No big boost in exports is expected till Pakistani manufacturers reorient their business model and target achieving scales to integrate effectively in the global supply chain.
They might also need to build agile organisations to quickly restructure and reconfigure market strategies to compete for a bigger share in the international market.
The perception that the private sector of Pakistan lacks capacity and capability can’t be true as it did prove its mettle by competing and breaking the stronghold of multinationals in the domestic market when it chose to. Thirty years back, multinationals ruled the drug market in Pakistan. Today, the local pharmaceutical industry commands the lion’s share in the domestic medicine market.
A recent report by the Pakistan Business Council (PBC) titled “Enhancing the Competitiveness of Pakistan’s Refrigerator Industry” provides a valuable insight in this regard. The local labour-intensive refrigerator industry that caters to 98 per cent of domestic demand by utilising 75-80pc capacity hasn’t been able to break into the export market. The said report dissected the costing and regulatory duty framework to conclude that the biggest hurdle in entering the export market is neither expensive power nor high dependence on imported raw material. Rather, it was the limited volume of production and Pakistan’s low economies of scale.
‘We have removed most of the impediments. We are witnessing excellent growth in industry and exports,’ says Abdul Razak Dawood
It is not surprising, therefore, that over the past decade, the contribution of the manufacturing sector to GDP has been hovering in the range of 12-14pc, which is the lowest in the region. The huge trade deficit (where export earnings were barely one-third of import spending) speaks of the poor show of the corporate sector in the global marketplace. The PTI government did succeed in containing and narrowing the trade gap but it was more through import suppression than export gains. Did the government and the private sector pay attention to expand the domestic market, achieve volumes and economies of scale to enter the global marketplace more confidently?
The attempt to approach the hierarchy in the Ministry of Industry was in vain. An officer who promised to share the position of the ministry in writing later excused herself saying that the team was preoccupied with some other work and had nothing to offer on the subject. Hammad Azhar, federal minister for industries and production, was not available either.
Abdul Razak Dawood, adviser to the prime minister on commerce and industry, responded promptly. In a written statement, he listed nine reasons for laggard growth of manufacturing and exports. He claimed: “We have removed most of these impediments so we are witnessing excellent growth of industry and exports.
“Manufacturing has been stuck at the 12-14pc of GDP for the following reasons: (a) severe energy crisis, (b) artificially overvalued rupee that encouraged imports over local manufacturing, (c) indiscriminate use of customs duty, additional customs duty and regulatory duties, making imported inputs too costly, (d) high duties led to an anti-export bias, which shrank exports, (e) holding back exporters’ refunds, (f) wrong setting of customs duty drawback amounts and then not paying them, (g) badly negotiated Free Trade Agreement with China, (h) putting revenue considerations before industrialisation and (i) not giving exporters competitive energy rates.”
Commenting on the role of the private sector in this regard, a retired bureaucrat who served in trade offices of Pakistan embassies in several key capitals blamed the business class. He mentioned several occasions when he saw businessmen flouting trade opportunities over the course of his career. “I have personally felt humiliated many times when consignments were rejected and the embassy was dragged in to clear the mess at the port of delivery.
“Economic diplomacy is tough but the irresponsible conduct of Pakistan’s businessmen makes it so much harder. They are hardened free riders. I’m not sure if they are naive or pure evil.”
He was bitter. “Addicted to protection and patronage, desperate for quick returns, shy to invest in innovation and standards, local companies lack what it takes to compete globally.”
A senior officer blamed protectionism for making the private sector of Pakistan lethargic, corrupt and complacent. “When carmakers can sell cheap old models for a fortune to a captive customer base, why would they bother to improve anything? You allow free import of cars, introduce competition in the auto market and see for yourself what happens,” he pressed.
Azhar Ali Chaudhry, former federal secretary of industries, agreed. “The short-sighted business class of Pakistan is so fixated on profit margins that they never tried to achieve scale or integrate in the global supply chain.”
Contesting this line of argument, PBC CEO Ehsan Malik pulled out the aforementioned report in defence of the business class. He wrote: “Refrigerators in Pakistan are sold at a lower price than India. This is despite 80pc reliance on imported materials and a higher cost of utilities. So it is incorrect to assume that local manufacturers are pursuing margin over scale. Indeed, the opposite is true. With 42pc penetration, and 75pc spare capacity, local manufacturers are trying to grow the market and achieve scale by keeping their margins and prices down.
“The contention about lack of global integration is also incorrect. Eighty per cent of the components are imported and the three big players accounting for 90pc market share are now owned or allied with global chains – Dawlance with Arcelik, Haier is a global player and PEL with Panasonic. Hence, they have access to global knowhow.
“Scale is a function of domestic and global reach. As 98pc of refrigerators in Pakistan are direct cool but global demand is for no-frost refrigerators, the priority for domestic manufacturers is to gain local scale before they can possibly address global demand.
“The refrigerator industry does not enjoy any protection beyond what is afforded to the engineering industry. Its imported components, apart from glass, carry a zero tariff. Impacting the competitiveness of the refrigerator industry is seasonality – bulk of the sales are made from March to May. Hence, the need to build inventory and carry the cost of working capital. The government provides tax holidays to new entrants while heavily taxing existing companies.”
Published in Dawn, The Business and Finance Weekly, February 22nd, 2021