The automobile assemblers have a history of protection in Pakistan. The sun is not setting in this import substituting industry. The three Japanese players are here for the last 3-4 decades, and they have only faced meaningful competition in the last decade or so – first the government relaxed the used car import policy (2011 onwards) which was followed by a policy that has allowed new entrants to enter the CKDmarket (2016 onwards). And now (2021 onwards), the government is pushing OEMs to start exporting.

Japanese are perhaps not happy with this, as reportedly, Japanese government has threatened to take Pakistan to the World Trade Organization (WTO) for forcing its three car assembling companies to export, as they think that it is a clear violation of WTO rules.

Without getting into the trade laws and legal debate, the Pakistan government has multiple ways to tighten the screws. The duty structure of CBU and CKD can be tweaked to reduce the protection of the local assemblers (CKD market) which is dominated by these three Japanese players.

Having said that, the OEMs are at a disadvantage to an extent. To gain competitiveness for surviving without protection and (or) exporting (parts and fully assembled cars), a certain scale is required.

In 2007-08, when the car market was around 200k units, the talks were of getting to 500K to attain scale. At that time, there were a mere three players in the market. Today, the number is much higher and used cars imports are on the rise too. And this year (FY24), combined CKD and CBU, the full year sales are likely to be below 125k. How can someone be competitive in this market?

Some would bleed. It’s either the consumer or the producer. The consumer is beneficiary of enhanced competition in the last decade. The buyer has multiple options. The market has moved from ‘on’ to ‘off’, as lately, players have reduced prices by 2-2.5 percent on certain variants (including hot cakes). Others are doing the same. Some are selling cars in instalments without charging any interest. That is unheard of in a market where OEM usually raise working capital from consumers while keeping their surplus cash invested in treasury instruments.

It is not easy for Japanese to dominate the market and influence the policies. The time has changed. Producer has to offer some value – mainly in terms of low pricing after localization. This might not be happening. For example, in Toyota Cross the assembler claims to have 50 percent localization; however, its price net of all taxes is around $23,900 which is a mere 3 percent to discount to net of taxes price in UAE where CBU is imported. And perhaps, excluding dealer margins, the car is cheaper in Dubai. Where is the advantage of 50 percent localization in Pakistan?

These kinds of pressing questions would be raised in a low volume market with growing competition. And with the low benefit of localization, export is becoming an issue. The government is asking to export mere 2 percent of imported value of CKD starting FY22, which may increase to 10 percent by FY26. The export could be of parts or assembled cars. The number is not big; but resolve is missing.

There are some Chinese new entrants which are experimenting with exporting fully assembled cars. Their localization is very low, but they still are tapping the market. On the other hand, biggest Japanese player by value in the CKD market was able to exports carpetsin recent months.

If this export policy must continue, there is a good chance that Chinese players will grab some share. Chinese are better in EVs, and they don’t have strong presence in right hand driving markets. They can start with Pakistan to cater to local and export market, as it might be better to tap markets such as Keyna from Pakistan (both are righthand markets) versus doing in China which is a left-hand market.

The EV giant BYD has already announced its entry in Pakistan, and it is a matter of time, before it turns big. Thus, the Japanese must rethink the strategy by creating more value for consumer from localization and be innovative in exporting. If they cannot export in the existing setup, they can buy auto part players which are up for sale, and some have potential for exports.

The status quo of infancy till attaining scale is near expiration.