The monthly average for car sales in September 2022 was the lowest in the previous five years. This followed the sales collapse, which had already caused the quarter's statistics to be 50% lower than they had been the year before.
The rapid rise in auto costs, the high cost of auto finance, and the limited purchasing power of customers are all blamed for the sharp decrease. The State Bank of Pakistan's limitations on the importation of completely knocked-down (CKD) kits have also slowed down manufacturing, compelling local assemblers to observe plant closures and non-production days. The central bank's action, intended to limit the economy's loss of dollars due to the ongoing depletion of locally accessible foreign currency, has had a detrimental effect on automobile manufacturing, contributing to the decline in sales.
Pakistan formerly intended to increase its yearly vehicle output from the current 250,000 units to around 1 million units over the following five years. The government said that this was possible because several automakers from across the world, particularly Chinese businesses, were interested in investing in the domestic auto sector.
However, even before the plane to realize that goal could take off, the local car sector was severely impacted by the State Bank's recent import limitations, which exposed the exaggerated claims of high localization made by the local assemblers. Due to the inadequate localization gained over the years, even the manufacture of cars that are more than ten years old has been restricted.
Additionally, the import bill for CKD and SKD kits increased alarmingly to $1.7 billion in FY22 from $1.11 billion in FY21, partly because of inadequate localization in cars offered by both new entrants and established assemblers. It's interesting to note that Pakistan's government was able to withdraw $1.1 billion USD after the International Monetary Fund (IMF) recently finished the combined 7th and 8th reviews under the Extended Fund Facility (EFF).
This indicates that the local assemblers' imports of CKD and SKD parts alone were substantially larger than the IMF tranche, which the government desperately needed to avoid default. This also demonstrates the enormous flaws in our car policy, since just 250,000 units were sufficient to severely harm the economy due to the enormous sums spent on imports. Imagine how we would reach the aforementioned 1 million unit goal. Or perhaps the government thought that by importing everything from overseas with nothing in the way of localization, the car industry would benefit. Without a doubt!
According to the Economic Advisory Group (EAG), by supporting market-seeking FDI (foreign direct investment) and the establishment of assembly plants, which are the lowest components of the entire value chain, least profitable, and do not allow for the transfer of technology, our automobile policy is a repetition of the mistakes made for more than 40 years in the automobile industry.
The influx of FDI has been modest compared to profits made and repatriated out of the nation because our policies have solely been focused on creating assembly units rather than increasing manufacturing capacity, which is the true driver of development in an economy. Additionally, the government's efforts to attract FDI in the form of assembly plants rely on incentives like tariffs and subsidies.
The goal of protection is to provide a space for future technological advancements that would increase efficiency—something that has never happened in Pakistan. Nevertheless, ongoing protection hasn't given the car sector the tools it needs to become productive, which results in consumer and welfare losses owing to increased pricing. In fact, lobbies have worked hard to guarantee that protection is never lifted, keeping the sector in its infancy forever. As a result, protection for any length of time has proven to be fatal.
The government will be lobbied by the protected local auto sector to prohibit any competition, even if it comes from decades-old used automobiles, and it will continue to rely on imports only to assemble those imported parts locally. Because imported goods are being subsidized at the expense of home manufacture, this also deters domestic producers of vehicle parts. This suggests that relative profitability in the assembly industry will be better than in the auto-parts manufacturing industry, which will eventually weaken the connection between domestic auto-part manufacturers and auto-assemblers.
The domestic market is too limited for the car sector to expand because demand is being constrained by protectionist regulations. In order to effectively maintain a demand-supply imbalance that benefits them in numerous ways, including generating premium/own-money, assemblers intentionally operate significantly below their manufacturing capacity. In order to facilitate the transfer of knowledge and technology, Pakistan's industrial community is not adequately connected to it.
Businesses had a great opportunity to profit from the tools and jigs that were abandoned from the rest of the globe since the majority of what has been launched in Pakistan in recent years are models that are globally obsolete. Furthermore, the minimal requirements for any car to be introduced in our nation are not governed by auto policy.
We need to completely rethink our policies, and thin tanks need to reset their thinking about what the auto sector has accomplished over the past three decades under protection. The auto industry will continue to be import-dependent, spending billions of dollars on importing parts while always railing against the meager amount of used-car imports. To assist boost the GDP of the nation, we require an industry that can export either whole automobiles or at least significant quantities of automotive parts.
The urgent necessity of the day is the implementation of measures to guarantee consumer and general economic wellbeing. Time to act and wake up!