by Jia Wei, Meng Fanrong

 

Data released by Pakistan Automotive Manufacturers Association showed that car sales in the country fell by 50% year-on-year in August, the lowest level since June 2020. In stark contrast, data released just a month ago said car sales in Pakistan surged by 54% in the 2021-22 fiscal year. Pakistan's auto industry appears to have hit an "invisible door" after a year of soaring growth. Can Pakistan find the key to this invisible door?

 

 

 

 

Mr. Farooq was looking for a "suitable" car at the 17th Pakistan Auto Show in Lahore, for him, the definition of "suitable" is "affordable", but it was not easy.

"Car prices are higher than usual this year," it wasn't just Mr. Farooq who complained. Hyundai Elantra and Sonata are going up in price. There are big price hikes in almost all major car brands in Pakistan, including Japanese and Korean car brands.

 

Consumers are complaining, and automakers have their own bugbears. "Production reduction" has become a common phenomenon across Pakistan’s auto industry. MG Pakistan General Manager Asif Ahmad told China Economic Net that all car factories had cut their production by 50%. Suzuki and Toyota, which have a combined market share of more than 80% in Pakistan, were forced to halt production in August as the State Bank of Pakistan (SBP) imposed restrictions on Completely Knocked Down (CKD) imports, affecting the country’s inventory levels.

 

According to Changan Pakistan's analysis of auto sales trends, Pakistan's auto industry will face a grim situation in FY23, with industry sales plummeting to nearly 240,000 units, a decrease of one-third. It cited restrictions on letters of credit approvals as the main reason for the loss of production in the past two months.

 

 

Is the import ban the biggest factor driving up car prices in Pakistan? Asim Ayaz, General Manager of Engineering Development Board, told us that the main purpose of the SBP ban was to control Pakistan's trade deficit. The impact is temporary and mainly on higher-priced Complete Built Unit (CBU), which will be improved in 2 to 3 months.

 

The battle between CBU and CKD has a long history in Pakistan. The Pakistani government has adopted a completely different policy on the import of complete vehicles and auto parts. For CBU, Pakistan’s Finance Minister Miftah Ismail once said that the government would impose duties and taxes of up to 600%.

 

Tariff increase on CBU has little impact on ordinary consumers with its luxury pricing. While CKD vehicles are accidentally injured by this tariff adjustment. As the trade deficit improves parts import restrictions will be gradually lifted, industry insiders are optimistic about CKD’s future. So what is the shadow hanging over Pakistan's car industry?

 

During the interview, almost all auto practitioners said that the interest rate hike policy implemented by the Federal Reserve was behind the rise in auto parts prices this year.

 

Pakistan's inflation hit a record high in the new fiscal year because of the appreciation of the US dollar and the depreciation of the Pakistani rupee. Pakistan's consumer price index rose 27.3% year-on-year in August, the highest in 40 years, Pakistan Bureau of Statistics said. Local auto parts makers are sensitive to the dollar because they rely on imported raw materials for production. This high dependence makes the dollar an important factor, with component prices passing through to complete vehicle prices when the dollar rises.

 

At a recent meeting of the Automotive Industry Monitoring Board in Pakistan, participants said recent car price hike was due to an increase in the dollar exchange rate, freight and raw materials including operating costs. "In addition to currency depreciation, freight has increased by 200%, which will eventually be reflected in car prices," those participants said.

 

With tires, gearboxes, engines and even freight charges paid in dollars, the heart of Pakistan's car industry is held thousands of miles away by the Federal Reserve. In a market dominated by the dollar, how do you escape the fate of being manipulated?

 

 

Asif said that effective localization would free the Pakistani auto industry from the changes in the dollar. "If we were independent of the dollar, our car prices would also go down. But low-tech localization hurts our auto industry. We're localizing by volume, not value. If we focus on effective localization, we'll be able to control costs."

 

If raw materials are purchased locally and components are produced independently of the dollar system, Pakistan’s auto industry can avoid being affected by the fluctuation of the dollar exchange rate. However, there is still a long way to go for Pakistan.

 

While in Pakistan's tractor industry, practitioners say that the industry has achieved 90% of localization. However, the reality is that this data is describing the localization of "assembly", while most of the key components are being imported. Engines and other components that require a lot of investment and high technology basically rely on imports, and only low-technology parts, such as shells, internal suspensions and braking systems are manufactured locally in Pakistan.

 

Although major automakers, including Toyota and Suzuki, have been assembling vehicles since 1992, their level of localization remains low. This has greatly reduced the degree of localization of Pakistan's automobiles. In a sense, SBP's restrictions on imported parts provide a rare opportunity for manufacturers committed to localization.

 

 

Asif believes that Pakistan's industrial base must first be developed with the help of Pakistan's existing parts suppliers. He cites the fabric on car seats as an example, "even though we are a textile-dominated country, we don’t have that quality of fabric. So we are discussing with China whether we can change the fabric to leather which can be produced in Pakistan. We have to localize each component to enjoy the advantages of industrialization."

 

If a nail can destroy a country, then the localization of Pakistani cars is built on these nails. "Taking seat belts as an example, it requires extremely high technology. Even if Pakistan can produce seat belts, the core components are still imported from other countries. MG wants to break the status quo and try high-tech localization, which is good for Pakistan. The automotive industry in Pakistan cannot develop unless its component manufacturing becomes part of the global supply chain," Asif added.

 

Abdur Razzaq Gauhar, Chairman of Pakistan Association of Automotive Parts & Accessories Manufacturers, told China Economic Net that for every part imported, there are huge costs and delays that add to the total cost. When maximum localization is achieved in this regard, costs are reduced and production speeds are accelerated. "Hopefully Chinese companies, Japanese companies or other global companies will come to Pakistan to set up offices and then further promote the localization of parts manufacturing in Pakistan."

 

 

At the auto show, Rana Faisal kept his eyes on the new energy vehicle booths. According to him, the Pakistani middle class is now giving more and more attention to fuel prices, which is why he is considering buying electric or hybrid vehicles. "If NEVs can be made cheaper, there will be a great demand in Pakistan." Asim said that if the fuel price goes up, the demand for conventional cars will drop and the opportunity for electric cars will arise. 

 

On its 75th Independence Day, Pakistan unveiled its first electric car prototype on August 14. This car, dubbed NUR-E 75, is the first electric car designed, developed and manufactured in Pakistan. As a "gift to Pakistan" on its diamond jubilee, its unveiling highlights Pakistan's ambitions in the field of electric vehicles.

 

Electric car is not a new topic in Pakistan. In 2019, the federal cabinet of Pakistan has approved the national Electric Vehicles Policy 2020-2025 to put check to the effects of climate change and offer affordable transport. In the first phase, the government will focus on converting 30% of the total number of vehicles, especially cars and rickshaws, into EVs. The target is set for the next four years to convert 100,000 cars and 500,000 two- and three-wheeler vehicles to EVs.

 

Many cities in Pakistan have short and fixed public transport lines and centralized operation and maintenance, which facilitates the deployment of new energy transport infrastructure and makes it a pioneer of new energy vehicles. Under the influence of above policy, cities including Peshawar and Karachi have cooperated with Chinese enterprises such as BYD and King Long to take the lead in launching new energy bus routes.

 

However, whether electric vehicles can be promoted in Pakistan depends on the reaction of ordinary consumers. On this issue, the auto industry presents polarizing views. Proponents say that fuel cars cause environmental pollution and cost several times as much as electric cars. The reasons for opposition include the fact that electric cars are not cheap, lack of charging infrastructure and fear of unknown future.

 

which comes first, charging infrastructure or electric vehicle promotion? It's a chicken-or-egg problem. Shahzada Saleem, Vice Chairman of All Pakistan Car Dealers Association, believes that the promotion of electric vehicles is nonsense when there is no large-scale establishment of charging piles in Pakistan. "On the highway, you have to charge every 150 or 200 kilometers, and the reality is there aren't so many facilities."

 

He also believes that electric cars are doomed to fail due to power shortages in Pakistan. "Electricity is getting more and more expensive in Pakistan and electric cars are only available where electricity is cheap. In Pakistan, electricity is cut off for 3-4 hours a day. In this circumstance, this all is rubbish and drama. Electric cars have no future in Pakistan."

 

Studies have shown that it is necessary to establish a network of charging piles to ensure the development of electric vehicles. Charging stations need to be spread along highways and urban roads at first, and then residential communities and office buildings, which requires a lot of resources for renovation.

 

"Our consumers are picky. If he drives a gas car, he can go at any time, and if he drives an electric car, he worries about where to find a charging pile. In this case, infrastructure planning is very important. Shell has set up charging stations in Karachi and Lahore, but these are more suitable for German vehicles," said Suhail Nasir, editor of Pakistani media Mobile World.

 

 

 

Lack of charging facilities along highways has been a key hurdle limiting the promotion of electric vehicles in Pakistan. Is Pakistan's infrastructure not ready for EVs? "There are some charging stations in Islamabad. It shows the determination of the people. In terms of infrastructure, national policy is crucial to the success of electric vehicles," said Asim.

 

Asif expressed optimism about Pakistan's energy prospects. "When I started my career in 1988, I was working for energy sources. Today, I see solar energy everywhere in villages and cities in Pakistan. We are not like Germany, where people cannot see the sun for seven or eight months. Other countries are developing EV policies, and we are slowing down because the infrastructure is not ready. Charging piles won't be ready for anyone, the U.S. is not ready either, but they will develop EVs. We have solar, wind and hydro, if we decide to do it, we'll do it."

 

Asif believes that the development of China's auto industry is of great reference for Pakistan. "The Chinese were late in the game, but they changed the game in a faster way. Ten years ago, Chinese cars entered the world stage, and they saw that some countries were making the best engines, and some were making the best gearbox. 'What do I have?' it asked. And then China made its own EVs. China is now the largest seller of EVs in the world. If you look at China's strategy, they don't stop fighting for lack of something, they bring what others don’t have. Pakistan has a lot of talent and we have to decide where to invest our talent."

 

 

In fact, for Pakistan's electric vehicle industry, which is struggling to find a balance between energy and the environment, finding a development direction is the key to changing the game.

Suhail offered a fresh idea, "In 2002, when Chinese motorcycles entered Pakistan, a revolution occurred in Pakistan's motorcycle industry. Pakistani consumers cannot afford motorcycles at 70,000 rupees, but Chinese motorcycles are sold for only Rs 30,000. It is worth noting that all these consumers are new members of the market and a new market is born. Currently, China is leading the three-wheeler market in Pakistan without any rivals, "he said.

 

Nearly 7 million electric vehicles were sold worldwide in 2021, with China accounting for half of them. In China, the world's most competitive country for electric cars, electric cars are only about 20% more expensive than comparable gasoline cars, compared with about 50% much higher in Europe and the United States.

 

Asif told China Economic Net that Pakistan is going through a consumption upgrade from over 2 million electric motorcycles to four-wheelers. Ordinary people can afford it. Some Chinese companies are experts in making entry-level cars. I think in the future, these companies will come to Pakistan to drive this upgrade."

 

"In Pakistan, the price difference between a motorcycle and a car is around Rs. 1 million. If some affordable cars were introduced to Pakistan, they could create a new market, which would be disruptive," said Asim. According to Suhail, cooperation between China and Pakistan on electric vehicles will break the high price stereotype of EVs and generate new consumers by creating a fleet of cost-effective electric vehicles that are suitable for Pakistan's road conditions.

 

Instead of competing with Japanese and German cars in the high-end electric car market, making cars affordable to the general people seems to be the most realistic option for Pakistan's electric car industry. In the past, imported cars dominated the Pakistani car market, but now, domestically produced or assembled cars are becoming more and more popular.

 

 

 

Asif said that MG plans to invest USD 100 million to produce hybrid vehicles, electric and plug-in hybrid vehicles. The full range of products will be available in Pakistan once the factory is ready. Pakistan needs to move from conventional engines to energy efficient and hybrid engines."

 

Jian Peng, an expert from the Research Association of China World Trade Organization, said that Pakistan's supporting sectors such as parts manufacturing industry have made great progress when Chinese auto brands set up joint-venture assembly plants with Pakistani partners. This will help reduce the cost of automobile production, enabling Pakistani people to purchase high-quality automobiles at reasonable prices."

 

Asim welcomed cooperation between China and Pakistan in the automotive field. "It is better for Pakistan because we will have more jobs, more exports and technology transfer from which our engineers can learn. It is a win-win situation for both countries," he said.

 

"We cooperate with China not only in factory construction, but also in after-sales. We do both parts manufacturing and research and development. SAIC is one of the leaders in electric vehicle technology in the world, it is our best partner if we want to start an electric vehicle revolution in Pakistan," said Asif. "We can't achieve all the miracles, but in the end, Pakistan will get a localized car."