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January 12, 2006
The Chinese connection
Though consumers are benefiting from the legal and illegal imports of Chinese goods owing to the low price factor, the repercussions are serious as the country is losing billions of rupees in revenues, writes Aamir Shafaat Khan
Perhaps for the first time in Pakistan’s history foreign products are being sold on footpaths and public buses at throwaway prices. The reason behind this is high production cost and taxes which make locally-made products uncompetitive against Chinese products.
To some extent the advent of Chinese products has opened job avenues for a large number of people but it has also virtually destroyed many organized industries, causing joblessness, as well as eroding the market share of locally-made products.
Hit by the liquidity crunch, a large percentage of buyers happily buy these items because they are affordable. Quality-conscious customers refrain from compromising on the quality but their number is limited.
A random market survey revealed that Chinese children garments have taken over 90 per cent of the market followed by 80 per cent in stationery items, 50 per cent in paints, 10 per cent in furniture, 50 per cent in women clothing, over 50 per cent in electrical goods, 10-15 per cent in women sweaters, 100 per cent in gents jackets and over 50 per cent in shoes. Besides, these leather bags, suitcases, school bags, artificial jewellery, ladies purses, watches, mirrors, door locks, car accessories, hardware items, cosmetics, auto and two wheeler spare parts etc. are also available in the market.
In the recent past, markets were flooded with original Japanese products, especially electronic items. Every house would have one or more Japanese products. These products being assembled in Malaysia and Singapore took the markets by storm as prices came down further.
The advent of cheap Chinese goods a few year back, brought down the popularity of the branded Japanese goods and also Malaysian and Singapore assembled items. The concept “high price means high quality,” often dubbed for Japanese goods, has now vanished.
Buyers, especially on a shoe-string budget, are now adopting a new attitude by purchasing things meant for “disposable purpose.” This concept was not in vogue when buyers went for Japanese products expecting it to last for a long time.
Why are Pakistanis buying sub-standard Chinese items despite the fact that China also produces high quality and durable goods that land in the USA and European markets? The answer: reduction in purchasing power and an increase in the poverty levels here has made people rely heavily on Chinese goods. This is why the demand of Chinese goods in Pakistan has risen.
At a time when inflation, measured by consumer price index (CPI), surged to 9.3 per cent in 2004-2005 from 4.6 per cent in 2003-2004, is estimated to range between eight and nine per cent in the current fiscal year. Chinese items are thus affordable for families who cannot buy costly items.
Lighthouse at M.A. Jinnah Road is the hub of Chinese items where leather and sports shoes, blankets, leather and artificial leather jackets, carpets, tracksuits, sunglasses, hosiery items, etc. are sold, attracting a sizable number of buyers.
Many famous retail outlets do not have any qualms displaying Chinese goods, while the leading footwear sellers at Tariq Road and Zaibunisa Street are selling Chinese footwear of high quality.
Even if we see the positive side of Chinese goods entering the shops one cannot ignore the implications for Pakistan’s economy, especially lost revenues which exceed millions of rupees due to smuggling, invoicing, misdeclarations, closure of units, joblessness and a hovering threat to many industries.
A random market survey revealed that third and fourth graded Chinese quality goods usually arrive in Pakistan to cater to the needs of a particular segment. Traders know that they can import high quality Chinese goods, but they do not take risks as buyers will not go for high prices.
Why will a price-conscious buyer go for a pair of locally made shoes for Rs800-1,400 when one can buy one for Rs350-400? One can get a VCD player at Rs1,000-1,400 as compared to a Korean make of Rs3,000. A Chinese DVD player can be purchased at Rs2,500-3,000 compared to Rs4,000-6,000 of Malaysian and Korean assembled sets of branded companies.
One can buy 12 pencils at Rs10 and three toothbrushes at Rs10 instead of Rs25 for only one brush.
A Chinese made 21-inch TV can be purchased at Rs8,000-9,000 as compared to other brands costing Rs12,000-22,000. One cannot be sure that a TV or any other electronic item one buys is really an original Korean origin or one is assembled in China. Market people say that leading world electronic and appliance makers have set up their production facilities in China because of cheap labour and low production cost. Dealers in the local markets are charging the same rate no matter where the products have been assembled.
Many market players have been doing roaring business by purchasing old computer monitors. They retain the picture tube and install new Chinese kits to make it a complete TV. The price of a 14-inch TV is Rs3,000 while a 17-inch one can be purchased at Rs3,500. “This kind of TV is popular among low income group people,” says Pervaiz Alam Khan, an electronic dealer in Saddar.
He further adds that the entry of Chinese goods in the market has improved the purchasing power of people for electronic goods. Khan says that before the entry of Chinese TVs some TV makers had a monopoly in the market and were working on high margins.
Chinese mobile phones have made inroads due to their low prices but it is hard to carve out a niche in the presence of user-friendly brands that are affordable.
Chinese furniture has started arriving in the markets even when domestic appliance and electronic item manufacturers have already been making a commotion in the markets.
Chinese split air conditioners being distributed and marketed by leading domestic appliance makers and trading houses, have virtually captured the markets. The low price factor is the main reason. Japanese assembled A/Cs used to cost over Rs45,000 two years back as compared to Rs14,900 to Rs23,000 these days. Lack of demand and low prices have combined together in wiping out window A/Cs which resulted in the suspension of production by the leading appliance makers two years back.
Leading domestic appliance makers have now become leading promoters of Chinese goods. They place orders in bulk in China for vacuum cleaners, toasters, sandwich makers, split A/Cs, microwave ovens and the manufacturers put the name of the Pakistani company on the product.
One of the executives in a leading domestic appliance company says that it will be a suicidal attempt to set up a unit for manufacturing of small consumer durables when similar cheap goods are arriving through smuggling and other illegal routes. There is no legal binding on any company to engage itself both in local manufacturing and distribution business, he says.
In the car market dominated by three Japanese and one Korean player, two local companies have introduced cheap Chinese cars but so far they have failed to capture the buyers. Due to the impression that Chinese products do not match Japanese quality, these cars are facing a tough time carving out a big share on the low price factor. They will have to strive hard in image building to convince the consumers of the car’s towards quality, safety and durability.
In two wheelers, Japanese bikes used to rule the domestic markets three years back and consumers were bound to take the costly ride by purchasing them. The entry of cheap Chinese bikes has changed the market scenario in favour of consumers. Currently around 41 Chinese bike makers roll out bikes under technical collaboration agreement with Chinese counterparts. Despite being cheaper by Rs15,000-20,000 compared to Japanese bikes, Chinese two-wheelers hold a big market share in Karachi in comparison to other provinces where people rely on powerful and durable bikes.
Honda is still the market leader despite stiff competition with Chinese bikes, but in Karachi it has lost its market share considerably because of being the most favourite of bike snatchers.
President, Sindh Motorcyle Manufacturers Association, Sabir Shaikh says that in 2003 a total of 60,000 Chinese bikes were sold in Pakistan including 15,000 imported Chinese bikes. In 2004, the sale increased to 120,000 units including 8,000 CBU units. As many as 200,000 Chinese bikes were sold in 2005 including 2,000 CBU units, while an estimated 250,000 Chinese assembled bikes are poised to be sold in 2006.
Shaikh says that Honda is still the market leader with over a 60 per cent share but half of the Chinese bikes, produced currently, are being sold in Karachi alone.
Besides motorcycles some local players have introduced Chinese light commercial vehicles (LCVs) through local assembly and also by importing completely built units (CBU). There is a marked difference in prices of Japanese LCVs and Korean brands. Consumers are shifting their allegiance towards low price Chinese LCVs.
President Karachi Chamber of Commerce and Industry (KCCI), Haroon Faruki says that legal imports from China rose to $1.84 billion in 2004-2005 from $1.1 billion, while Pakistan’s exports stood at only $354 million in 2004-2005 as compared to $288 million in 2003-2004. Despite rising exports from Pakistan the balance of trade continues to be against Pakistan and the volume of trade does not commensurate with the actual potential which could be increased.
“Think of the volume of illegal arrival of goods which must be over the actual legal figure of $1.8 billion. It is now time that both governments should explore new land and shipping routes where Customs Stations are set up so that legitimate trade could be augmented by curbing the flood of goods through informal channels,” said Faruki.
Though it is true that consumers are benefiting from the legal as well as illegal arrival of goods due to the low price factor, its repercussions are very serious as the country is losing billion of rupees in revenues. “The local industry has to face unhealthy competition, and it results in closure of many industries,” Faruki says.
Textile owner, Majyd Aziz, says that China, India, Thailand and Indonesia have captured 70 per cent share in gents fabrics while in ladies fabrics these countries enjoy over 60 per cent market monopoly. The government should check the entry of goods at low prices.
Garment company owner, Hanif Bilwani, says that very low quality of goods is arriving from China and people are slowly realizing it. However, Chinese goods continue to increase in the market because of their low price. “Now the sellers have started cautioning the consumers that most Chinese goods have no guarantee or warranty and even durability,” he says.
The local furniture industry as stated before, is also threatened with the arrival of Chinese furniture. It is estimated to have captured 10 per cent share. Chairman Arambagh Furniture Market, Atiq Mir says that 95 per cent of the importers in the country are now focussing on China due to low prices.
Many traders say that the Chinese items are selling well and that they are not bothered about the rising trade deficit and depleting foreign exchange reserves. “This industry is slowly becoming a victim of Chinese goods and the government can save it if it is genuinuely interested, Mir added.
However, he says that the furniture industry is perturbed over the cartel of chipboard makers and foam/mattress makers who increase the prices of their products on their own, thus impacting the price of furniture. On the other hand, the price of wood has increased by 100 per cent in the last one year. As a result, bedroom sets have gone up by Rs4,000-6,000 in the peak wedding season.
Atiq says that people will go for Chinese furniture in the future if locally made furniture prices continue to escalate owing to various reasons. There is a need to cut import duty on chipboard so that furniture prices cane come down, while the government should also break the monopoly of foam makers.
Chairman Site Association of Industry, Amin Bandukda says that Chinese fabrics and clothes have captured 40 per cent market share. “We have several times asked the government to check the under invoicing and illegal entry of Chinese goods but all efforts have failed,” he said, adding that even legal imports of Chinese clothes, fabrics and garments are also rising.
He further stated that Chinese fabric was cheaper than the cost of Pakistani fabric. Only dumping duty could help for the local industry.
Chairman Sindh-Balochistan region of All Pakistan Textile Mills Association (APTMA), Mushtaq Vohra says that subsidies and other facilities for export-oriented units in China have created havoc in prices here due to very low production cost. On the contrary, Pakistani products fail to compete with low price Chinese items because of rising utility charges, nine per cent export rate, 13 per cent mark up on loan from commercial banks etc..
Even on the export front China is a potential threat after lifting of quota from January 1, 2005 under WTO. “Our products will remain high priced due to higher cost of production and Chinese items are cheaper due to low cost of production,” Mushtaq says.
Former Vice chairman of Pakistan Automotive Accessories and Parts Manufacturers Association (PAAPAM), Mohammad Ashraf Shaikh, who has just returned from China, says that massive industrialization in China is taking place because the government gives huge facilities like export rebate, no taxes on industries for an initial three year period, cheap land, subsidized utilities and efficient infrastructure. Besides, petroleum products are very cheap in China. All these factors play their role in keeping the productivity cost low.
“In Pakistan the situation is totally reverse for the industries,” he says. “Here the raw material is costlier and thus the price of finished products is high. Something must be done soon to save our industries,” he adds.
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China in Lahore?
‘China 0km’ had Lahorites enthralled. Wondering what this new marketing ruse would turn out to be, they commuted past the huge red-coloured billboard. Soon enough, the teaser was replaced with an image of a shalwar kameez-clad Chinese woman inviting them to a skyrise – ‘China Centre’.This upcoming plaza will be another addition to the thoroughfare of plazas scattered across the city where China-made products are sold. Besides these plazas, open markets are experiencing an influx of Chinese products. Some markets are set up specifically for these products where very few other products are up for sale.
This is true for various categories of consumer goods. Chinese made cloth, ready-made garments, electronic items, gadgets, toys, footwear and various other utilities are finding an increasing market share here.
As this influx rises so does the competition among vendors, dealers and agents, and so do the options available to the spendthrifts of Lahore. Certain categories of products have aroused frenzy among consumers always keen for variety. These categories of course include cloth material, ornamental accessories and footwear. Chinese pure silks, brocades, ‘shanghai’ and the rather indispensable ‘grip’ material for shalwars captivates women shopping for semi-formal and formal wear. Chinese made handbags and jewellery also offer women and girls a cheaper alternative to branded accessories. One can sometimes save in thousands without having to compromise too greatly on quality. And not to mention the substantial number of branded products that are manufactured in China.
Where some vendors have their point-men in China overseeing their placed orders, other vendors buy goods from these wholesale suppliers, while others still depend on smuggled goods through the Sino-Pak border. However, the recently upgraded Preferential Trade Agreement signed with China some two years ago has brought down the tariffs and is likely to encourage more people to import goods from China.
The Chinese products have made such significant inroads into the market that even categories like furniture are now increasingly imported from China. An uptown furniture showroom owner regularly visits China to place his orders. The furniture he gets there is both trendy and affordable for his customers.
The well-known toy shop has also recently opened in an upmarket area offering a wide variety of toys all made in China. This shop is sure to attract many age-groups of children as there is hardly any toys-only store in the city.
This mushroom growth of towers, plazas and stores in Lahore’s commercial areas indicate one persistent fact – goods from China are here to stay. n —Amna Sadat
Buyers and sellers, a happy lot
A large number of consumers visit the roadside stalls in Saddar and other areas to buy Chinese products as they get items at reduced rates compared to regular shops.A third year student of a Polytechnic institute, Waqas Ahmed Hashmi, while buying a Chinese VCD player (unknown brand), said that he was sure of saving Rs 400 by getting this item at Rs1,400 at roadside stalls as compared to Rs1,800 at the shops in the same area. He bought the item after conducting a market survey. A Korean brand was available at Rs3,000.
To a query why he bought this item despite its sub-standard quality, his answer was if a product completed one year at Rs1,400 without any problem then there was no harm in buying it. The seller was also responsible for the one year warranty, he said.
An employee in a law enforcement agency, Sarfaraz, who bought a mini tape at Rs150, said the same thing. If the product worked for the next six months or so, then it was considered a good buy, even if it developed a fault in three months. “This type of item is very helpful during travelling,” he said.
Shopkeeper Karim, who has been in this business for the last nine years in the Saddar area, said that people from every walk of life came to the roadside stalls.
“People visit our open air shops because of cheaper rates as compared to the regular shops. They know about the cheap quality of Chinese goods but the throwaway prices drive them crazy.”
He further added that consumers brought Chinese items with a mind set that they would dispose off it in a short period.
“Frankly speaking, hardly anyone returns to us with products arguing about the fault developed after buying it,” Karim said adding that Chinese goods at least cover the cost which the buyers pay on spot buying.
“In case a fault does develop, we take the product back to the supplier who replaces the item under the warranty or removes the fault. We usually procure the items from Boulton Market and then put on display at roadside stalls,” he explained.
A tape recorder price ranges from Rs600-1,800 while a vacuum flask can be purchased at Rs 120-175 followed by Rs400-700 for a telephone and Rs400-600 for aniron.
“We pay Rs 50-60 a day to the police for our roadside business at Saddar, while other government agencies like the KMC do not charge anything,” he said. n — A. S. K.
A trousseau made in China
A recent trip took me to a well-known shopping mall in the city for some trousseau shopping. Since the idea was to get the best possible quality items, in particular cutlery, everyone had recommended getting fine quality silver made in Germany, England or France as these were countries well known for their high quality of cutlery.However, the trip proved to be a total surprise; from cutlery to dinnerware and cooking pots to water sets, every single product was made in China. We moved from shop to shop searching in vain for cutlery imported from Germany but each seller declared firmly; “We could lie and say to you it’s from Germany but actually it is from China. Every single thing in the shop is made in China.” I was stunned for two reasons. How was I supposed to get the best quality items given that it’s from China? How come China was making everything?
I ended up getting a very good quality cutlery set which the shopkeeper explained was “German brand manufactured in China.” The shopkeeper explained the reason for the lack of authentic goods, “If we had to import these items from Germany, England or anywhere else for that matter, items like dinners sets which you can buy for less than ten thousand rupees now, would be available for a hundred thousand. China is making everything so cheap that it has put a lot of foreign and local firms out of business.’ n –– Afia Zahoor
Barely surviving
While many industries have been up-rooted in the massive floods of goods from China, there are some who are either on the brink of closure or looking towards the government to help them.One of the survivors is a toy company called Evergreen which has witnessed the closure of well established toy industries here. “Chinese toys now enjoy a market share of nearly 100 per cent in mechanical, educational and remote control toys. Invasion of Chinese toys started in 1992 and took the country by storm,” says the company owner.
Another survivor is the stationary industry. Chairman Writing, Instruments Manufacturers Group, Naeem Akhtar Yousuf says that the share of Chinese pencils and ball pens is between 70-80 per cent followed by 80 per cent in fountain pens. In markers the share of China is 85 per cent while in geometry boxes it leads with a 90 per cent share. In colour pencils and ink colours Chinese goods virtually rule the market by 80 and 90 per cent respectively.
In the last five years, eight units have closed in Pakistan while five units are currently barely surviving.
Pakistan and China have recently signed an agreement to enforce early harvest programme (EHP) reducing tariff on a number of industrial and agricultural products from January 1, 2006. The two countries would cut tariff on about 3,000 items in three phases till January 2008. In the first phase the Chinese side will bring down the excise duty on 769 items, mutually agreed products that include vegetables, fruits, marble material and cotton fabrics. Pakistan will reduce the tariff to zero on 486 items including textile machinery and chemicals.
Naeem Akhtar says that under EHP — seven per cent import duty is imposed on the entry of Chinese stationary items in Pakistan. Previously the duty was 20 per cent on finished goods imports.
With smuggling being curbed and with the other negative factors, the local industry is bound to collapse. “If we currently enjoy 20 per cent market share then it will be cut to 10 per cent after this decision in the near future,” Naeem says. The local industry pays 5-15 per cent import duty on raw material besides paying 15 per cent sales tax on the sale of finished products. n —A. S. K.
If you can’t beat them, join them
“If you cannot beat them, join them.” This famous saying was quoted by the Research Head of Karachi Chamber of Commerce and Industry (KCCI), Mohammad Ishaq Subhani while urging the private sector to think about entering in more joint ventures, technology transfer etc. in order to contain the informal entry of Chinese goods, he said during a speech.By joining hands with Chinese counterparts, he said, one can hope for new job avenues. Besides, Pakistan can also talk to the Chinese government and their entrepreneurs in getting free market access for those items which are in high demand.
On the other hand, Pakistan can stop the illegal entry of Chinese goods by imposing anti-dumping duty. But this could not be done easily as China is a friend of Pakistan and a powerfull ally.
“We have suggested that the government make the National Tariff Commission (NTC) an independent body with greater representation of the private sector,” Subhani said adding that the private sector, which is also facing problems due to the entry of Chinese goods, can suggest ways and means to impose anti-dumping duty on Chinese goods as the government cannot take a decision in this regard.
Contrary to the consequences on Pakistan’s economy due to Chinese goods’ influx, consumers are the real beneficiaries and are happy because they pay less for Chinese goods which match the quality of some locally made products which are costlier, Subhani stated.
A market analyst says that a deficit of $1.5 billion in the two way trade between China and Pakistan is not a matter of grave concern, because if the economy suffers suffers from it then on the other hand it has also a positive impact.
Importing of machinery, chemicals etc. have increased from China which the industrialists used to buy from Germany, Taiwan, and Korea at higher rates. This also suggests that the cost of production has definitely declined due to cheaper price of raw material and machinery.
Even compressors for fridge and deep freezers are coming from China at low price. “Our productivity has increased and the cost of production has declined to some extent due to cheaper imports of raw material from China,” said Subhani. But the issue is not as simple as it appears.
The arrival of cheaper goods that erode the market share of local goods, is also breing felt by America and other western countries who feel threatened due to the low cost productivity of Chinese goods.
“If the legal imports to China are on the rise then why has nobody bothered to expedite exports to China. Policy makers and the private sector should now put their heads together and seek opportunities from the Chinese government and their private sector for those items which are in high demand so that exports could be increased,” opined Subhani. n —A. S. K.
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