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The business bigwigs—rallying under the banner of “Make in Pakistan” believe we are becoming slaves to imports. And synonymous to this theme is the suggestion to introduce policies for import substitution; benefits of which are contentious and subject to a global debate. So let’s consider the case of the local automobile industry, with the caveat that not all sectors are the same or work the same way. The car industry has been manufacturing for over three decades, so have they successfully substituted imports?

The sector has had three major Japanese car makers, who started off by producing 33,000 units back in 1996, growing to the peak of 176,000 units in 2007, and since laid low. Now the volumes are hitting 200,000 cars and are expected to go up with the culmination of the new auto policy with at least three more players entering the field (Read “The Year of Cars”, Jan 29, 2018).

There is no doubt that the three Original Equipment Manufacturers (OEMs) have invested in Pakistan. Recently, Indus Motors expanded capacity worth Rs4 billion. Honda invested Rs240million to expand its press and paint shops. The sector provides direct and indirect jobs to over 2 million people.

There is a large parts manufacturing industry that runs parallel to the primary industry. Technology transfer has also happened with the support of carmakers. Vendors have signed technical agreements with prominent counterparts abroad to increase capabilities. Indus Motors Chief, Ali Jamali told BR Research that Toyota in Pakistan buys 126 million parts from local vendors every day. Seems like a huge number! But let’s consider another huge number.

Import bill for Completely Knocked Down (CKD) kits has grown from $268 million in FY09 to $673 million in FY17, according to data retrieved from Pakistan Bureau of Statistics (PBS). That’s more than Completely Built Unit (CBU) imports. This means, the imported content to manufacture one unit of car, on average, has remained between $3,000 to $4,000 through the years. With such a huge import burden for manufacturing, have we truly substituted imports?

Without giving exact numbers, OEMs argue that they have very high levels of localization. But our calculations suggest that localization levels have remained between 50-56 percent between FY12 and FY17. In fact, localization level has come down from 52 percent in FY12, instead of increasing. Today, at a weighted average price of cars at Rs1.4 million, it stands at 51 percent. (See table)

While these levels haven’t changed, it is also important to note that none of the three carmakers have introduced any new models, except Suzuki with its Wagon-R and most recently, Fortuner and Honda Br-V in the high-end categories (mind, that these two were not considered for our localization level estimations. They have low volumes and localization levels). In fact, most new cars are upgrades or uplifts with aesthetic changes to the design.

The second question is: if we are making 126 million parts every day for one OEM, what kind of parts are these, and what is their value? It is our understanding – and clear from the numbers—that the functional, high-tech (and expensive) parts are imported and local vendors make parts that are either cosmetic, or require little engineering. While vendors have invested in introducing low-tech parts, there is a lot more investment, expansion, tech-transfer and training of engineers to be desired.

Lastly, it is argued that localization will happen only if it makes economic sense; and the culprit is the low volumes. There are parts manufacturers in countries like Thailand, Singapore and Indonesia who have such high volumes for manufacturing that costs per unit are lower. Importing these parts is cheaper for carmakers here, than if they were to make them locally.

This assertion is not wrong. India has managed to localize up to 90 percent in most cases while expanding car varieties and it has happened at the back of fast growing volumes. High-end brands, the likes of BMW in India are 50 percent localized in all models while Mercedes Benz has 60 percent localization.

So then, the question becomes, why haven’t we brought volumes? Is the demand not enough, or do OEMs deliberately keep volumes low to create a shortage and charge the prices they desire? Surely, the huge influx of used cars is a good proxy for demand. Why are they being complacent and content with what they are making? Is it because they enjoy lifelong protection from imported cars in the form of hefty tariffs? Why do they shy away from making more investments in this fast growing population of 200 million people? Is it because they face virtually no competition and can sail by with business-as-usual?

Evidently, if they were to expand, they’d be able to localize more, which would bring down import bill, bring down costs, which would in turn bring down prices for end-users as well. Investment into localization will hurt the pocket in the short run but will pay dividends in the future.

Nevertheless, somewhere along the way, OEMs have demonstrably failed in substituting imports while “making in Pakistan”. Now we are resigned to hope that the new auto players who are expected to shake the industry will commit to go beyond business-as-usual. But import substitution, we will believe only when we see it.

Copyright Business Recorder, 2018

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