Pakistan’s automotive sector has been under intense scrutiny and discussion for a long time. However, despite being one of the fastest urbanizing countries within the South Asia region, Pakistan’s automotive industry faces significant hurdles in its growth and localization efforts. But, the country’s auto sector itself is also responsible to some extent for the low growth rate.
Pakistan’s automotive sector has been under intense scrutiny and discussion for a long time. However, despite being one of the fastest urbanizing countries within the South Asia region, Pakistan’s automotive industry faces significant hurdles in its growth and localization efforts. But, the country’s auto sector itself is also responsible to some extent for the low growth rate.
There is also a complex web of economic, political, and infrastructural challenges on the part of the government, which has kept car prices high, thereby hindering local production. This deters other international brands from entering Pakistan to set up manufacturing plants.
Notably, the sector ranks sixth among manufacturing sectors in Pakistan, contributing about 3 percent to GDP annually. It also significantly impacts the economy through foreign investment, foreign exchange earnings, employment, and the generation of revenue.
With 13 major players and their huge vendor networks, the automotive sector in Pakistan employs over 2.5 million people, with approximately five million indirect employees.
Presently, Pakistan is 34th among the passenger car-producing nations globally. Similarly, it is also one of the 16 economies capable of making all kinds of vehicles, from motor cars to buses, trucks, LCVs, or tractors.
The locally manufactured brands are always under criticism for concerns regarding their quality and safety standards. This is because several models do not have advanced safety features.
Moreover, the industry has been slow to innovate and often lags in adopting new technologies and design trends. Consequently, high prices hold back a large number of consumers. The cost is usually passed on through overpriced finished goods that the local population cannot afford to buy locally, with taxes and levies at times being over 100 percent higher than the actual manufacturing costs in some cases.
However, the sector also suffers from an uphill battle due to excessive taxation, duties, as well as the influx of used car imports. The manufacturers complain that the government’s import policy favors used car imports instead of supporting the local sector and growing the economy.
On the other hand, these manufacturers/assemblers have also failed to achieve significant localization since the sector only manages slightly above 60 percent of its manufacturing currently being localized.
The import of used cars, initially intended for overseas Pakistanis, has spiraled out of control due to corrupt practices. This loophole has led to grey channel transactions worth billions, severely undercutting the local industry. In the first eight months of FY 2023-24 alone, these imports caused a staggering Rs45 billion loss to the economy, exacerbating the challenges faced by local manufacturers.
According to the Pakistan Bureau of Statistics (PBS) latest data, in April 2024, a significant 148 percent increase was seen in completely built units (CBU) imports of motor cars, mainly used vehicles, totaling $21 million compared to the previous year. From July to April, the figure surged by 256 percent to $207 million over the corresponding period.
Economically, the low industrial base also hampers growth and localization. This leads to importing parts for assembling automobiles, which ultimately increases the production cost. The reliance on imports also exposes the sector to supply chain risks. Another major risk is currency fluctuation, which has pushed them to significantly increase the unit prices in the last three years.
Additionally, technology deficiencies hinder advanced manufacturing processes, unlike peer markets that have invested significantly in technology to produce high-quality automotive parts domestically.
There is less foreign and local investment in the automotive sector of Pakistan due to political instability and inconsistent economic policies. Conversely, India has a stable political environment and proactive automotive policies, which have attracted a lot of foreign direct investment, leading to a more localized production system.
Inconsistencies in policies are one of the key difficulties faced by Pakistan’s auto market. Frequent alteration of regulations and tax structures create unpredictability for investors and hamper their long-term planning. Without having a steady policy framework, it becomes complicated for the industry to attract overseas investments into this sector.
At the same time, players in the industry must concentrate on quality enhancement, uptake of new technologies, as well as increase component localization. Only through coordinated efforts can Pakistan’s automotive sector overcome its challenges and realize its full potential.
– The write is a staff member
