Driving Backwards: What is Wrong with Pakistans Automobile Industry?

PREFACE “Driving Backwards: What is Wrong with Pakistans Automobile Industry†is the result of a collaborative effort led by Usman Qadir, Shaaf Najib, and myself, aimed at unraveling the complexities and inefficiencies that have long plagued Pakistans automobile sector. The importance of the global automobile industry is undeniable, with its valuation projected to reach USD 4.36 trillion in 2024. This sector is not only essential for daily mobility but also underpins numerous ancillary industries such as steel, glass, engineering, rubber, and paint. Despite these vast potentials, Pakistans automobile industry has struggled to tap into these opportunities, remaining trapped in a cycle of low production, outdated technology, and widespread consumer dissatisfaction. For the past 70 years, Pakistans automobile policy has been misguided, providing excessive protection to the industry without fostering the development of exports. This protectionist approach has stunted growth and innovation, leading to an industry that is insulated from global competition and out of touch with international standards. Moreover, the policy dialogue in Pakistan is dominated by outdated concepts such as “localization,†“indigenization,†and “import substitution.†These terms have long been rendered obsolete by decades of research on global value chains, economic growth, and the experiences of other countries. Yet, they persist in Pakistan, often to the point of absurdity. The policy-making process itself is another area of concern. Policies are formulated in the interests of a select few, with little to no local research or public debate. Such policies are often crafted behind closed doors, without any meaningful discussion with society at large. This lack of transparency and inclusivity has contributed to the perpetuation of ineffective and outdated strategies. One glaring example of misguided policy is the longstanding ban on new car imports. For decades, there has been no local car import business, and instead, Pakistan has relied on convoluted schemes like the “baggage scheme†and inconsistent secondhand car import policies. At various times, these policies have allowed the import of three-year-old cars, five-year-old cars, and now, no secondhand cars at all can be imported. These erratic policies have only served to stifle competition and limit consumer choice. Manufacturers in Pakistan often contend that they need decades to build a position where they can export. However, this argument does not hold up under scrutiny, as many countries that started after Pakistan are now successfully exporting vehicles, often using the same manufacturers as those in Pakistan. Additionally, manufacturers frequently threaten that any disruption to their operations would destabilize the Pakistani labor market. In reality, these manufacturers employ only a small number of workers, and their departure would not significantly disturb the market. The broader car value chain, which employs a far greater number of people, has the potential to thrive if the industry were opened up to competition and innovation. To address these issues, the Pakistan Institute of Development Economics (PIDE) recommends a radical shift in policy. Specifically, PIDE proposes that the profits of automobile manufacturers be taxed at a rate of 60%. However, to incentivize exports, manufacturers should be offered a rebate of 2% for every 1% of their sales that they export. In this way, any manufacturer that exports 30% of its production could effectively become tax-free. This policy aims to push manufacturers towards greater integration into global markets, enhancing competitiveness and reducing reliance on the domestic market alone. This book is the culmination of three years of intensive research, stakeholder consultations, and conferences organized by PIDE. It is meticulously structured to provide a thorough analysis of the persistent challenges faced by the sector and to propose potential pathways for revitalizing this critical industry. The book is divided into seven chapters, each penned by experts in the field, offering a diverse range of perspectives and in-depth analyses. The initial chapters (two to five) delve into the fundamental issues that have stunted the growth of Pakistans automobile industry. These discussions cover the detrimental impacts of an overemphasis on localization, the ongoing challenges faced by consumers, the black market premium phenomenon known as “On Money,†and a critical review of past government policies. The subsequent chapters (six to eight) turn towards the future of mobility, exploring the potential and challenges associated with Electric Vehicles (EVs) in Pakistan. These chapters address environmental implications, the current state of the EV transition, and a comparative analysis of the costs and benefits of EVs versus Internal Combustion Engine Vehicles. Our objective with this book is to illuminate the deep-seated issues within Pakistans automobile industry and to stimulate discussions on actionable strategies for reform. The insights provided by the various contributors underscore the urgent need for a paradigm shift in policy and industry practices, aligning them with global advancements and consumer expectations. As editors, Usman Qadir, Shaaf Najib, and I are deeply grateful to the contributing authors for their invaluable input and to PIDE for its unwavering support of this research endeavor. We hope that this book will serve as a catalyst for meaningful change, guiding policymakers, industry stakeholders, and academics towards a more competitive, efficient, and consumer-friendly automobile industry in Pakistan.