Automotive Industry

of Pakistan
Case Study | Hira Mumtaz
Automotive Industry Overview
The automotive industry is thought to be at the epicenter of a country’s economy. Pakistan is no
exception. The sizeable automotive industry of Pakistan - with the presence of world renowned
automotive manufacturers such as JVs and TAAs - has the capacity to produce automobiles that can
meet the entire domestic needs of the country. The active and ever-expanding large-scale
manufacturing (LSM) sector of Pakistan, of which the automotive industry is a part of, has shown
positive growth for over two decades, maintaining a share of 2.8% of the country’s Gross Domestic
Product. It has managed to generate a total of Rs. 73 billion, second only to the petroleum sector.
The industry has managed to create a turnover of Rs. 299 billion, along with a total of 1.392 million
jobs for people, out of which 195,000 were direct jobs, leaving a job multiplier of 1:8 while
simultaneously adding an approximate of Rs. 1.8 billion to the county’s foreign exchange reserves
through value addition. Additionally, its registered membership base includes 2000 automotive parts
manufacturers (APMs) of Tier 1 and Tier 2.
However, the industry has suffered decline since 2008, due to severe inconsistency as a result of
rapid policy changes. The demand forecast produced a staggering overcapacity which led to high-
margin losses. As per the current situation of the industry, new as well as used CBU vehicles are
freely importable, where terrible misuse of schemes takes place (facilities such as SRO 577).
Localization is expensive, and the critically low volumes eradicate all chances of competitiveness,
and a resultant growth in the industry. There is dire need for the revival of a long term Auto policy,
and the establishment of an enabling environment with interplay of consistent policies.
It is worth mentioning here that the industry has never produced on full capacity. It has the installed
capacity to produce a total of 275,000 units of cars and LCVs per annum, but the maximum that
production has risen up to is an aggregate of 187,654 units in the year 2007-08. In the current year
2012-13, only 136, 324 units were produced. The same goes for other types of vehicles in the
industry. The highest production of trucks and buses also took place in the year 2007-08, with a total
of 6,139 units although it had the capacity to produce 25,500 units. In 2012-13, 2,445 units of trucks
and buses were produced. In the current year, 50,859 units of tractors were produced despite an
overall installed capacity of 100,000 units, with the highest production of tractors being 838,665
units in 2010-11. 2/3 wheelers make a similar case, with 819,556 units produced in the year 2012-13
although the industry has the capacity to produce 2500,000 units of 2/3 wheelers per year.
Active members of the auto industry that are involved in the production of passenger cars and
LCVs are Suzuki, Toyota, Honda, Hyundai, Land Rover, Karakoram Motors and Faw. Trucks and
buses are being made by Hino, Daewoo, Isuzu, Faw and UD Trucks. Fiat and Massey Ferguson are
involved in the production of tractors, whereas local companies producing 2/3 wheelers are Atlas
Honda, Suzuki, Qingqi, Ravi, Piaggio, DYL Motorcycles Ltd, Sohrab, Hero, Habib and a few
Chinese companies.
Trade Progression with India over the Years
The overall status of the Pak-India trade is such that India gave Most Favored Nation (MFN) status
to Pakistan in 1996, limiting trade to a Positive List consisting of 1946 items that Pakistan could
import from India. The current situation is such that Pakistan has decided to grant MFN status to
India, enabling import of all types of goods except 1209 items that are mentioned on the Negative
List. Despite that, the Auto sector of Pakistan has been prevented from importing CBU/CKD parts
from India, initially by non-inclusion of those items on the Positive List from the Indian side, and as
the current situation holds, listing those items on the Negative List so no trade involving the items
can take place. While the future prospects maintain that the Negative List from the Indian side will
be eliminated through a series of phases, members of the Auto sector believe that it is possible to
commence trade with India, in the form of imports from across the border, at normal tariff rates
once the Negative List has been abolished. It is also possible to export to India at the South Asian
Free Trade Agreement (SAFTA) duty regime, with a share of 8% for CBU and 6% for CKD.
Regional Auto Policy Comparison
A comparison drawn amongst the auto policies of different countries across the region shows that
whereas the annual volume of cars produced in India is a total of 4 million units with 1.5 million
units in Thailand and 1.1 million units in Indonesia, Pakistan lies far behind with an aggregate of
175,000 units produced yearly. The CKD duty that India and Indonesia get to pay is 10%, followed
by 30% for Thailand, whereas Pakistan pays a total of 50% as duty tax. When it comes to the
payment of CBU duty, Pakistan pays an additional 50% as regulatory duty along with the CBU duty,
which is 100% for vehicles exceeding 1800cc, 75% for those falling between the range of 1501cc –
1800cc and so on. When evaluating the amount of protection placed on vehicles, Pakistan falls last,
with a protection of 17.5-42.5% compared to 90% for Indian vehicles, 50% for vehicles from
Thailand and between 5-30% for Indonesian vehicles.
In light of the above findings, the incentive for localization for Pakistan is such that it will lead to
100% excise duty exemption on vehicles that have at least 30% local content.
It is also to be noted that according to FBR data, Pakistan has had a rapidly increasing trade deficit
with India since 2006 especially, the largest being a negative sum of Rs. 1,368 million in the financial
year of 2011, followed by Rs. 1,161 million in the year 2010.
Threats and Opportunities Analysis of Trade with India –
Two/Three Wheeler Sector
Among all industrial sectors of Pakistan, the two/three wheeler sector is one of the most vibrant
and dynamic, with its sales and production having an average growth rate of 31 percent for the last
10 years (from year 2000-01 to 2010-11). The market is defined by success of a single type of engine
(70cc), which gives the local industry a unique advantage of being the sole makers of the product in
the entire global market. Keeping this in context, the prospect of initiating trade with India would
seem like an ideal opportunity for the automotive industry in Pakistan, were it not for the myriad of
trade barriers enforced by the Indian government. These barriers can broadly be categorized into
technical barriers, barriers created through requirement of approvals and permission, and well-
disguised tariff applications.

Technical Barriers to Trade (TBTs) are a part of Non-Tariff Barriers (NTBs) and are essentially
measures referring to product characteristics such as quality, safety or dimensions, including the
applicable administrative provisions, terminology, symbols, testing and test methods, packaging,
marking and labeling requirements as they apply to a specific product1.

Homologation

This discriminatory NTB targets all imported vehicles and parts coming into India. The process of
certification of a part manufactured in India takes more than 9 months, and that of a part
manufactured outside of India takes even longer, with categorization as ‘failure’ being the usual
outcome. In 2004, after the testing facility in Ahmad Nagar refused to grant a homologation
certificate to world premier luxury brand Bentley – product of a British based company – the Indian
government amended their policy to allow an exemption to cars with a price tag of US $40,000. This
allows the Indian government to effectively keep out foreign competition and to provide protection
to its local industry. As a result, the two/three wheeler industry of Pakistan sees little hope in
meeting the Indian standards when many global brands such as BMW have failed to make it
through2.

Emission Standards

India’s emission standards, namely Bharat Stage 1 and Bharat Stage 2, have set their measuring
method to a durability of 30,000 km, which is considerably hard to meet, as compared to EVER-40
set by Pakistan, Indonesia, Vietnam, Brazil and several other countries. This technical barrier to
trade is an effective tool to keep competition away from the Indian market.

1
United Conference on Trade and Development (UNCTAD)
2
The internationally established market leaders in quality BMW had to face delays and severe red tape-ism despite
having paid EU 200,000 for the homologation certification of ‘Minor’ in 2009
Tariff Barriers

Significant and cumulative tariff affects imported motorcycles. Import incidence in the area is over
134% of import value, to which extra charges such as port expenses (approximately 3%) and other
incidences of clearance (2% of the CIF value) need to be added. Even if the basic custom duty
component is reduced, the remaining taxes and incidentals exceed 25%. These coupled with the cost
of approvals, permissions and certifications makes exporting cost of two/three wheelers to India
quite prohibitive.

A comparison of landed cost of Pakistani export to India with the landed cost of Indian motorcycle
export to Pakistan shows that whereas Pakistan incurs landed costs from a range of Rs. 42,480 –
105,405, the costs of Indian motorcycle export go up to as high as Rs. 161,192, implying that
products from Pakistan are reasonably competitive when it comes to price, and even quality,
however it is unfortunate that the strict non-tariff barriers make it next to impossible for Pakistani
products to make a place for themselves in the Indian markets.

It is believed that a pragmatic and step by step approach is essential for trade normalization with
India. The Pakistani market should be opened for Indian two/three wheeler industry to the same
extent and level of access that India does for Pakistani products. Further, the Indian government
will have to gradually remove NTBs from its side and undertake several confidence building
measures to provide incentive to Pakistan for trade.

Justification of Import of Automobile Components from India – Pak

Suzuki Motor Company Limited
India is progressively becoming a hub for Automotive Manufacturing with the Japanese and other
foreign OEMs shifting their manufacturing base to India. The prime reasons for this are cheaper
costs of production, a large domestic market, availability of raw materials, trained human resource
and long-term government policies for foreign investment. The operations are not limited to just
production and sales, but also the development cycles of new models from designing of vehicles to
launch, including testing facilities for vehicles and components.

Suzuki Motor Corporation Japan has many overseas production facilities in various parts of the
world; however, Maruti Suzuki India is becoming the largest production facility outside Japan, due
to above cited reasons. Pakistan being a neighboring country can reap two-fold benefit from
importing automotive components from India – lower costs of components due to lower raw
material, utilities and labor costs, as well as lower cost of freight and transportation time due to close
proximity of Wagah Border as land route and a short sea route from Mundra Port (Gujrat) to Port
Qasim in Pakistan. Importing from India will also ultimately result in saving foreign exchange of the
country, as presently these items are being imported from Japan at much higher prices due to
depreciation of the Rupee against Japanese Yen by 108% in the last five years.
Additionally, since Pakistan and India are similar in terms of culture, language, and customs, and
have commonalities of models such as Swift, Alto, Mehran car and Bolan van, the vehicles designed
and produced in India will be a perfect fit for the Pakistani markets.

It is also believed that this might also lead to a transfer of technology from Indian Components
suppliers to Pakistani vendors. Since the local vendors industry is protected by higher tariff on
components which are manufactured locally under SRO 693, it will provide reassurance to the
vendors from fear of import of Indian components into Pakistan.

With the growth of Indian industry on a rise, it is speculated that the cost of labor and other
operations of business will be significantly higher than Pakistani vendors, putting the locals in
Pakistan at a considerable advantage. This increases the possibility of manufacturers in Pakistan
supplying components to Indian OEMs in a few years’ time.

Recommendations for Trade – Pakistan Association of Automotive

Parts & Accessories Manufacturers (PAAPAM)
A careful look into Indian engineering industry shows that in addition to having a large engineering
industrial base, its raw materials are home-based, it does not face any energy crisis or an international
image problem, and exports in auto parts are well supported by the Indian government and tuned up
to well over US $12 billion in the last year, averaging a 40% annual growth.

It is seen that India retards investment into Pakistan through enactment of insurance and banking
restrictions, equity restrictions in investments by Pakistani nationals in Indian companies as well as
investment restrictions by the Reserve Bank of India on Indians wanting to invest in Pakistan. For
reasons noted above, the Pakistan’s automotive industry is currently not positioned well for an
onslaught of Indian finished auto goods.

Members of the Pakistan Association of Automotive Parts & Accessories Manufacturers

(PAAPAM) believe that, as promised at the time of AIDP implementation3, the Government of
Pakistan should fulfill its commitment to support the auto parts makers with Productive Assets
Investment schemes, Human Resource Development Program, Technology Acquisition Scheme,
Auto Industry Investment Policy and Auto Cluster Development. These schemes will ensure greater
competitiveness for the local auto parts makers, in the absence of which industry will suffer great
losses. An example of this is the Pakistan’s Car sector which will become competitive after achieving
a production volume of 500,000 vehicles whereas the current demand for four wheelers is estimated
at 250,000 vehicles. Same applies to the Motorcycle sector, which must cross an annual production
of 5 million, where current production is a mere 1.7 million.

It is safe to assume that the government of Pakistan will also have to take capacity-building measures
to protect its local industries. The Ministry of Commerce must remain cognizant of ground realities

3
AIDP:
http://www.engineeringpakistan.com/EngPak1/Auto%20Industry%20Development%20Programme%20(AIDP).pdf
facing each industrial sector of Pakistan and negotiate such policies that offer increased trade
opportunities to Pakistani companies. The TDAP/WTO cell should carry out a detailed study of the
TBTs and NTBs restricting the export of Pakistani auto products, initiate seminars to enhance the
understanding of trade with India, support trade fair participations in India, and most importantly,
facilitate branding of Pakistan as an “Engineering Destination”. The State Bank of Pakistan should
enhance the value of SME assets to Rs. 400 million for Engineering Auto Industry in order to avail
SME preferential markup regimes. It is also suggested that Federal Board of Revenue (FBR) should
change the Auto Parts Import Regime from Kilograms to Units, set up Auto related import
structures (such as NTBs), and commence 15% export rebate on Auto Parts exports. Engineering
Development Board of Pakistan (EDB) is recommended to ensure development and usage of local
engine and transmission components in Pakistan, reinforce Quality and Standardization Cell within
EDB, commence AIDP implementation with adequate funding, and lastly, negotiate the inclusion of
Pakistani vendors into the Indian OEM supply chain with local OEMs. Pakistan Standards Quality
Control Authority should set up a dedicated Automotive testing lab, introduce Pakistan National
Automotive standards for all sectors, provide inter-ministerial interfacing with import requirements
of FBR, subject all imports to quality and environmental certifications and harmonize quality
standards and testing laboratories between both countries. Lastly, Pakistan Environmental
Protection Agency must be responsible for ensuring vehicular emission standards compliance on
imported auto parts and components, and impose compliance requirements on all CBU imports
including used vehicles. These measures will substantially improve operations of the automotive
industry, and increase their competitiveness against Indian products.

However, it is also suggested that in order for the above to happen, few imports may be allowed
from India through all routes (including the Wagha border) immediately, as they are expected to
assist the local industries in achieving a competitive pricing structure. These imports are raw
materials including steel, plastic and rubber; special machinery and equipment; tools, dies, jigs and
fixtures; process and manufacturing inputs; and sub-components only when imported by PAPPAM
members under a J.V. duly approved by EDB. Additionally, to ensure that the local auto parts
industry continues to grow both in terms of volumes and technology, import of finished auto parts
in any form including CKD/SKD must not be allowed for OEMs or aftermarkets. Once trade is
fully opened, any trade that takes place must be based on equality and the local industry of Pakistan
must have an equal access to the Indian OEM supply chains and aftermarkets as would the Indian-
based companies in Pakistan; additionally, the Indian automobile manufacturing companies should
be encouraged to invest in Pakistan at OEM level within the framework of the New Entrants policy
of Ministry of Industries.