DOMESTIC APPLIANCES INDUSTRY

UNLESS MANUFACTURERS ARE PROMPT IN ADAPTING NEW TECHNOLOGIES CONTAINING SMUGGLING IS DIFFICULT TASK

SHABBIR H. KAZMI
(feedback@pgeconomist.com)

Sep 3 - 9, 20
12

Manufactures of domestic appliances in Pakistani face various problems from rampant smuggling to rising cost of production and from lack of financing for consumer durables to declining purchasing power of people in the country. While the manufacturers lack the capacity to overcome these problems at their own, apathy of the government is adding to bankruptcies. An Industry that has the potential to earn millions of dollars is facing extinction. If immediate attention is not given to resolve the haunting issues millions of workers may lose jobs.

To begin with excessive load shedding of gas and electricity, high inflation and eroding rupee is adding to the cost of doing business. When there are prolonged outages of electricity and gas production process comes to grinding halt. While outage of electricity can be overcome by installing generators to some extent, eroding value of rupee is escalating cost of all the imported components. This industry is heavily dependent on imported components because Pakistan has failed in establishing basic manufacturing units i.e. steel mills and petrochemical units. Added to this is failure of the authorities to contain smuggling. Much of the abuse is due to Afghan Transit Trade (ATT). It is on record that almost 90% of the appliances imported ATT sever cross the border.

Over the years efforts have been made to establish TV, refrigerator/deep freezer, air conditioner assembly units but rampant smuggling rendered these units soon economical unviable. It is on record that compressors used in refrigerators, deep freezers and air conditioners are smuggled into Pakistan as scrap. It is one of the reasons that local production of compressors has remained economically unviable. Similarly, smuggling of steel/tin plates is rendering local manufacturers uncompetitive.

While the share of many of the leading America, European and Japanese brands in on the decline, Korean and Chinese bands are becoming popular. These brands have attained popularity because of the affordability of price as well as improving quality standards.

Last year China's Hefei Meiling Company invested US$3.4 million to establish a joint venture with a local company to manufacture and distribute air conditioners. Hefei Meiling's subsidiary Zhongshan Changhong Electric Appliance Co is cooperating with a Pakistani company in establish two joint venture companies, one focusing on air conditioner manufacturing and the other on its sales and marketing. The joint venture Company expressed plan that within next five years the manufacturing joint venture will be producing 157,600 units per year and sales revenue for two joint ventures will reach $19.86 million per year on average, with profit of about $219,800 per year. The low cost of logistics, labor and transportation in South Asia, combined with strong demand given the high temperatures, makes for a growing market. With furious competition in domestic home appliance market, it's a wise decision to look overseas.

According to a study conducted by National Engineering Exports Development Strategy (NEEDS), Pakistani domestic appliances sector has matured. This sector enjoys more than 95% share of the domestic market with a large pool of low cost human resource. The sector has already acquired a number of basic technologies while the organized sector of the domestic appliances has sufficient managerial capacity to handle export business.

According to various reports Pakistani domestic appliances industry enjoys freight advantage over Chinese competitors in Middle East and African markets. The existing exporting markets of the Pakistani home appliances products are Afghanistan, UAE, Sri Lanka and Iraq, while potential also exists to expand further in the Middle East markets, and create new markets for South Asia and Africa. While home appliances produced in the country are low tech, refrigerators and freezers are based on direct cool technology and fully automatic washing machines, which are yet not produced in Pakistan.

A large part of washing machine segment is unorganized and does not have managerial capacity to handle export business. The industry lacks complete knowledge about potential markets and their dynamics which does not able to serve these markets. The organized sector of home appliances industry needs to expand production capacities, improve quality standards and certification requirements if they wish to be successful in global markets.

A closer look at the past performance of industry shows that an industry which was not prepared to talk about exports at the time of Engineering Vision in 2002 has taken the initiative of exports itself. Although, small in number, the industry managed to export refrigerators and freezers worth US$6 million, washing machines worth $2 million and air conditioners worth $5 million in 2008. This small success was not without problems the industry faced but manufacturers can't overcome energy crisis, eroding rupee value and rampant smuggling at their own. The government has to resolve these issues, which are not difficult to surmount if there is a will.

Though, it is often said that Pakistani home appliances industry has matured but experts are of the consensus that it is slow in adaptation of new technologies. Industry came to grinding halt when split air conditioners were introduced globally. Consumer preference shifted from window type to split type energy efficient air conditioners. Almost around the same time Pakistan underwent a fiscal policy restructuring phase wherein through supply side reforms, the import tariffs were liberalized. Around 2006, the activity restored but only to a limited extent. Now air conditioners are being assembled in Pakistan through CKD/ SKD operation only to avail the fiscal incentives offered by the Government of Pakistan.

In fact, the manufacturers need to do a lot to integrate backward and add value so that they are able to reduce their costs and become competitive in the global markets. According to some experts washing machine manufacturers can be divided into two groups, the organized sector and the unorganized sector. The organized sector of washing machine industry started in 80s through fiscal incentives and in its initial phase worked under high tariff walls. Washing machine industry survived the supply side reforms and has matured. It produces approximately 150,000 units of single tub washers and 125,000 units of semi-automatic twin tub washing machines. No fully automatic machines are manufactured in Pakistan. In comparison, the unorganized sector, mainly clustered around Gujranwala and Lahore, is stated to be much larger than the organized sector.