconditioned cars by spending a huge amount of foreign currency.

Permission to import of reconditioned cars remained on-off in the last five years in particular. The wide variety of brands of vehicles, whether commercial-heavy or light motor vehicles, are imported whereas the countries of origin mainly include countries like Japan, South Korea, European and USA. To restrict the import of vehicles, the government has imposed taxes and duties on imported vehicles, which increases the price and made it harder to afford by the middle-income earners.

Last government gave lucrative incentives including fiscal benefits for new initiatives in the auto sector. Existing manufacturers are also demanding same incentives in case they expand their capacity. Pakistan needs to put some effort to expand heavy industry as it can contribute to economic development. The market condition is matured enough to go for manufacturing import-substitute vehicles of different categories like bus, mini-bus, truck and 800-1000 cc cars for personal use.

Appealing Pakistan market

As per online available data, the automotive industry in Pakistan is the one of the fastest growing industries of the country, accounting for 4 percent of Pakistan’s GDP and employing a workforce of over 1,800,000 people. Currently there are 3,200 automotive manufacturing plants in the country, with an investment of ₨. 92 billion (USD 870 million) producing 1.8 million motorcycles and 200,000 vehicles annually. Its contribution to the national exchequer is nearly ₨. 50 billion (USD 470 million). The sector, as a whole, provides employment to 3.5 million people and plays a pivotal role in promoting the growth of the vendor industry.

Over the last two decades, as the use of vehicles has increased significantly with the increasing population, improved infrastructure along with the increased mobility of people from one place to another for jobs and improved living standard, the demand for automobiles has also increased. Pakistan has to depend on import of auto parts cars from abroad and then cars are assembled in Pakistan, which is not a very efficient way of running the country’s economy. Time has come to manufacture cars and automobiles in Pakistan now.

The market of Pakistan’s auto sector is alluring to investors at home and abroad and has the potential of making profits. There are foreign companies who are showing interest in investing in the automobile industry in Pakistan. 2018 marked a positive for the sector in terms of interest expressed by various automakers in the Pakistani market. Considering the incentives offered under the auto policy, many international automakers have shown interest to invest in Pakistan’s auto market.

A Chinese subsidiary, Joylong Pakistan, announced its intent to provide light commercial vehicles to Pakistan’s dilapidated transportation sector by importing completely built units (CBUs) from China. Master Motor Corporation plans to collaborate with China-based Changan to manufacture crossover SUVs as well as light commercial vehicles. Master Motor Corporation will start assembling Iveco trucks in Pakistan this year. Volkswagen, the world’s largest automobile manufacturer, entered into an agreement with a local luxury brands dealer for the assembly of vehicles in Pakistan, becoming the second European carmaker that will make inroads to capture the Japanese-dominated market. The National Logistics Cell (NLC) has also signed an agreement with Daimler AG, owner of Mercedes-Benz, for local assembly and production of Mercedes-Benz trucks in Pakistan. Sazgar Engineering Works, which manufactures auto rickshaws, was also given approval to set up a new car manufacturing plant in Pakistan in partnership with a Chinese company.

Therefore, it is safe to say that Pakistan auto industry is an evolving Industry as it symbolizes autonomy and economic development. As a matter of fact, almost each automobile journey ends with either an economic matter or several other benefits to the quality of life. It’s an encouraging fact that there is a huge demand for automobiles in Pakistan and people are affording to buy bikes, cars, luxury cars and other means of transport. In recent years, we have seen increase in the disposable earnings, shifting the way of life and economic situation. Hence we witnessed increase in the demand of luxury commercial automobiles.


Challenges ahead

Though Pakistan’s auto sector is progressing, yet it has many challenges. The auto industry reported a 6 percent decline in sales in the first two months of FY19 for the first time since the financial year 2015. The auto industry had been struggling as three factors namely increasing prices due to rupee depreciation, increasing policy rate, which has been making car financing less enticing for the buyers and ban on non-tax filers were affecting sales. Massive depreciation of rupee against the US dollar has led to increase in the prices by the existing carmakers, a huge downside of assembling cars instead of manufacturing. The crisis of efficient labor is a major weakness for the automobile industries in Pakistan. The initial investment is very high in the automotive sectors due to which new companies are always reluctant to invest unless the government allows significant incentives. In addition, new companies evaluate the market in terms of volumes. If they think they will not get the volumes then their project becomes financially unviable. Therefore, such analyses are to be done carefully because exit is not an option after making an investment.

One of the major weaknesses for this sector is related to environmental concerns. Vehicles are the main reason for air pollution in Pakistan’s main cities in particular. Mainly vehicles that run on diesel, pollutes the air in large level therefore a vigilant environmental regulator is required with good skill set.

Many foreign investors have nominated Pakistan as a country of safe investment in the auto sector. There is a huge opportunity for automobiles industry to increase its production line in the country. Since the population of the country is increasing day by day, the demand for the automobile is also increasing accordingly. At the same time, the number of middle-class families with more disposable income is increasing.

The political unrest not only creates a threat to the automobile industry but also almost all industries in Pakistan. It is very important for the present government to keep the political temperature in control especially when it has the full support of the real decision makers so they should just focus on governance instead of unnecessarily creating a political scene.

Pakistan is moving towards achieving the sustainable development goal by implementing and taking necessary steps for it. The previous government issued a good auto policy, which needs to be implemented in its letter and spirit. The government is concerned about the automobile industry therefore strong preference should be given on the development of the manufacturing of cars and heavy vehicle.

Writer is an Infrastructure consultant based out of Islamabad and can be contacted on arooj.asghar@acltd.net .

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