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The changing scenario

Dec 22 - 28, 2003

Electronics market in Pakistan has long remained a seller's market offering little, or no, choice to the buyers particularly in term of price and product. It has also been dominated by imports with little or negligible share of locally assembled products specifically televisions, air conditioners and the whole range of home and kitchen appliances. All that has changed, and is still in the process of changing, to the point where a buyer can purchase a split air conditioner at less than one-third the price three years ago. The prices of other items such as refrigerators, televisions and an array of kitchen and home appliances have registered a similar downward trend bringing prices of electronics goods to affordable level for the benefit of buyers.

What has helped transformed the market is the presence of numerous imported products in the market, most of them Chinese, at affordable prices. It would be safe to say that without the presence of Chinese products the prices of electronics goods would have remained unchanged at unaffordable levels.

What has also helped transformed the electronics market is the changing life style influenced greatly by the western style of consumerism and the increasing forays by the commercial banks into consumer financing. What has made the banks offer easy consumer financing loans, either directly or as partners in marketing and promotional schemes, itself is made possible by huge liquidity they have been sitting on due mainly to bottoming out of construction activities. That also explains the reason for increasing forays into auto and house financing by the banks.

The increasing presence of Chinese electronics products across the local markets nationwide has also influenced the local industry. Many brands believed to be produced locally are in fact produced in China, either in full or in part. Many of the components used in the manufacture of electronics goods are also produced in China. The reason for the growing acceptance of Chinese products, knowingly or unknowingly, by the consumers can be attributed to one single factor the price. The silent relocation of manufacturing activities to China, either in full or in part, is driven by the low production costs that it offers and is primarily aimed at remaining competitive in a market getting tougher by each passing day. It is also driven by the urgency to remain profitable by using production facilities in China as well as components and accessories to help cut costs.

Though a number of multinational and local companies have been producing some of the most popular items such as television, refrigerators, deep freezers in the country and many more are assembling these and other items, the electronics market in Pakistan remains dominated by foreign products by and far. The cause of concern, however, is that the market is flooded by products brought into the country illegally, both smuggled or legally imported by misdeclared both in terms of quantity and price. Needless to say, the unscrupulous trade is depriving the government millions in duties and taxes and discouraging the legal imports as well as having a destabilising impact on the local industry.

That explains the reason for the closure of the television assembly plants of a number of multinational electronics companies in the country on the one hand and the downsizing of the operations of a number of others. According to the Chairman of Pakistan Electrical and Electronics Association Abdul Khaliq Jafrani around 40 per cent of the products available at local electronics markets, particularly that of Karachi, are finding their way into the shelves through the illegal channels, both smuggled and legally imported but misdeclared. "The sealing of the Pak-Afghan border has helped discourage smuggling of electronics goods, like many other goods last year but it did not totally eradicate the menace. However, the dry ports in the province of Punjab has become the single biggest source of flow massive quantities of electronics into the local markets because of rampant misdeclarations both in term of price and quantity." In addition, the Chinese products are also finding their way into the market through the Sust border in the North West Frontier Province where misdeclarations are also as rampant. In the other parts of the world the dry ports are primarily used to facilitate exports wherein here they are being used to facilitate imports and that too to undermine the foundations of local industries and legal imports. Similarly, just how unregulated the trade through the Sust border is evident from the fact that the government itself does not know the volume of imports through this checkpost because the Customs valuation has not been provided the copies of the bills of entry despite a letter written by it to the Collectorate office in the Rawalpindi city.

"The rampant practice of misdeclaration at the dry ports as well as at the Sust border have neutarlised any benefit of slowing down of smuggling activities through the Pak-Afghan border due to the sealing as well as the pushing of goods imported for Afghanistan, but actually meant for the Pakistani market, through the Iranian port of Bander Abbas. However, even today the body of Toyota Hilux truck can still be completely changed in towns close to Afghan border in the province of Balochistan for just Rs 100,000 showing that the unscrupulous elements are once again ready to start their nefarious trade. The decision to allow Afghanistan import many items through the Pakistani ports, which were put into the negative list under the Afghan Transit Trade (ATT) a few years ago, is feared to result in enhanced illegal trade of electronics goods.

"The total impact of duties and taxes on imported electrical and electronics goods adds up to 54 per cent of the landed price which provides ample incentives to the unscrupulous elements to push the products of all description and quality into the local markets at prices which the importers and local producers could only dream of. Not only the completely built-up products are coming through these illegal channels but parts, accessories and raw materials needed to manufacture many electrical and electronics goods are finding their way into the country thereby destabilisng the legal trade and industry which comprises about a dozen manufacturers both multinational and local as well as many more in the unorganised sector. "

According to a market survey conducted by the Marketing Manager of Samsung Electronics, Ehtesham Albari, the changing lifestyle has redefined the consumer needs and demands and has resulted in technological shift to mass production of consumer electronics in Pakistan like elsewhere in the world. He said that the electronics market, particularly that of consumer appliances has registered a remarkable growth due mainly to presence of more products in the market, the purchase potential and availability of both the branded and low priced unbranded products in the market to suit all tastes and all pockets.

Putting the demand of air conditioners at around 130,000 units per annum and television sets at 600,000 units per annum he said that the major demand for the former is being catered by such local brands as Waves, Dawlance and PEL while the rest is met by the branded imported by a number of multinationals, including Samsung, as well as Chinese products. The major players competiting for the television market include branded products such as Sony, LG and Samsung but recently a number of Chinese-origin brands have also popped up in the market. The reason for highlighting the market of television and air conditioners is important to understand the electronics market of Pakistan because though television is the single largest electronics item in the country the air conditioner sales is its benchmark because it is the biggest revenue earner and thus being considered as the bread and butter earner for the companies producing, importing or assembling air conditioners in the country.

Many fear that the "popping up of some Chinese-origin television sets" in the local market is just the beginning of a trend. The assumption is based on the fact that China is producing far more television sets and for that matter cars, washing machines and home appliances than it can absorb in its local market which would ultimately find their way into the global markets, particularly the bordering Pakistan. China is the top producer of television sets in the world around one-fourth of all the television sets produced in the world today are produced in China.

The same is also true for the washing machine whose annual demand in the country is put at over 400,000 units per year by Ehtesham. Like television sets, China is also the top producer of washing machine in the world 25 per cent of the total machines produced annually in the world are produced in China. Though at present about 85 per cent of the total washing machine demand comprise washer type model, the increasing emphasis on quality is expected to help Chinese counterparts to emerge as strong competitors in near future at prices, which like other Chinese products are affordable.

Ehtesham's overview also puts the annual demand of refrigerators in the country at around 350,000 about 80 per cent of which is enjoyed by the Direct Cool category compared to higher priced No Frost. The demand for other home appliances such as microwave is estimated at 125,000 units while vacuum cleaners estimated at 30,000 units. The prices of almost all electrical and electronics items including television sets, air conditioners, microwave ovens, washing machines and vacuum cleaners have dropped during the year due to direct or indirect Chinese presence be it in the form of completely built-up products finding its way into the country through legal or other channels, local brands produced on Chinese assembly lines or increased use of Chinese raw materials, accessories and parts.

Kitchen appliances such as food processors, choppers, juicers, blenders also make a substantial part of electrical and electronics market in Pakistani. While foreign brands dominate this particular segment of the market local brands produced in China also enjoy a substantial share of the market due mainly to price.

There is also a great demand for electric fans in the country all of which is being catered by the local manufacturers. The major brands now offer a far better product by bringing in innovations related to the look and colours, many of them have also introduced remote-control fans, to attract consumers who can afford to buy air conditioners. While heavy losses, due primarily to massive smuggling of television sets under the ATT garb, forced multinational Philips to limit its television production operations activities, the company still enjoys a substantial share of the bulb and tubelights market though a number of Chinese-origin products are also available at much cheaper prices.

The entrance of a wide range of Chinese products has brought a competition in the local market for not only the imported brands but also for those produced locally. However, Chinese products offer competition mainly in term of price rather in term of quality thereby allowing the well known brands, the bulk of which is being imported into the country legally, to compete with each other on one-to-one, in particular segment of the market for instance television where the majority of buyers still prefer a well known brand such as Sony, LG, Samsung, etc.

Despite the increasing flow of Chinese products and the ensuing competition, the multinational brands, such as Samsung, which markets a whole range of products, including many which it produces here, are optimistic to only retain their market but also to expand it in the years to come. Ehtesham said that "Samsung by virtue of of its global presence and strong base have entered the market from various fronts home appliances, audiovideo items and mobile phones. The price difference between Chinese and brands available in the local market may shock a buyer but we have enjoyed a unique advantage as we are capable of selling in quantities. Another advantage is that we are targeting the quality-conscious segment of the market and have also started local assembling of a number of items including television sets and microwave ovens to help us earn greater confidence of the people.

He adds that while the majority of the Chinese products available in the country has not been able to acquire the brand-recognition status like other well known brands lie this. "However, Haier, one of the leading brand of China has started to make its presence felt in the market due mainly to an affective marketing campaign which has been able to establish it more as a brand to built its image par above the low-priced Chinese products. Haier has also engaged in local assembling of refrigerators and washing machines to help give it a further boost."

Increased influx of Chinese products, which Ehtesham claims enjoy a high duty advantage of 30 per cent on valuation over products imported from other origins, is posing serious threat to the locally assembled and imported products and brands. In a price-sensitive market like ours, the absence of level playing field resulting in a high duty advantage of 30 per cent could be a disaster for both the local electrical and electronics industry as well as for companies like us, he added.

Asked to comment the future outlook of industry, Ehtesham predicted that the way the things are going Chinese products would sweep the market much before the imposition of WTO on January 2005. His prediction was based on the fact that local as well as internationally known brands engaged in production activities in the country are increasingly outsourcing their work to China. "In addition, there has been a negative price growth of imported brands like ours while the price sensitive market flooded with Chinese-origin goods keeps on offering us thinner and thinne profit margins due primarily to duty advantage that Chinese imports enjoy. The situation is made worse by the changing trend in the market which is shifting from branded items to local products or cheaper counterparts due mainly to prices."

Another Chinese product that has the potential to sweep the local market en masse giving the known brands a run for their money is mobile telephone. Yes, the refurbished telephones and accessories are already flooding the market through the legal as well as illegal channels offering a tough competition to known brands imported into the country legally. What, however, remains less known is that China houses over three dozen local and foreign mobile phone manufacturers who have the combined capacity to produce 40 million sets a year, double the sets sold in the country during first half of the current calendar year.

Not too long along price cuts used to be an unusual phenomenon in Pakistan. The growing influx of Chinese products has forced the local manufacturers as well as companies marketing multinational brands to announce substantial reduction in the prices of their products. Electrical and electronics goods market in Pakistan is in transition to become an increasingly buyers' market for the benefit of the consumers. Motorcycles, shoes, poultry meat, peanuts, garments have emerged as some of the most visible signs of the Chinese products across the markets nationwide. The impact of a wide array of Chinese products on the market is all too evident. The prices of split air conditioner has fallen to as low as Rs 17,000 while the prices of all other electrical and electronics items have registered a substantial decline to levels not imagined possible until recently.

Despite increased forays of commercial banks into consumer financing on easy terms, both on individual basis as well as a strategic partner with multinational companies, the multinational companies importing as well as engaged in small scale local production, are finding it harder and harder to keep retain their customer base. The reason is simple, in a price-driven market like Pakistan, the price remains the most important deciding factory to buy a product, a market which is increasingly finding more and more lower-priced Chinese products at the retail shelves.

Meanwhile, China is on the road to become 4th largest exporter this year replacing France and behind only the US, Japan and Germany. Chinese Vice Commerce Minister Wei Jiangu made the prediction on the basis of the growth of his country's surging exports of electronics thus far this year. WTO's figures show that China was the world's 5th largest exporter in 2002 at $ 325.6 billion behind France at $ 331.8 billion and well ahead of Britain at $ 279.6 billion.

During the first 10 months of this year China exported machinery and electronics products worth $ 178.45 billion depicting an enviable growth of 42.1 per cent over the same period last year. Wei said that the full-year export of machinery and electronics products was likely to exceed $ 190 billion. Since this particular type of exports make up over 50 per cent of Chinese exports, and has registered an increase of 33 per cent in 1997, it would help a pivotal role to help China become the 4th largest exporter this year.

The proximity of China and its extremely friendly relation with Pakistan would certainly result in increased trade between the two countries in the years to come and certainly a large volume of it would comprise electrical and electronics goods, particularly due to increasing demand for these products here.

While the increased presence of all kinds of Chinese goods; be it two-wheelers, home appliances, shoes, etc., etc., have helped brought a real competition for the benefit of buyers in Pakistan, the Chinese prowess to export has been a cause of concern for many developed countries. For instance, the US government has already slapped curbs on Chinese textiles and television exports.

Is there a lesson that we can learn from China? Indeed, China's foreign exchange reserves stood at $ 401 billion end October while foreign direct investment rose 11.9 per cent to $ 40.2 billion during the first 9 months of this year over the corresponding period last year. Chinese yuan has remained stable at 8.28 per dollar for the past 9 years and is blamed for jobs losses and export problems in the US.

The Pakistani industry and trade can follow the Chinese example to produce goods at affordable prices, be able to work on minimal profit margins to help them better compete in the domestic market initially. The competition in international markets is just as important but it is the topic of this article as we have witnessed that how Chinese products been able to bring in a real competition in the electrical and electronics market.