What is Pakistan’s car industry good for?

With insufficient local demand and no exports, we need to rethink our automobile policy.
Published February 8, 2019

The transaction ban on cars has been lifted, at least partially. Commercial imports of cars have been severely restricted. It appears our infamous local automobile manufacturers — err, assemblers — have won.

Let’s be clear here. Imports of cars have not been banned per se — a mechanism to commercially import cars did not exist in the first place. All cars were imported under personal baggage or gift schemes, which have now been tightened.

Cars can now only be imported if all payments, including duties, are made using money earned abroad and remitted through formal banking channels.

These steps are not very surprising in Pakistan’s economic conditions. I wrote previously about how banning transactions in any industry has ripple effects, dragging other sectors of the economy down with it.

We are also very familiar with Pakistan’s chronic trade deficit, driving incessant demand for dollars and putting consistent downward pressures on the rupee.

The macroeconomic compulsion of encouraging local manufacture of cars while restricting imports has finally found its ground in the midst of our fiscal crisis.

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The bigger problem with the ban, however, was different. In the form that it existed, prohibiting sales to non-filers disproportionately pushed the poorest buyers out of the market.

Sales figures backed this intuition; vehicles like Ravi, a small commercial van that microentrepreneurs often buy, were hit strongest. With the ban on new registrations now partially lifted for vehicles up to 1300cc, this concern also stands addressed.

The market is therefore open to buyers of vehicles up to 1300cc again. In theory, this removes the disadvantage that the poorest buyers faced. However, one thing is certain: consumers are worse off as a whole, and these policy adjustments are formulated to appease local assemblers more than anything else.

Why do local assemblers need the government to appease them every now and then? The simple answer is, Pakistan’s market for automobiles is too small to merit any serious investment without significant incentives or concrete guarantees.

Consider these numbers, for example: we produce around 200,000 cars a year. With six times the population, India produces more than four million — 20 times as many — cars and more than 20 million two-wheelers.

With a population less than a third of ours, Thailand produces approximately two million units a year, often producing more cars in a month than we do in a year.

The next question, then, concerns the success of these markets: what makes a successful car market?

Local demand is part of the answer, including in countries such as India where more than 80 per cent of the production is sold domestically. China and the United States are also large domestic markets that are very attractive opportunities for car manufacturers.

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However, the common element in all these countries is a large population with a significant number of people who can afford to buy cars.

The United States, with 325 million people, now averages more than two cars per household. India and China both have populations of over a billion people each, and even with relatively low car ownership rates, their sheer size alone would make them among the biggest markets in the world.

The second part of a successful market involves export potential for automobile production. Thailand, an example I quoted earlier, has a population of less than a third of Pakistan, but produces more than 10 times as many cars.

More than half of them are exported; companies like Toyota, Mitsubishi and even BMW use the country as a regional manufacturing base from where they export to other countries.

It should be clear to us that Pakistan is not a good market on either front. Locally, only 6pc of our households can afford to own a car, bus or truck — with a household size of over six, that is a vehicle ownership rate of less than 1pc.

When I talk of the poorest buyers in the market, even those who buy Mehrans or other low-end cars are among the richest people in the country in relative terms.

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And where can we export to?

Under current conditions, we have very little potential in our immediate neighbourhood. China and India, among the world’s biggest markets, produce their own vehicles and are in fact growing in influence as exporters of cars.

Iran also has a fairly robust automobile production industry, producing in excess of one million vehicles every year in spite of the sanctions on the country. Afghanistan worries us more because of cars that are smuggled in from the country, let alone exported to it.

We clearly do not have a market for local production of cars that is both beneficial to local consumers and profitable for manufacturers. The state of our industry and the quality of cars it produces is evidence of this; recent additions of new brands, welcome as they are, seem to be following the same model of incentivised investments, centralised ownership in a few hands, and eventually profiting off the protected market in Pakistan.

These problems are all in addition to the immense environmental and infrastructural costs of private car usage that have been highlighted multiple times before.

Even with only 6pc of Pakistani households owning vehicles, our big cities are already choked. Imagine if all 32 million households in Pakistan were able to afford two cars each: are we really prepared for that at all?

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The truth is, private cars present a uniquely double-edged sword for our country. Assembling cars locally creates thousands of jobs, even if the industry has largely been stagnant and devoid of any innovation, entrepreneurship or even the mundane economies of scale and scope associated with long-term establishment.

Car sales also generate revenue for the government through sales and excise taxes, registration charges and other taxes. At the same time, the industry’s consumers are predominantly the richest few.

Yet the government is compelled to protect and incentivise local assemblers for them to operate profitably in a very small market.

Even with our low rate of car ownership, the costs are huge: we spend billions on building infrastructure that enables private cars. We import oil worth billions of dollars, of which almost half is used to power our love for private cars.

In burning these hundreds of thousands of litres of fuel everyday, we create toxic environmental conditions for the poorest of our people: those who must walk, cycle or use other public means to commute, who cannot afford the filtered air through a car’s air-conditioner, and worse, who spend days and nights out on the streets.

At some point we will have to stop and ask ourselves: is it really worth it?

From a scientific and planning perspective, that point has long passed. Yet we are still eagerly attracting new companies in — to assemble private cars, act as protected sources of profit for our seths and make already dysfunctional cities worse by introducing even more cars on the road.

There is no easy way out here. If produce cars we must, we should explore possibilities to eventually export vehicles to neighbouring markets while discouraging their usage locally — think Thailand again, where the prevalence of locally manufactured diesel trucks is widely cited as an environmental crisis which the government is now fighting on an emergent basis.

Better still, instead of cars, we can and should encourage manufacturers of environmentally friendly transit vehicles — buses, vans — to set up shop in Pakistan.

Instead of catering to the 1%, such vehicles can cater to the 99% and their need to travel both within and between places. They are also environmentally safer and reduce the need for infrastructure.

And, interestingly, the potential for export is also higher: most countries (including Thailand!) have followed car-friendly policies similar to ours, and the market for transit vehicles presents unique opportunities that we can compete for.

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