Automobile Industry of Pakistan

By: Mirza Ahmer Ammar, M. Ahmed & M. Salman

BBA 7E
1
Overview of Auto Sector

2
3
History Auto Industry of Pakistan
• The auto sector is considered the sixth largest manufacturing sector
in Pakistan and is therefore of prime importance to the economy of
Pakistan.

• Pakistan’s automotive industry started with an automobile plant set

up by General Motors in 1949.

• It built the first assembling plant in Karachi, which started to

manufacture semi knocked down (SKD) units of Vauxhall passenger
cars and Bedford trucks.

• In the 1960s, Rover jeeps and Massey Ferguson tractors started to be

assembled, and in 1963 Hyesons started the assembly operation of
Mack Trucks.

4
Cont.
• In 1972, nationalization of industries took place and the auto sector
was reorganized under the Pakistan Automotive Corporation
(PACO).

• For tractors, Pakistan Tractor Corporation was formed.

• By this time, Suzuki and Toyota were assembling pick-up trucks on a

small scale. PACO, in collaboration with Suzuki, Yamaha and with
Honda, started progressive manufacturing of two wheelers.

• A decade later PACO invited private sector participation primarily

to support the thriving auto parts manufacturing sector.

• This was made possible by allowing the manufacturers of Japanese

cars in Pakistan on the condition of achieving 75 per cent local
content levels in five years.

5
Cont.
• In order to achieve 75 per cent local content levels, auto
manufacturers started to look for local sourcing.

• They also started to provide auto parts manufacturers with technical

assistance to ensure quality and uninterrupted supply.

• This policy culminated in a number of successful projects like Pak

Suzuki Motors was established by PACO and Suzuki.

• The company started to assemble passenger cars, pickups, vans,

and jeeps.

• Other collaborations included those with Honda, Toyota and

Daihatsu.

6
Cont.
• The 90s were marked by privatization of the state run enterprises
under PACO.

• In 1992, Suzuki became the majority shareholder of Pak Suzuki

Limited and built a new assembly plant with integrated production
lines.

• In the same year, Atlas Group collaborated with Honda Motor

Company and Honda Atlas Cars Pakistan was established which
started the commercial production of City and Civic cars in 1994.

• Simultaneously Atlas Honda Limited was also established which

started the production of 70cc, 100cc and 125cc motorcycles in
Pakistan.

• In 1993, Indus Motor Company Limited was established as a joint

venture between Toyota Motor Corporation, Toyota Tsusho
Corporation and Habib Group — which is now the manufacturer of
the Toyota Corolla cars in Pakistan.

7
Production As of FY 2018-2019

Vehicle Type Number Of Units Produced Annually

Buses 762
Trucks 9,331
Jeeps 12,860
Pickups 29,136
Tractors 70,887
Cars 216,786
Motorcycles 1,931,340

8
Standards & Quality

9
Standards
• Pakistan Standards govern the automotive and parts sector, with a
central body, the PSQCA, to implement and formulate standards.

• Pakistan Standards apply to two- and three-wheelers, but not cars.

• Vehicular exhaust emission standards are monitored by the National

Environmental Quality Standards (NEQS), while safety standards are
outlined in the Motor Vehicles’ Rules.

• However these are not implemented in light of insufficient capacity

in the Offices of the Motor Vehicles Examiner for standards testing.

10
Cont.
• With no implementation of national standards for firms to comply
with, there is also consequently no recall policy that would require
firms to withdraw from use those parts that did not meet national
standards.

• The lack of standards and resultantly, a recall policy, means that

consumers are poorly informed about the relative quality of the cars
because this signal is missing from the market.

• Currently, there is also little awareness among producers about

standards and this effects our exports too.

• Investment in Pakistan of international accreditation and testing

entities such as Global GAP or ISO is urgently required to allow
Pakistan to export.

11
Cont.
• The lack of testing facilities also mean that imports cannot be
regulated for consumer protection, and that the government is
excessively dependent on the OEMs to define and conform to their
own standards.

• The lack of testing facilities also mean that imports cannot be

regulated for consumer protection, and that the government is
excessively dependent on the OEMs to define and conform to their
own standards.

• A Mutual Recognition of Agreements was signed in 2012 between

the Pakistan Standards and Quality Control Authority (PSQCA) and
the Bureau of Indian Standards (BIS). This allows for equivalence of
standards across countries, but has not yet been implemented in the
proper spirit.

12
Vendors

13
Vendors
• According to the AIDP there are over 200 recognized vendors in
Pakistan supplying directly to assemblers and the same number of
unorganized vendors who then cater for the needs of these vendors.

• Vendors are mainly SMEs. Due to the lack of scale in the auto
assembly sector, vendors could not achieve economies of scale.
There was also little incentive for vendors to invest in higher
productivity as their premiums were high due to local content
requirements and the tariffs on components produced indigenously
were very high.

• The GoP currently supports vendors through relaxation of custom

duties on the import of inputs and duty free import of raw materials.

14
Cont.
• Pakistani vendors produce mainly low value added components
namely: Sheet metal parts, wire harnessing, interior trims, seats,
rubber and plastic parts, batteries, wheel rims, tyres, lighting
accessories etc.

• The lack of specialization in higher value products can be attributed

to the fact that technologies for production of sophisticated
components are licensed, the acquisition of which involves high
costs.

• Other factors include: • Lack of availability of local raw materials. •

Lack of trained workforce.

15
Foreign Direct Investment

16
Foreign Direct Investment
• FDI for this sector accounts for on average only 1.56% of total FDI into
Pakistan.

• Foreign Direct Investment (FDI) data shows that FDI in this sector rose
by 121% between the years 06-07 & 07-08. FDI fell in 08-09 but it was
still at a healthy level of $104 million.

• However after some steady years of FDI the highest FDI (whole
Country) was noted in May 2014 which was of $600 million.

• The new Government failed in capturing the trust of foreign investors

and FDI fall down.

17
Cont.

FDI Since PTI Took Over

350

300

250

200

150

100

50

0
Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19
FDI in Million $

18
19
Passenger Cars

20
Passenger Cars
• The passenger car industry in Pakistan comprises a market of
approximately 216,786 cars per annum.

• After the oil and petroleum sector, the auto industry sector in
Pakistan is the second largest taxpayer in the country.

• Currently the average capacity utilization of the car industry remains

at 47%.

21
Contribution of giants

Suzuki Toyota Honda

Sales Revenue (Rs. Bn) Rs. 84.5 Rs. 140.2 Rs. 55.02
Economic Contribution 32.26 37.5 11.5
Direct Employment Not Found 2091 3100
Vendors 110 60 53

22
Localization of Cars

Localization of Cars

70

60

50

40

30

20

10

0
Wagon R Civic Swift Corolla City

Series 1 Series 2 Series 3

23
Market Share
• The car industry in Pakistan currently comprises three large players,
with Japanese principals.

• According to the findings, other automakers only share 9% of

Pakistan’s car market.

• Toyota IMC has stood first with 35% market share.

• Pak Suzuki Cars maintain 29% share.

• Honda cars have 27% dominance in the market.

24
Cont.

Market Share
Others
Honda 9%
27%
Suzuki
29%

Toyota
35%

Others Suzuki Toyota Honda

25
Cont.

Vehicle’s Market Share

7% 4%

14% 35%

21%

19%

Corolla Civic City Cultus Wagon R Swift

26
Cont.

Market Share Including Imported Cars

7%
24%
22%

20%

27%

Others Suzuki Toyota Honda Imported

27
Imported Cars

Used V/s New Imported Cars

70,000
60,000
50,000
40,000
30,000
20,000
10,000
0
2009-10 Used Imported
2010-11
2011-12
2012-13
2013-14 New Imported
2014-15
2015-16
2016-17
2017-18

New Imported Used Imported Column1

28
Herfindahl-Hirshman Index
• The concentrated structure of the market can also be measured
using the Herfindahl-Hirshman Index (HHI),

• The HHI is calculated as follows:

• Where (si) is the market share of firm (i).

• A lower HHI indicates a greater degree of competition, and HHIs

greater than 1800 indicate markets that do not meet competitive
norms.

29
Cont.

Car Segment Manufacturers HHI

Below 1000 cc Suzuki 10,000

1000 cc Suzuki 10,000

Above 1000 cc Suzuki, Honda, Toyota 5,196

30
Cont.
• The other interesting aspect of the car market is the stability of
relative market shares, particularly for Suzuki.

• While there have been several attempts to enter the market, for
example by Adam, Nissan and Kia, these have been short-lived and
the market continues to be dominated by the three existing players

• These factors signal potential anti-competitive behavior.

• car sector was investigated by the Competition Commission of

Pakistan in 2010. However, no conclusive evidence for collusion
amongst car makers was presented, and findings were heavily
criticized by the industry.

31
Sales Volume
• One of the most important features of the passenger car segment is
the low volumes, which prevent the manufacturers from reaching
economies of scale.

• Domestic sales volumes are currently approximately 216,786 per

annum, with total sales.

• The motorization index in 2011 for Pakistan was 12 cars per 1000
people, compared to the global average of 165.97.

• Industry stakeholders that we interviewed suggest that they would

achieve economies of scale at 500,000 car/annum.

32
Sales Volume of Giants

SALES VOLUME
Suzuki Toyota Honda

90000

79000

62000 61000
55000
50000

35000
32000

22000 23000
20000
13000

2011-12 2012-13 2013-14 2014-15

33
Regional Price Comparison

Honda Civic

45000
40000
35000
30000
25000
20000
15000
10000
5000
0
Pakistan Thailand China India

Final Price Ex-Factory Price Column1

34
Cont.

Toyota Corolla Grande

30000

25000

20000

15000

10000

5000

0
Pakistan Thailand China India

Final Price Ex-Factory Price Column1

35
Cont.

Suzuki Wagon R

12000

10000

8000

6000

4000

2000

0
Pakistan Thailand China India

Final Price Ex-Factory Price Column1

36
Motorcycles

37
Market Structure
• The motorcycle segment in Pakistan has seen rapid change in
recent years, the most important of which has been the increase in
volume.

• From a volume of merely 63,000 in 1999-2000, production has grown

to around 1.9 million units in 2017-18.

• The impact of this increase in volume has been to potentially allow

the assemblers and suppliers in their vending chain to achieve
economies of scale, and consequently high levels of localization
and low price.

• These lower prices have in turn fueled demand further.

• Currently the market is characterized by a large number of

assemblers competing on price, with low barriers to entry.

38
Cont.
• The motorcycle industry began with Honda’s assembly of
motorcycles under the Atlas group in 1964.

• The industry was initially dominated with just three Japanese brands:
Suzuki, Yamaha and Honda.

• Of these, Honda was the dominant player with approximately 70 per

cent market share.

• In the late 1990s non-Japanese OEMs began to make forays into the
market and by the early 2000s, several local companies had started
local assembly.

39
Cont.
• The first sharp growth period started in 2002, driven by this increase in
the number of players, a low exchange rate, and low duties and
taxes.

• A defining feature of this growth was the introduction of the

“Chinese bike” or “Honda clone”.

• The clone motorcycle, is a replica of the classic Honda CD-70,

assembled out of local and Chinese parts, and available at about
two-thirds of the price of the Honda original.

• Despite the financial crisis, which registers as a dip in the period

2007-09, the industry quickly picked up volumes as it entered the
sharpest incline since its inception.

40
Number of Manufacturers

Year Number of Manufacturers

2009-10 83
2010-11 95
2011-12 100
2012-13 103
2013-14 111
2014-15 112

41
Large Number of Competitors
• The rapid increase testifies not just to the demand factors discussed
earlier but also to low barriers to entry on the supply side.

• The vending chain is now well developed and non-exclusive, so

motorcycle parts are readily available to new entrants.

• In addition, standard practice in the motorcycle industry (as indeed

in other small scale manufacturing in Pakistan) is to fund operations
through market credit.

• Under this system, inputs are purchased on the understanding that

payments to vendors will be made after the final product is sold, a
credit period of anywhere between 30 and 90 days.

• What this means is that the start-up costs of opening an assembly

plant is not much more than the rent for a shed and wages for the
assembly labor.

42
Market Share

Market Share
5%
11%

24%
60%

Honda United Road Prince Others

43
Share of Japanese Brands

Share of Japanese Brands

120

100

80

60

40

20

0
2000 2005 2010 2015
Series 1

44
Localization
• Data from EDB suggests that localization in the motorcycle industry
varies from 77 to 83 per cent.

• According to industry sources, Honda has achieved the highest

localization with the 70 cc motorcycle 95 per cent localized, and the
100 - 125 cc models 90 per cent localized.

• In comparison, the clone motorcycles are 80 – 85 per cent localized.

• This represents the second highest localization in the auto sector.

45
Cont.
• Honda is able to localize further as they are able to manufacture
more sophisticated engine parts, such as pistons, in house.

• These high levels of localization indicate that engines have also

been largely localized.

• In general, engines for 70 to 125 cc are made locally with a small

proportion of imported parts (such as carburetors).

• While the 150 cc and 250 cc engines are imported.

46
70 cc Dominant Market
• This is particularly surprising given the trends in the global motorcycle
market.

• The 70 cc engine is apparently not produced anywhere else in the

world and parts that are imported for the 70 cc model from China
are made only for Pakistan, and are not exported by China to other
countries.

• Certainly, Honda currently only manufactures this motorcycle in

Pakistan.

• Honda maintains that the success of their 70 cc motorcycle in

Pakistan is due to the fact that it is an economical bike, low on
maintenance and Honda’s best engineered product.

47
Cont.
• The move to higher capacity engines is essentially determined by
income, as more powerful motorcycles are used for sport or luxury,
giving better road clearance and speed.

• An additional advantage of the 100 cc in Pakistan is that it has good

resale value, as it is used as a Qingqi (3 wheeler) after being sold in
the second hand market.

• Industry sources expect that by 2020, the 100 cc and 70 cc

motorcycles will have equal market share.

48
Standards
• Two main institutions implement standards for the motorcycle
industry, Pakistan Standards & Quality Control Authority (PSQCA)
and Environment Protection Agency (EPA).

• However, there seems to be a lack of clarity on whether EPA or

PSQCA is now responsible for monitoring and implementing the 2
and 3 wheeler standards, after devolution under the 18th
constitutional amendment.

• The PSQCA has so far set industry standards for 2 and 3 wheelers111,
yet implementation remains a serious issue.

49
Cont.
• The PSQCA has so far set industry standards for 2 and 3 wheelers, yet
implementation remains a serious issue.

• There are no labs available in Pakistan that can check compliance

with Euro II standards.

• In the absence of the requisite labs, it was decided that assemblers

were to get a certificate from the importer stating that the engine
was Euro II compliant.

• In practice this has led to a proliferation of non-authentic

certificates, either copied, or provided by labs that are not ISO17025
certified.

• This current system is therefore not effective and needs reform and
investment, such that the facilities and resources are matched with
the duties and responsibilities that have been assigned to the
appropriate government department.

50
Cont.
• Investment in labs is essential, as is investment in the skill level and
capacity of auditors and inspectors.

• The Automotive Research Institute (ARAI) in India on the other hand

has made investments of over US$2.66 million in order to set up
testing labs across India to enforce standards.

• Industry experts estimate that investments in lieu of US$0.20 million

would be needed to build labs and their capacity to test for Euro-II
or higher standards.

51
Regional Trade
• The global motorcycle market is dominated by Asian producers (90
per cent), with China and India sharing more than 60 per cent of this
market between them, Pakistan ranks within the top 10 in volume
terms.

• The main regional competitors are China, Thailand, and India, with
China exporting almost half of its production.

• Pakistan currently exports only 1.4 per cent of its total production.

52
Cont.
• In order to determine the indicative trade potential of Pakistan in the
export of motorcycles regionally, we use trade flows between
SAARC countries, Pakistan and the world for 2013.

• We find that in the sub-category of motorcycles of engine capacity

50 to 250cc, Pakistan has a regional presence in the motorcycle
market. Out of total global Pakistani exports of US$4.8 million, exports
to regional SAARC countries stood at US$4.7 million.

• However, these exports of Pakistan represented a small share of total

SAARC imports (1.02 per cent) from the world, which were US$460
million.

53
Regional Comparative Advantage
Product Description RCA PAK RCA IND
With reciprocating internal combustion piston 0.04 0.05
engine of a cylinder capacity not exceeding
50cc
With reciprocating internal combustion piston 0.42 10.42
engine of a cylinder capacity exceeding 50cc
but not exceeding 250cc
With reciprocating internal combustion piston 0.45 2.13
engine of a cylinder capacity exceeding
250cc but not exceeding 500cc
With reciprocating internal combustion piston 0.01 0.01
engine of a cylinder capacity exceeding
500cc but not exceeding 800cc
With reciprocating internal combustion piston 0 0.01
engine of a cylinder capacity exceeding
800cc
Other 0 0.02
54
Honda Atlas Motorcycle Export

HONDA ATLAS MOTORCYCLE EXPORT

Honda Atlas Motorcycle Export

2013-14 5129

2012-13 8128

2011-12 18909

2010-11 13557

2009-10 5937

55
Tractors

56
 TRACTORS

• According to Pakistan agriculture sector contributes about 20.9% to the national GDP
economy.

• Tractor has the sustainable and stable market being an agriculture input,

• Globally India and China are considered to be the hub of tractors.

• As per (2009) data Following Chart shows the highest regional usage of tractors
around the Globe.

Afghanistan Bangladesh Indonesia Bhutan China India Pakistan

0.1 1.2 2 11 81.8 128.5 153.4

57
 Cont.
• In1980s, The focus on indigenization has been particularly strong. The players in the market made
significant investments in vendor training and facilitated technology transfers.

• Vendors are now not only supplying to the manufacturers, but are also exporting parts such as
radiators, sheet metal parts, silencers, AC parts, plastic parts and gearboxes to the international
market.

• A disadvantage, however, of having established suppliers and a high degree of localization is

that it makes new entry difficult. For this reason, the tractor industry remained highly
concentrated over the years

• According to The Pakistan Tractors Corporation (PTC) was separated from the auto sector early
on which leads to heavy focus on Indigenization.

• The corporation included both main players and foreign collaborators of tractor Industry.

• It was made that high tech parts will be import and will be localized.
58
 MARKET SHARE

As per 2015,

59
SALES VOLUME

60
 SALES VOLUME

FARM TRACTORS (2018) (2019)

Al ghazi 23,917 17,993

MILLAT 38,670 32,018

ORIENT IMT 467 394

TRACTORS
TOTAL TRACTORS 63,054 50,405

61
 TARIFF STRUCTURE

• The current tariffs on tractors follow the schedule of the Five-Year Plan in the AIDP 2007-12.

• Fully built tractors face a customs duty of 15 per cent, whereas licensed vendors or tractor manufacturers can
import parts that have been localized at 35 per cent.

• There is no duty on parts that are imported for domestic production, given that localization is so high.

• Tariffs in India duties on tractor imports in India are in the range of 29 per cent, whereas the duty on tractor
parts is 26.2 per cent.

62
 GOVERNMENT POLICIES

• The tractor industry did not have to pay any sales tax till 2011.

• This was announced in SRO 549 (1)/ 2008, dated 2nd February 2008, in order to make
agricultural tractors more affordable for farmers.

• In March 2011, government decided to impose a GST of 17 per cent on the sales of tractors.

• The GST of 17 per cent was reduced to 16 per cent in the budget of 2011-2012.

• It was increased to 10 per cent in January 2013 and was increased to 16 per cent in the next
phase on January 2014. However in the budget of 2015, this was again reduced to 10 per
cent.

• Currently, GST having been reduced from 16 per cent to 5 per cent and later increased to 10
per cent.

• Different Schemes were introduced:

1. Benazir Tractor Scheme

2. Green Tractor Scheme

3. Sindh Bank tractor Scheme

63
 STANDARDS

• Standards which are important for agricultural machinery, include general safety standards like lighting and marking,
visibility, braking etc., Roll-over Protection Standards (ROPS), safety of electronic control systems, testing and
performance standards and off-road diesel exhaust emission regulation.

• In the U.S., ANSI/ASAE S318 is the current national standard that addresses the safety requirements of agricultural tractors
and machines.

• This standard requires compliance with the ISO 4254 series, which pertains to agricultural machinery safety and the ISO
26322 series that covers agricultural safety.

• The ISO 4254 series are being adopted directly or with slight modifications by the EU, Canada, Russia, Australia and
China.

• Pakistan’s performance with respect to global standards is not very encouraging. According to the industry, the PSQCA is
not well equipped to carry out testing for safety and performance standards as per global requirements.

• As far as road safety is concerned, ANSI/ASAE S279 lighting and marking is a legal requirement in North America while
in the EU, member states specify requirements.

64
 TRADE BARRIERS

• Standards

• Licensing

• Technology

• Unstable government policies

• Financing

• Demand

• Trade Environment.

65
Auto Parts

66
 AUTO PARTS
• Products that are manufactured for new cars are generally not competitively priced, and are able to
compete with imported parts only because of the tariff protection afforded to local manufacturers.

• Some manufacturers export a part of their production, focusing typically on niche markets such as
replacement markets for outdated models and/or in developing countries, particularly Africa.

• Greater volumes would allow firms to specialize and acquire greater technical expertise. So far,
local manufacturers generally produce low-value addition parts.

• One of the major impediments for parts manufacturers is the licensing required to produce local
parts in accordance with OEM standards.

• The OEMs typically require manufacturers to enter technical collaborations with their global
suppliers, which can include mandatory use of equipment imported from the global suppliers or
their subsidiaries.

• Technology acquisition is also limited by access to finance.

• Machinery is also typically imported second hand, discarded by global firms as they move on to
new cutting-edge technologies. This means that Pakistani manufacturers are sometimes several
generations behind technologically.

67
 AUTO PARTS

MARKET STRUCTURE

• The auto-parts sector is made up of a diverse set of firms, both in terms of products
manufactured and in terms of size.

• They produce a variety of parts: interior trims, plastic parts, forgings, casting,
machined parts, rubber parts and electrical parts.

• The auto manufacturers produce sensitive and sheet metal parts in-house.

• Pakistan Association of Automotive Parts Accessories Manufacturers (PAAPAM),

firms engaged in several different processes: forging, casting, plastic injection and
blow molding, glass and sheet metal.

• There are two segments in the auto parts sector: sales to OEMs for assembly into
new cars, and the replacement market.
68
EXPORTED AUTO PARTS

• Sheet metal

• Forged metal (wheel caps, rims)

• Plastics

• Radiators (copper-brass)

• Glass (apart from windscreens)

• Pakistan already has some exporting success in the auto parts segment.

• In 2014, auto parts exports were US$140 million. Pakistan’s major export partners
include the USA, Europe,135 Middle East and Africa, comprising a total of 57
countries.

69
70
 TRADE BARRIERS

• Quality and environmental standards

• Licensing

• Financing

• Technology

• Business environment

• Smuggling and under-invoicing

• Customs irregularities

71
 TRADE OPPORTUNITIES AND CHALLENGES

• Pakistan’s trade in the auto sector is mostly based on imports. Pakistan’s top three
suppliers include Japan, Thailand and China.

• Pakistan’s major regional export destinations are Sri Lanka, Bangladesh and Nepal in
South Asia and Indonesia, Thailand and Philippines in East Asia.

72
 TRADE OPPORTUNITIES AND CHALLENGES

TRADE WITH INDIA

• India represents a huge market for Pakistan, but one that has been largely inaccessible,
despite Pakistan having been granted Most Favored Nation (MFN) status by India in
1996.

• From MFN to Non-Discriminatory Market Access (NDMA) in order to reduce domestic

opposition, the automotive and agricultural lobbies contested the move, stalling trade
talks.

• The Indian market remains critical for Pakistan, especially for automotive parts. The
Indian auto component export market has grown rapidly with a compound annual
growth rate (CAGR) of 17 per cent between 2008 and 2013, and is expected to reach
US$115 billion by 2020.

• India regarding concessional duties available for imports from Pakistan under SAFTA
was 57 per cent, while 7 out of every 10 Indian traders.

• Auto parts producers are hesitant to send new products to India due to high risk, as
custom valuations of new products are cumbersome.

73
 TRADE OPPORTUNITIES AND CHALLENGES

TRADE WITH CHINA

• The most important FTA for Pakistan is the Pak-China FTA of 2006. Pakistan and
China trade amounted to US$11.3 billion in 2014.

• Overall auto imports of Pakistan grew by almost 260 per cent between 2005 and
2013.

• China has offered to remove, in three years, tariffs on firefighting vehicles as well
as duties on a number of parts related to tractors and dumpers such as brakes and
drive axles with differential.

• Imports from China almost doubled within five years from $51.5 billion ($84.2
billion in 2019 dollars) in 1996 to $102 billion ($148 billion in 2019 dollars) in
2001.

74
 TRADE OPPORTUNITIES AND CHALLENGES

TRADE WITH AFGHANISTAN

• Closely linked to transit trade is the issue of trade with Afghanistan.

• The Afghanistan and Pakistan Transit Trade Agreement (APTTA) 2010 allows Afghan
commercial and non-commercial cargo into Pakistan, India and other countries.

• Transit trade had increased since the implementation of the APTTA in 2010, with
Pakistani exports increasing at a faster rate than Afghan imports. Between 2000 and
2010, annual export growth of Pakistan for Afghanistan was 29 per cent.

• Exports of tractors have taken place indirectly through third party buyers for Millat
tractorsand Al-Ghazi.

• Tractors can export directly as it has special one- time permission to export to
Afghanistan through its own dealers, under its own name, and not as New Holland.

• Afghan tariffs are much lower, 5 per cent, as compared to 35 per cent customs duty and
16 per cent sales tax in Pakistan.

75
Regional Policy Comparison

76
Cont.
This section aims to contextualize Pakistan’s
auto sector and policies through a
comparison with the major auto producing
countries in the region. Five major auto
producing countries have been selected for
the comparison: China, South Korea, India,
Indonesia and Thailand.

77
Production in South Asia:

COUNTRY YTD 2017 (Q4) YTD 2018 (Q4)

China
29,015,434 27,809,196

South Korea
4,114,913 4,028,834

India
4,792,231 5,174,645

Thiland
1,988,823 2,167,694

Pakistan
250,800 269,700

78
Production in South Asia:

35,000,000

30,000,000

25,000,000

20,000,000
YTD 2017 (Q4)
15,000,000
YTD 2018 (Q4)
10,000,000

5,000,000

0
China South India Thiland Pakistan
Korea

79
Passenger cars Trade

Country Exports Imports Trade ratio Export ratio

China 490,562 1,411,696 10 2

South Korea 2,735,583 336,572 74 66

India 1,041,308 7,729 33 33

Thailand 473,177 62,413 72 64

Pakistan - 23,028 19 -

80
Import and Export Comparison

3,000,000

2,500,000

2,000,000

1,500,000
Exports
Imports
1,000,000

500,000

0
China South India Thailand Pakistan
Korea

81
Trade and export ratio:

80
70
60
50
40
Trade ratio
30 Export ratio
20
10
0
China South India Thailand Pakistan
Korea

82
Pakistan
• Pakistan’s relative trade profile in the auto sector is not much
different from its relative standing in terms of scale of
production. Pakistan’s auto industry, in particular car
manufacturing, is dominated by a handful of joint ventures
with major Japanese players such as Toyota, Honda and
Suzuki. The industry essentially serves the domestic market and
does not have the scale and productivity to export to the
world or the regional market.

83
China
• The data is on exports, imports and its share in total passenger
car production (trade and export ratio).

• Although China is the largest producer by a significant order

of magnitude, its trade and export ratio is the lowest amongst
the six countries.

• Chinese imports of cars are much higher than its exports, the
overall trade ratio in comparison to other countries in the
region is much lower which is suggestive of inward-looking or
protectionist policies.

84
India
• The Indian car manufacturing industry has shown significant growth
since the country liberalized its trade and investment policies in the
90’s. The exports of passenger cars have been on the rise and in
2014 were over 1 million – second in the region after South Korea.

• The low levels of imports is a consequence of a highly protectionist

trade policy regime in the auto sector. Although India has promoted
foreign direct investment and joint ventures in the auto sector over
the past three decades resulting in phenomenal growth of the
industry, this has been achieved under an umbrella of protective
trade policies.

85
MFN Tariff Rates on Passenger cars:

Country Average(%)

India 100

China 25

Pakistan 70

Thailand 80

86
Graphical presentation:

Average(%)
120

100

80

60
Average(%)
40

20

0
India China Pakistan Thailand

87
Interpretation:
• India offers the highest level of protection to its auto industry (passenger
cars) with an average tariff rate of 100 per cent.

• The second highest average MFN tariff rate, 70.5 per cent, is imposed by
Pakistan followed by Thailand, which is marginally lower. However, unlike
India, which has the same maximum and minimum applied MFN tariff,
both Pakistan and Thailand have large variations in the applied rate.

• China and Indonesia have lower MFN tariff rates with an average of 25
per cent and 29 per cent, respectively.

• South Korea has the most liberal trade regime in the auto sector with a
relatively low average MFN tariff of 8 per cent. As discussed before,
South Korea, has a developed and globally competitive auto industry
which explains its relatively open trade policy regime.

• The exception is Thailand which, despite a fairly developed auto sector

with a high trade ratio, is still protected by a 70 per cent average MFN
tariff rate. This level of protection is comparable to Pakistan’s, which has
a much smaller production scale and a far lower level of sophistication
in the auto industry.

88
China Auto Policy case study:
• China’s auto policy can best be described as carefully managed
with an ultimate objective of establishing an indigenous industry.

• The 2014 Catalogue maintains 50% requirement for joint venture.

However, the Ministry of Commerce announced on 10 April 2015
that the shareholdings of Chinese parties in joint ventures should be
more than 50%. The new policy now only allows foreign companies
at most two joint ventures for passenger and commercial vehicles or
motorcycles.

• The current policy is evidently tilted in favor of local industry. This is

reflected by the policy on parts and research and development.
Foreign companies are allowed to establish wholly owned
enterprises if they will manufacture auto parts or will support
research and development for localization of parts. There are no
restrictions on number of interests that can be maintained under this
line of manufacturing.

89
Cont.
• A key reason for the failure of these joint venture agreements is
linked to the weak intellectual property protection in China which
becomes a greater threat given the fact that local Chinese partners
are allowed to hold interests in multiple joint ventures simultaneously.

• Importing a car (especially used) is next to impossible in China. The

first requirement is having a local resident status to be able to import.
Only legal residents (holders of “Z” visas) are allowed to import cars,
eliminating this option for holders of business visa (“F”) or tourist visa
("L"). However, not everyone who qualifies as resident can bring in a
vehicle; only those who have "foreign expert status" which is
provided by the PSB (Public Security Bureau) and the visa
departments are allowed.

90
Thailand Auto policy
• Thailand’s auto industry has grown on the back of policies that have
supported local manufacturers to become more competitive.
Thailand has never had an extremely protective regime; however,
support to local manufacturing has always been a priority.
Thailand’s local auto industry under the ‘vision 2021’ will be
developing state-of-the-art testing facilities, research and
development centers, automotive information centers and an
automotive academy, while the government is providing policy
integration and policy research support. The vision intends to
transform Thailand into a global green automotive production base.

• Four key factors that have ensured sustainable development of

Thailand’s automotive industry include: favorable government policy
to promote investment and domestic market expansion through
systematic integration, developments to accommodate technology
changes by enhancing the capacity of green technology
development, increase domestic value creation through
productivity improvement for parts manufacturers and quantitative
and qualitative human resource development.

91
India Auto policy:
• Indian auto sector has shown rapid growth in the last few years. This phenomenal
growth is a consequence of policies that have both protected local industry and
at the same time supported it to become more competitive. The government of
India has developed an adequate protection mechanism by imposing various
tariff and non-tariff barriers. Besides that, the government has formulated a range
of policies that discourage import of automobiles and promote localization.

• For the import of CBU vehicles, importers are required to obtain certain permissions
from the government which entails a long bureaucratic process.

• Only a right-hand-drive car can be imported. Left-hand drive automobiles are

prohibited from entering the country (except for consulates and some other
special categories).

• The Indian government has entirely banned individuals from importing cars whose
engine capacity ranges from 1000 - 2500 cc. While new cars can be imported via
the customs port at Mumbai, Calcutta and Chennai, used cars can be imported
only from the Mumbai port. Also, the used car cannot be older than three years
(from the date of manufacture).

92
Conclusion:
• A comparison of policies across countries that have successful auto
sectors shows several common trends. These countries have all
pursued active industrial policies, using a variety of consistent
instruments such as protection and incentives to encourage local
content, investment and transfer of technology.

• For Pakistan, a set of consistent policies that provide investment and

transfer of technology incentives in a stable policy environment with
continued tariff protection would be recommended.

• It is essential that the full complement of policies be provided to

ensure that the auto sector is able to utilize the tariff protection
effectively.

93
Policy recommendation:
Passenger cars:

• Imports of used cars should not be used as a means to create

competition for local car makers, and the allowable age of used cars
should not exceed three years.

• The existing TR, personal baggage and gift schemes for import of used
cars are being abused by commercial importers and stringent controls
must be implemented.

• Policy stability is necessary to ensure government credibility and

encourage long-term investments as the car sector requires up-front and
lumpy investment

• A uniform industry-wide national standard must be created for cars, with

the requisite testing and enforcement facilities —the government needs
to build its capacity to implement it

• The car financing/leasing market must be further developed. This can be

done through financing at more attractive rates, and through schemes
that allow trading-in the residual value of older cars.

94
Cont.

• Lowering tax rates would also help in the expansion of demand, and
consequently car volumes.

• R&D must be promoted through Technology Acquisitions, JVs and

PPPs

95
Cont.
• Motorcycles:

• Smuggling is damaging the local motorcycle vending industry, and

better border control is required to ensure that trade is brought within
the formal, regulated market .

• Facilitate exports by streamlining procedures and reducing red-tape.

• Ensure refunds on customs duty paid by local vendors on imported raw

materials

• Pakistani motorcycle producers can increase their exports by forming

raw material cooperatives of vendors to lower production costs (and
hence make prices more competitive and attractive for exporting)
through bulk purchases of inputs.

• Create a Motorcycle Auto Tax Collection Unit within FBR with one-
window operations to ensure speedy export rebates.

• Taxes on components and sub-assemblies of motorcycles should be

reduced immediately

96
Cont.
• Tractors:

• Production in Pakistan is mainly dominated by 50HP tractors, which fall in

low- medium powered agricultural machinery whereas the more
profitable market is of high-powered tractors. Pakistan must have JVs
with their principals to enter this segment.

• Negotiate with India to remove tractors from its sensitive list and also
remove the 10 per cent additional duty it levies, so that tractors can
become competitive in Indian Punjab.

• Ensure that Pakistani tractors become Euro II compliant, including

meeting requisite fuel (diesel) standards

• Pakistan has no national standards in the tractors sector, and even

though it is an off-road vehicle, the government must provide
technological support so that 7th generation technical standards can
be met in the next five years (currently Pakistan is at the 2nd generation).
Tractors must meet international safety and emissions standards

97
Conclusion:
• Countries with automotive manufacturing sectors enjoy many
economic benefits such as contribution to GDP, employment, and
tax revenue. But perhaps the more crucial advantages are those
offered through the creation of a supply chain that consists of
upstream industries that add value to basic industries like rubber,
plastics, glass, steel and mining and help establish downstream
industries not just of auto parts and vehicle manufacturing, but more
importantly of marketing and rentals, finance and insurance, as well
as service and repairs. In addition, technology up-gradation in the
automotive sector has positive spillover effects on other industries—
and through increased export incomes and greater potential
foreign investment— the economy as a whole.

• Pakistan should skillfully explore its regional options. China represents

a key opportunity and Pakistan must act quickly to try to deepen its
existing trade ties with China and ensure that the opportunities are
utilized fully. The Chinese auto market is expected to grow at seven
per cent annually for the next five years, and China is poised to
produce more than 32 million vehicles. 98
Cont.
• Pakistan should take advantage of the current investment policies
that China is following in its auto sector. For example, it requires all of
the 20 global OEMs currently manufacturing in the country to
partner with a Chinese firm. If Pakistan properly manages its own
investment and custom duty policies, it can access these JVs by
fitting into a regional value chain. Undertaking economy-wide
economic reforms is a daunting and long-term challenges.

• Instead, Pakistan should create islands of “excellence” that can

take advantage of the CPEC. The requisite infrastructure that caters
to supply chain needs must be built now. Small and medium sized
vendors may be assisted through customs bonded warehouses that
allow import duty payments to be made later. Special Economic
Zones can be used to produce export quality competitive goods.

99
Automotive Development Policy 2016-
2021

100
Category A: Greenfield Investment
• This category calls for the installation of new
automotive facilities by an investor for the
production of automobiles those are not being
assembled or manufactured in Pakistan.
• The Ministry of Industry and Production allowed
United Motors Private Limited, Kia-Lucky Motors
Pakistan Limited and Nishat Group to set up units
for assembly and manufacturing of vehicles under
the Greenfield investment category

101
Category B: Brownfield Investment
• This category calls for revitalizing existing assembly
and/or manufacturing facilities i.e. either not
operational or closed since and before July 01,
2013 and the make is not being produced in
Pakistan since then.
• This revitalization may be activated either by the
original owners in independent capacity or by the
new investors or through joint venture with foreign
principal or by foreign principal in independent
capacity through purchase of plant or various
incentives for investment.

102
Significance of policy
• Salient features of new auto policy 2016-21 as per the Board
of Investment cover the duty-free import of plant &
machinery to set up an assembly and manufacturing unit (on
one-off basis), permission for the new investors to import 100
vehicles of the same option in form of CBUs at 50% of the
existing duty after the project gets initiated and reduction of
10% custom duty on non-localized parts for 5 years rather
than earlier 32.5%.

• The duty was reduced to 30% from July for existing investors.
New investors are allowed to import localized parts at 25%
duty as compared to the current 50% for 5 years. For existing
players, this duty on import of localized parts was decided to
bring down to 45% from July 01, 2016.

103
Cont.
• Taken as a whole, the performance of Pakistan
Automobile Sector remained unable to meet its
true potential except for motor cycle
manufacturing sector. Most of the Car assemblers
are using technologies and providing insignificant
features than those of the cars in Global Market.
• Domestic Consumers are not having the best
available technologies and safety requirements in
vehicles. Hence, Economic Coordination
Committee (ECC) formulated the Automotive
Development Policy (2016-21) for the development
and growth of automobile industry in Pakistan.
104
Sales Trend

160,000,000.00
140,000,000.00
120,000,000.00
100,000,000.00
80,000,000.00 2015
60,000,000.00 2016
40,000,000.00 2017
20,000,000.00 2018
0.00

105
Result of the policy:
• All the companies showed positive movement in
sales and net profit margin in 2017 again. Besides,
Sales of all three companies showed continuous
rise from 2012 to 2017 even after the policy
changes. Hence, it may be concluded that the
share of profit of the major players of the
automobile industry those were creating
monopolies is not expected to decline even after
the new policy.
• This policy is not showing to effect monopoly of
existing car manufacturers in the near future,
however, consistent implementation of policy may
change the scenario.

106
Cont.
• The main issue was the monopoly of few firms
which were not taking into account the safety
measures and innovation as per global standards
but still the problem remain intact even after the
policy that is may be because of the trust of
people on the local makes or expected ease in
maintenance than those of the imported ones.

107
Possible Causes of Hike in Prices

108
Causes
• Absence of Genuine Competition: The absence of genuine
competition has let the local industry to dictate the market in terms
of prices. The continuous price increases of local automobiles since
2006 has put new cars out of range of middle-income groups. This
should be pursued with the current investment policy of attracting
other car manufacturers in the country.

• Appreciation of Foreign Currencies: A recent increase has been felt

in the prices of major Auto companies in Pakistan as a result of Yen
appreciation against various currencies, making imports of parts and
accessories expensive.

109
Cont.
• Premium Charged: In a constraint automobile market coupled with
long delivery time of cars consumers in Pakistan have a tough
life, cars with high demand have waiting of 3 to 5 months on
average. So to cope up with this lead time dealers are charging
hefty amounts as premium in order to deliver car with in days to the
customers.

• FED Charged: After the announcement of this year’s budget

government has imposed FED on both imported and locally
manufactured cars. Imported cars were exempt of FED before and
in local market cars with engines larger than 1700cc were charged
with 10% FED. Now for 1000cc its 2.5%, 5% for engines up to 2000cc &
7.5 % for engines bigger than 2000cc.

110
THANK YOU

111