Jan 14 - 20, 2008

Automotive industry in Pakistan started in 1950 and has gone through different phases of progress from getting initiated from private sector to the nationalization phase in 1970s and then again witnessed a boom in late 1980s and onward. At present around 64 units of automobile manufacturing are operative in Pakistan. Segment wise classification is as follows: Cars 7 units, LCVs 7 units, Jeeps 2 units, Truck and Bus 5 units, Tractor 4 units, Motor cycle 39 units and there are approximately 400 Vendors in automotive industry. Industry operates under franchise and technical cooperation agreement with Japan, Europe, Korea and China. Japanese car manufacturers control most of Pakistan's passenger car production and sales. According to an estimate, automobile sector contributes 10 per cent to the total annual tax revenue of the government. It also substitutes imports worth US$600 million a year. Over the past year, the auto industry has shown strong performance with a production of 100,000 cars.

The two segments of the industry namely; car and two wheelers have shown remarkable growth over the last five years. The growth in domestic market of cars has risen from 40,601 in 2001-02 to 126,817 in 2004-05, which crossed 150,000 units during 2005-06. This growth is attributed mainly by car financing schemes, improved liquidity position of certain class as a result of economic growth indicators and other monetary measures. The motorcycles have also shown marvelous growth due to new entrants. The new entrants with fair competition have brought about the availability of cheaper vehicles in the domestic market. New vehicle sales for the first 10 months of Pakistan's financial year (Jul 06- Jun 07) suggest that the automotive industry is on track to meet BMI's forecast in its recently published Pakistan Automotives Report. Passenger car sales totaled 131,962 units, while truck sales amounted to 3,567 units and bus sales 746 units. Total vehicle sales, including light commercial vehicles and tractors, reached 210,140 units. This sits alongside projected full year sales of 247,467 units, which would represent growth of 5% over FY2005-06. Analysts have also maintained output forecast at 2.8%, with passenger car production up 3.1% within that total.

It is believed that growth in sales of domestically-produced cars will continue to drop off as the Pakistani car market opens up to imports, which are comparatively cheaper, although the effects are not likely to be felt immediately. However, the government is aiming to protect the domestic industry through its Auto Industry Development Plan (AIDP), a five-year plan under which the government aims to increase the local production of cars from 200,000 in 2005-2006 to 500,000 in 2011, by making the local auto industry more competitive, creating capacity for local design and innovation, domestic competition, human resource development and auto-cluster development.

The decline in sales growth is attributed to a moderation in GDP-growth and a hike in interest rates following the central bank's decision to raise the discount rate by 50bps to 9.5% in July 2006. Lending rates are set to reach 11.65% by end-FY06/07, up from 9.53% in the previous financial year, thereby increasing the cost of borrowing to purchase cars. The lending-rate is expected to decline over the rest of the forecast period, while GDP growth is likely to recover to its FY05/06 level, leading to a strengthening of automotive sales growth.

Indeed, an increased economic and political risk rating, coupled with the industry's penetration potential have pushed Pakistan up to joint fourth place in Business Environment Ranking matrix for the automotive industry in Asia Pacific. However, despite the potential for growth of the automotive market both in terms of sales and output, high inflation could take its toll on consumer spending and, consequently, the potential for buying luxury goods, such as vehicles. Projected low output growth in relation to other regional markets also drags on Pakistan's composite score.

Development of automobile vendor industries assures transfer of technologies in nearly all spheres of engineering, specifically, metallurgy, plastics and glass. Technology exists for major engine, suspension and transmission components but due to limited market, prospective entrepreneurs shy away from investment. Over 400 vendors are engaged in the production of auto parts locally including tyres, sheet metal parts, mirrors, gaskets, engine valve, camshaft, oil pump gears, pistons, radiators, seats, dashboard, and axles. Due to current electricity crisis in the country, it is making almost impossible for auto parts" manufacturing units to meet local and export orders. In addition to this, non-availability of electricity is forcing the industrialists to close their units subsequently causing heavy loss to the national exchequer and increase in unemployment.

The car and motorcycle segments have grown by over 50 to 100 per cent respectively. The trucks, buses, and the LCV sector is also thriving and the tractor industry has maintained its positive momentum. This growth has prompted established original "equipments manufacturers" to bring forward investment plans in both in-house progressive manufacturing as well as part-making. Capacities are being increased and new investments contemplated.

The importance of sending out the positive signals to investors at this stage is important. Most existing players in Pakistan like Honda (Atlas), Toyota (Indus Motor), Suzuki, Yamaha (Dawood), Hyundai (Dewan), Massey Ferguson (Millat), Fiat (Al-Ghazi), Nissan (Biboji), Hino and some Chinese manufacturers have presence all over the world. They are aware of global competitiveness. When questioned on the long-term viability of the industry, they are unanimous on the need for Pakistan to have an automotive industry. Generally, the advice given to the government by investors is to think long-term and negotiate well at both the multilateral as well as bilateral forums. Automobile sector is one of the fastest growing sectors in Pakistan. It contributes towards the nations economy in the form of Technology Transfer, Employment, Investment and much more.

As the industry is growing, so are the Automobile companies. Every manufacturer is in the process of increasing production capacity to meet customer demands. Through out the 90's the annual automobile production remained constant around 45,000 but due to consistent policies and positive macro economic conditions the industry boomed to over 120,000 units/ annum in just 4 years.

Pakistan's auto industry is criticized over the protection given to them on the basis that domestic manufacturers are taking undue advantage whereas giving little benefit to the country in terms of transfer of technology, increased investments and job creation. Further, few experts believe that there is no point in protecting an industry which is internationally uncompetitive because soon Pakistan will accept WTO mandated and will have to reduce its tariff and non-tariff barriers.

The contradictory trends in the growth of car production and auto financing are a result of extension of auto financing for used and imported cars by some banks. Due to high interest rates, car financing is on decline as compared to last years. Besides high interest rates, numerous service charges being charged by the banks, higher insurance premiums, forcefully installing trackers, and continuous decline in the quality of service is forcing consumer to avoid getting fresh loans from banks and leasing companies. Once there was a small set up in banks for consumer financing but now it is one of the largest. But with the passage of time, attitude of banking staff is no more friendly and cooperative especially with the induction of new staff. Since last many months, inflation in Pakistan is on continuous rise, which has badly affected the budgets of common man. Thus they have lesser money not only to take fresh car loans but also to pay back the already taken loans. In addition to this, maximum number of people has already obtained car loans and possibility of issuing fresh loans is comparatively low as compared to prior years under current economic situation where peoples" purchasing power is diminishing day by day. Now, banks are also facing difficulty in getting loan installments from their customers in time and some times they have to confiscate the cars because of defaults. It wouldn't wrong to say that going forward; auto financing will face number of challenges for its survival.


The government has prepared its Auto Industry Development Plan (AIDP), a five-year plan under which the government aims to increase the local production of cars from 200,000 in 2005-2006 to 500,000 in 2011, by making the local auto industry more competitive, creating capacity for local design and innovation, domestic competition, human-resource development and auto-cluster development. The government is consulting with local carmakers to achieve consensus on how the AIDP can realize its objectives.

One of the main issues is the indigenization of the local automotive industry. The industries ministry and the car assemblers also agreed to set up a constitutional mechanism involving both the government and the auto industry for regular assessment of the AIDP implementation.

In December 2006, local car assemblers demanded a complete ban on the import of used cars in the government's proposed AIDP. They warned that the country's car industry faced collapse unless protectionist measures were implemented. The government has stated that it will not include the provision in the draft policy until the gap between supply and demand was bridged. There is therefore a chance that Pakistan could opt for a more protectionist trade-stance, which would ensure a market for domestically-manufactured vehicles. Protectionism could perpetuate inefficiency and raise costs for the automotive industry, which could limit growth in automotive exports and future growth in the manufacturing sector. The automobiles industry witnessed a growth of only 5.0 percent during the first quarter of 2008, compared with 11.1 percent achieved in the same period of 2007. The quarter 1 of 2008 growth is the lowest first quarter growth since 2002. The growth in the automobile industry is generally influenced by the growth in the production of cars and jeeps with 64.1 percent weight in the sector.

During quarter 1, 2008, the production growth of cars and jeeps dropped to only 0.9 percent as compared with 12.7 percent in quarter 1 of 2007. Excluding the performance of cars and jeeps, growth in automobile sector accelerated to 17.1 percent, mainly contributed by rise in the production of motorcycles, LCVs and buses during quarter 1 of 2008.

This needs to be reconsidered especially when motorcycle production has increased almost by 10 times and cars and jeeps production has increased by 5 times only, similarly the production of other component industries of automobile sector has changed significantly. Automobile jeeps and cars growth in automobile sector in quarter 1 and the substantial imports of cars also indicate that domestic demand pressures remain strong. The domestic automobile sector needs to improve efficiency by investing heavily in order to meet the growing domestic as well as external demand. The government, in an effort to protect local automobile industry from competition reduced the proposed 2007-08 budget withholding tax levy of 5 percent to 2.5 percent and allowed import of only less than three years old vehicles. The government has approved the Auto Industry Development Program (AIDP) to provide a predictable and transparent investment opportunity.


The tariff policy should be reinforced. The ban on reconditioned or smuggled vehicles should be strictly observed as well as dumping, under invoicing, both in components, parts and completely built up (CBU) units. As far as vending industry is concerned at this stage of development, it is important to reinforce several fiscal and regulatory measures in full spirit. The domestic auto industry can only be as competitive as the local vendor industry. The latter in turn has made great strides. Last year it exported parts valuing over $30 million.

However, the potential for parts volumes in the domestic market is being marred by the inability of the vendor industry to compete in the replacement market against smuggled and under-invoiced parts. Eighty per cent of the replacement market is being served by such spurious means. Since the replacement market is the real opportunity for generating part volumes, the vendor community is being deprived of the essential source of gaining competitiveness through economies of scale. It would be in the fitness of things to ensure competitiveness by imposing minimum value on imported parts, eliminating duty on the basic raw materials as well as imposing a higher duty on deleted parts.

Similarly, it is important that any distortion in the input costs at the assembly stage be checked. If smuggled or under invoiced components find their way into regular production, an unfair cost advantage develops. Such distortions have recently come to light in the case of motorcycles and trucks. In the long term interest of the industry, it is imperative to ensure a level playing field and to check such activity in a timely manner before an unorganized sector plaguing various other industries becomes an issue in the automotive industry too. Suffice to say, that such problems have also arisen in other countries. However, the resolve of the host countries to tackle the issue has been such that those accused of malpractices or dumping have been taken to task. In fact, in some cases the outcome has been very positive.

Throughout the world, no industry has grown without protection whether that industry had a competitive advantage or not. Even in the world of globalization, competitive advantage alone has not been a determining success. Hidden protection, access to markets and technology are still as much a barrier to entry as they were a decade ago.

In order to hedge their bets, developing countries with growing markets are therefore cautious in opening certain industries to freer trade. Unless fair trade can be ensured, the onus is still on the government to provide necessary support.