Pakistan's Automotive Revolution: The Next Five Years (2021-26) - Part I
Pakistan, April 29 – The growth of an economy depends on efficiently utilizing available resources for optimal productivity. An economy can reach its full capacity when a supportive business climate is fostered via advantageous and entrepreneur-friendly governmental policies. Consequently, a comprehensive auto-sector reform strategy, which addresses current issues and tackles specific industry inefficiencies, needs to be established. This opinion piece series focuses on Pakistan’s Auto Industry Development & Export Policy (2021-26).
Traditionally, local automobile manufacturers were shielded from global competitors via import duties and tax reductions. Nevertheless, these protective measures did little to improve policy outcomes or sectoral performance since they confined operations solely to vehicle assembly without fostering product localization. As such, anticipated competitive advantages failed to materialize; instead, protections merely perpetuated inefficiencies within the industry and stifled operational expansion. Auto firms found greater profitability in maintaining their current assembly-focused activities. Meanwhile, authorities seemed content with tariff- and tax-generated income rather than addressing underlying issues. Ultimately, however, it is consumers who suffer because of inflated prices coupled with inferior quality goods.
Hence, the aim of the policy should be to encourage increased production volumes, greater investments, and superior quality vehicles equipped with advanced technologies. It is also crucial to strike a balance between industry expansion and consumer advantages, ensuring the long-term viability for all parties involved. Additionally, it must offer a consistent and positively foreseeable regulatory environment for potential investors.
The initiative for achieving the deletion program stemmed from locally producing vehicles, an effort that spanned from 1987 to 2004. Notably, this localized approach shifted from being company-specific to becoming sector-wide, overseen through yearly audits. However, full localization wasn’t realized regarding spare parts and components—many of these items required advanced technology and significant value-addition; thus, crucial spares still needed importing. Starting in 1995, the Engineering Development Board (EDB) managed the deletion program until it evolved into the Tariff-Based System (TBS), aligning with Trade-Related Investment Measures (TRIMS) within the World Trade Organization framework beginning July 1, 2006. Emphasis was put on enhancing value rather than merely reducing costs during production, prompting biannual updates to pertinent rules.
Given the regulatory framework and objectives, a comprehensive automotive tariff strategy spanning multiple years was deemed necessary. Consequently, the Automotive Investment Development Plan (AIDP) was introduced in 2007 after consultations with various stakeholders for an initial period of five years. This initiative aimed at boosting investments, enhancing technological advancements, expanding export volumes, and generating employment opportunities. However, these ambitions faced significant setbacks due to challenges such as unfeasible tariffs within the stipulated timeframe, coupled with adverse conditions including an economic downturn and reduced output between 2008-09, exacerbated by limited financial flexibility. As a result, car financing and leasing services faltered, further contributing to manufacturing shortfalls in the year 2011-12.
The localization of advanced technology parts and components did not come to fruition. There were minimal advancements in cultivating skilled and qualified personnel. Consequently, the AIDP failed to take effect primarily because of insufficient proactive governmental backing. Apart from the entry of one company, Al-Haj FAW, there wasn’t notable financial commitment. Tariffs persisted until the issuance of ADP 2016-2021, leaving the sector adrift for four years without explicit policy direction.
In order to draw investments, the subsequent policy from 2016-21 offered a reduced tariff framework aimed at enticing fresh stakeholders. This strategy encompassed five key aspects: incentives for greenfield projects targeting newcomers and brownfield opportunities for closed units; a five-year tariff scheme applicable both to current Original Equipment Manufacturers (OEMs) and new participants; streamlined payment processes designed to prevent abuse within the import regulations concerning vehicles as per SRO.52(1)/2019; provisions ensuring oversight and enforcement mechanisms related to quality assurance, safety measures, and adherence to set standards; along with the creation of the Pakistan Automotive Institute (PAI).
The rationale behind the Auto Policy stems from the expiration of the Automotive Development Policy 2016-21 at the end of 2021. Consequently, there were two options: extend the current policy or introduce a new one. Hence, a fresh policy named “Auto Industry Development and Export Promotion Policy AIDEP2021-26” was introduced. Notably, several outcomes under the earlier policy, ADP 2016-21, proved successful. Therefore, assessing whether these achievements warranted an updated strategy became crucial. The automotive industry faced challenges like insufficient localization of components, minimal producer rivalry, inadequate investment levels, lack of proper infrastructure, few safety measures, and extended vehicle delivery times. These issues underscored the necessity for a revised approach within the framework of the newly formulated policy.
In general, the policy is divided into these nine key areas: Concentration on Emerging Technologies; Incentives for Developing Innovative Products; Stress on Implementing Safety Standards; Boosting Local Component Production; Stimulating Exports; Safeguarding Consumer Rights; Cultivating Domestic Expertise; Adoption of New Platforms for Automotive Sector Expansion; Detailed Procedures for Application Handling.
(To be concluded).