Two third global of trade is in engineering goods while less than ten percent in textiles. It is the other way round in Pakistan. How can we become the part of the global value chain (GVC) or global production networks without enhancing exports in engineering? One low hanging fruit is in auto parts - be it motorbike, cars or tractors.
Firstly, the need is lower the logistic costs and bring efficiencies at ports, roads, railways and trucking. According to industry experts’ calculations, the cost of transportation from Shanghai to Karachi is Rs18/km while taking same goods from Karachi to Lahore costs Rs76/km. Similarly, a 20 cubic feet container load from Karachi to a European port costs $910 while the cost is $600 from Mumbai to the same European port.
To become part of GVC, the utmost need is to lower these costs, so that the country can enhance its trade volume. For example, Vietnam’s total trade volume is around $400 billion, while Pakistan’s is well under $100 billion. The long term solution to our balance of payment woes is not in import compression, but in expanding the overall trade volume. For that to happen, trade liberalization policies, lobbying and logistic efficiencies are prerequisite.
The cost of logistic is high due to premium charged on the country risk, and operational inefficiencies. With PM’s efforts on improving country’s image amid improved security situation, the government level negotiations are required to lower the logistic insurance premiums or warfare charges. Improvement in port and rail infrastructure is also an important part that cannot be ignored.
Coming to the auto part industry, the strengthening of relationship of vendors with OEMs is at the core. Currently, there are three OEMs in car segment and all three are Japanese companies. The parent company in Japan decides on the localization of any part, but the vendors producing parts under contract cannot sell those in after sale market domestically, and are not allowed to exports.
Usually, the automobile companies invest in vendor industry and then export to their assembly networks in other countries - Japanese companies operating in Pakistan have such partnerships mostly in Thailand and Vietnam. Localization is happening in Pakistan, but not at the desired pace. However, to date, there is no partnership with local vendors to become part of GVC. One case of success might happen soon as one vendor plant, for the purpose, is planned to be installed in Port Qasim SEZ.
That is just a start, the government should make a case of lobbying to Japanese players and upcoming other players to work with vendors in making export market for Pakistan auto parts. The vendor industry players see a few bottlenecks - such as the overall country risk. The international auto industry works on just in time inventory system where timely supply of parts is the essence. They perceive that in Pakistan, every now and then there are strikes or transportation routes are blocked, and seeing that, they are not ready to invest in Pakistan. It is the role of the government to address these fears.
The other problem is the low productivity of the labour in Pakistan which makes the cost high despite the fact that labour wages are lower in Pakistan. The need is to invest in human resource investment through vocational training and improving the quality of engineers. Third issue is undue tariffs on raw material imports which are to be processed for domestic use as well as for exports. In case of exports, if the refund scheme is availed, it is hard to get refunds in time - causing cash flow problems. The National Tariff Policy is in the making, and it should address this issue. Once resolved, the policymakers can push the foreign investors to make joint ventures with local vendors for exporting markets.
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