While robust GDP growth has been witnessed over the last few years, this growth did not translate into improving the economic security of its people due to high rate of inflation and unemployment. The increasing trade deficit-- a cause of concern- needs to be addressed by policies that facilitate growth of export-related industry while at the same time reliance on imports should be reduced. This will require enhancing the power generation capability, strengthening the manufacturing base, and investing in alternate fuel to reduce dependence on imported oil.
But Pakistan seems content exporting textile products, while the rest of the upcoming economies are investing in high growth and high technology industries and human capital development. This has to change for broadening the middle class and raising the standard of living of the populace. Investment in alternate fuel (e.g., ethanol) and electronic equipment production should be the two prime targets for strengthening the manufacturing base. The focus in this article will be on the need for establishing local electronic manufacturing industry and the ways to achieve this.
According to the Economic Survey of Pakistan, the country spent $1.8 plus billion in importing telecom equipment during July-April of FY2006-07, a growth rate of 17.3 per cent over the same period of 2005-06. With the increasing use of mobile phones and the number of subscribers growing north of 100 million within a few years, the country will be doubling its imports of telecom equipment within a few years. Imports of telecom products will most likely become the second highest ticket item after petroleum if nothing is done to change this now.
If all of these electronic products are produced locally, this will not only provide new employment opportunities in direct and ancillary industries but will also help reduce the trade imbalance. Once Pakistan gets on the map of the world of electronic manufacturing, new opportunities will sprout up where local companies can provide outsource services in RF and ASIC design; printed circuit board design; and electrical, thermal, and mechanical simulations. This may seem optimistic, but having worked in this industry for close to 20 years, I have seen the transfer of electronic manufacturing and design industry from higher cost to lower cost regions of the world. New markets and cost reduction are the constant drivers for this industry and the Nokias, the Samsungs, and the LGs of the world are looking to provide better and cheaper products to the consumers and compete with each other.
There are two distinct models that the industry follows for electronic products manufacturing; the in-house manufacturing model and the fabless model. In the in-house model, the original equipment manufacturers (OEMs) like Nokia and Samsung have their own manufacturing facilities. On the other hand, companies like Sony Ericsson and Cisco follow the fabless model, outsourcing almost all of their manufacturing to electronic manufacturing services (EMS) providers to reduce cost. These EMS houses, such as Foxconn and Flextronics, have seen tremendous growth during the last few years and are opening new facilities all over the world. The EMS model is also attractive because these companies can manufacture any type of electronic products (mobile phones, laptop, desktop, printers, flash drives, and so on) and are not just dedicated to one product type such as a mobile handset.
Given that the consumers prefer name brand such as Nokia and SonyEricsson, Pakistan needs to attract investments from both types of companies to make sure that the electronic manufacturing grows beyond just mobile phone handsets. However, for these companies to make investments, the local conditions must be right. These conditions include factors such as market size – captive or export oriented – as well as investment climate. With a potential of $5 billion the local market within a few years, the assessment would largely be based on the following four factors and it is incumbent upon the new government to work concurrently on all four aspects to be successful in attracting new investments:
*Law and order: The lack of security of a company’s investment, properties, and personnel is probably the biggest obstacle that must be overcome. The growth of industry and employment will make it difficult for the militant organisations to recruit new suicide bombers.
*Incentives: Everywhere in the world where companies have re-located or established manufacturing facilities, the host country’s government has offered attractive economic incentives. The Board of Investment must do exhaustive analysis of these incentives – especially the ones offered by India and the countries in Asia-Pacific region - and offer something better.
Special Economic Zones (SEZ) must be developed, dedicated to a particular industry. For electronic industry which depends on ‘just-in-time’ manufacturing and multiple suppliers, incentives must include duty-free imports of raw material, tax holidays, fast transportation and competitive freight fees, and swift clearance from customs.*Infrastructure: Although headway is being made in improving roads and transportation infrastructure, Pakistan must increase its electrical power generation capacity to meet industry’s demand. No company, domestic or foreign, would make investment in a region where constant power outages are the norm. This is one of the main reasons Intel chose Vietnam over India for its new chip assembly plant. A dedicated power generation facility for an SEZ should be considered as it will cut the cost of distribution, reducing the operating expenses.
Solar thermal power generation is becoming more attractive as the cost is coming down and must be considered in the mix, especially with the abundant availability of sunlight.
*Skilled labour force: Although Pakistan does not have the trained labour force to serve the needs of electronic industry, the assembly of electronic systems is not a rocket science either. Special operator and technician training centres can be established in SEZs to provide this training. Also engineers can be trained rather rapidly in the process and quality engineering skills required for this industry.
Many Pakistani engineers are working in the US in electronic industry with extensive experience. They can be tapped to provide training, and many of them will gladly offer their services. At the same time, engineering schools in close proximity to these SEZs would need to modify their curriculum to prepare engineers with the technology and skills necessary for this industry. Local engineering universities and industry partnership should also be encouraged as part of general incentive package to conduct R&D, thus providing a constant stream of trained engineers.
Pakistan has the potential to be at par or better than India in providing low cost manufacturing and engineering resources to the world of electronic products design and manufacturing. Much time has been lost, but sound policies and flawless execution at highest priority can still yield desired results.
While robust GDP growth has been witnessed over the last few years, this growth did not translate into improving the economic security of its people due to high rate of inflation and unemployment. The increasing trade deficit-- a cause of concern- needs to be addressed by policies that facilitate growth of export-related industry while at the same time reliance on imports should be reduced. This will require enhancing the power generation capability, strengthening the manufacturing base, and investing in alternate fuel to reduce dependence on imported oil.
