Vision for Economic Transformation:

A Case Study of Auto Industry in Pakistan

Prepared by Tuaha Adil

Key Highlights
 Trade barriers have restricted the transfer of technology and resulted in a decline in
productivity.
 High tariffs and taxes have soared the prices resulting in the inability of the majority to
afford vehicles domestically and declined competitiveness internationally.
 Dependence on limited products and markets has stagnated the exports of the country.
 Uncertainty emanating from short-term policies has mired foreign investment in the
country.
 Prolong protection diminishes incentives to improve and contributes to inefficiency,
economic losses and unproductive utilization of resources.
 Absence of mechanism for localization of components in the auto policies has restricted
the backward linkages of auto industry.
Introduction
The transformation of an economy is contingent upon the utilization of resources in the most
productive manner. Sectors of the economy will operate at maximum potential when business
conducive ambiance is created through favorable and ease promoting government policies. The
economic transformation policy based on the identification and resolution of contemporary
structural and sectoral inefficiencies and futile economic policies is inevitable for the prosperity
of the country. The performance of the auto sector is analyzed as a case study to evaluate the
efficiency of government industrial policies. The government’s policies and initiatives to expand
the auto industry are based on the assumption of latent comparative advantage. Therefore,
domestic auto companies are protected from international competition through tariffs and tax cuts.
However, the outcome of policies and performance of the sector have been unsatisfactory due to
confinement to assembly of vehicles and nonexistent localization of products. The policies adopted
by countries having developed automobile industries have also been discussed to evaluate
shortcomings of the policies adopted in Pakistan.

1
Industrial Policy Framework
 Reduce custom and regulatory duties and replace these with a uniform tariff across all
sectors and product categories1.
 Redesign existing schemes (such as the SBP’s export finance scheme) to incentivize the
export of new products and/or to new markets.
 Focus on being competitive for parts of Global Value Chains (GVCs) for products, rather
than for the entire product, and on moving up GVCs.
 Strengthen industrial and infrastructure capacity to attract efficiency-seeking FDI (which
is more geared to boost exports) rather than market-seeking FDI.
 Actively engage with regional trading blocs to either join these or enter into an FTA with
them. Potential candidates include Regional Comprehensive Economic Participation
(RCEP) and African Continental Free Trade Area (AfCFTA)2.
 Engage with regional countries and work towards signing bilateral FTAs.
 Work with national and sub-national trade bodies to help businesses conform to
international standards.
 Improve border infrastructure along the western border and facilitate Central Asian
countries to use Gwadar port for their trade.

Evolution of Automobile Industry in Pakistan

Automobile industry has been one of the highest protected industries in the country. In 1990s,
assembly of cars started in Pakistan by three companies i.e. Pakistan Suzuki, Honda Atlas Motors
and Toyota Indus Motors, while the assembly of motorcycles, trucks, and busses started from 2001
to 2007. The assemblers were given incentives in the form of tax exemptions and tariffs on the
imports of cars along with barriers of entry for new companies. The protection was intended to
protect the assemblers from international competition in their early years until efficiency is
achieved, an Infant Industry Argument first put forward by Alexander Hamilton, which states that
infant industries need protective measures in order to survive and successfully compete with
foreign mature competitors as they lack same level of technology, expertise and efficiency. But
the policymakers ignored the prerequisites of the protection such as dynamic externalities,
potential to mature, technological innovation and spillover effects.
The most quoted successful examples of infant industry argument are the US, UK and Europe, but
the fact is that these countries provided protection in the 18th and 19th centuries at the time of
industrial revolution and were spending heavily on research and innovation to enhance

1
Industrial Policy Framework is extracted from the article, unpublished, “New Vision for Economic Transformation:
Rethinking Resource Allocation and Productive Structures” by Economic Advisory Group chaired by Syed Javed
Hassan.
2
PRIME. 2021. “RCEP: An Opportunity to Increase Pakistan’s Trade & Investment Potential”.
https://primeinstitute.org/rcep-an-opportunity-to-increase-pakistans-trade-investment-potential/

2
productivity and efficiency on their own. However, auto industry in Pakistan was provided
protection but they did not undergo any research and innovation, and consequently, remained
inefficient. John Stuart Mill proposed that protection should be temporary and the protected
industry should become self-sufficient in a given time while Charles Bastable proposed a test
which envisages that the cost of protection faced by society in terms of high prices should be
compensated by lower prices after achieving efficiency to ensure consumer and economic welfare.
Unfortunately, no tests were performed to determine the viability and efficacy of the protection
provided to the automobile industry.
The provision of protection without sufficient empirical analysis has proved to be futile and latent
comparative advantage could not be realized as a result of overwhelming regulations. In reality,
the government’s protection kept the industry inefficient and restricted the scale of operation.
Resultantly, the actual demand for vehicles and actual comparative advantage could not be
determined. In contrast, motorcycle industry flourished and prices remained stable due to removal
of trade barriers and entry of multiple companies.
The automobile companies expand their scale of operation and morph assembly plants into
manufacturing plants when the demand of vehicles is high and sale exceeds their specific targets.
In case of Pakistan, the high cost of cars, low per capita income and myriad taxes have restricted
the affordability of citizens and demand from growing. Governments in Pakistan kept tariffs and
taxes high to restrict the demand for vehicles to curb the import bill as the country continuously
suffered from current account deficits but such intervention resulted in hindering the transfer of
technology and subsequent efficiency. Resultantly, car ownership that stood at 6 percent in 2015
increased to mere a 9 percent in 2019 and motorcycle ownership increased from 41 percent to 53
percent in the mentioned period. Therefore, auto companies find it more profitable to continue
assembly business, governments are complacent on the revenues generated from tariffs and taxes,
but consumers are at the receiving end of welfare losses.
Automotive Development Policy 2016-21
Before discussing the performance of the auto sector, it is imperative to mention the policies
adopted by the government to augment efficiency and productivity. The government implemented
Automotive Development Policy (ADP) in 2016 with an objective: to facilitate higher volume,
more investment and better quality with the latest technology; create a balance between industrial
growth and tariffs to ensure sustainability of all stakeholders; ensure consumer welfare and provide
policy consistency and predictability for investors. The reforms envisaged in the policy comprise
rationalizing import policy, tariff restructuring, establishment of Pakistan Automotive Institute,
financing from commercial banks and incentivized fleet operations. The components of auto policy
are illustrated in Table 1.

3
 Table 1: Components of Automotive Development Policy 2016-21

Category Description Tariff structure

 Duty-free import of plant and machinery for setting up
the assembly and/or manufacturing facility on a one-
time basis.
 Import of 100 vehicles of the same variant in CBU
Installation of new and form at 50 percent of the prevailing duty for test
independent auto assembly and marketing after the groundbreaking of the project
manufacturing facilities by an  Customs duty of 10 percent on non-localized parts
Greenfield against 32.5 percent for new investors and 30 percent
investor for the production of
Investment for old investors.
vehicles of a make not already
being assembled / manufactured  Customs duty of 25 percent on localized parts against
in Pakistan. 50 percent for new investors and 45 percent for old
investors.
 In the CBU category, customs duty on cars up to
1,800cc engine capacity reduced by 10% for 2 years
for old investors and 7 years for new investors.

 Import of non-localized parts at 10 percent rate of

Revival of existing assembly or
manufacturing plants closed or
Brownfield not operational before July 2013
Investment through investment by owners
or new investors or joint
ventures.
customs duty and localized parts at 25 percent duty for
a period of three years for the manufacturing of Cars
and LCVs.
 Import of all parts (both localized and non-localized)
at prevailing customs duty applicable to non-localized
parts for manufacturing of trucks, buses and prime-
movers for a period of three years.

As a result of this policy, more than 12 automakers announced to collaborate with different
companies in Pakistan; however, only a few projects like Kia-Lucky, Faw Al-Haj Motors, Nissan
Gandhara, Hyundai Nishat motors, Changan- Master, United and Regal materialized; whereas, rest
of the investments were either completely pulled off or put on hold like Renault, Volkswagen, Fiat,
Zotye and Chery. The efficacy of policy can be assessed from the outcome: although few
companies have entered the auto industry in Pakistan, yet the scale of operation remains confined
to assembly, there is no significant increase in sales, prices of vehicles remain high and out of the
reach of majority, transfer of technology did not happen and local manufacturing of vehicles is not
an objective of auto companies in near future. The main components of vehicles such as engine,
transmission, gearbox, axles, ignition system, clutch system, braking system and motors are still
imported by the auto companies.

Performance of Auto industry

The performance of the auto sector can be gauged from the analysis of following parameters.

4
 1. Prices and Regulations

The productivity and efficiency of a sector depend

upon cost-effectiveness and business enabling
environment. The cost-effectiveness of the auto
industry is much influenced by government’s
domestic and trade regulations. Consequently, the
price constitutes cost of 60 percent and the
government’s regulations of 40 percent (see
Figure 1).

The excessive regulations have hindered the

production and sales of vehicles in the country.
High regulations make the vehicles expensive not FIGURE 2: AUTO SECTOR SALES
only for assemblers/ manufacturers but also for
Cars 2/3 wheelers
the public at large. The car sales have not

1,931,340

1,781,959
1,630,735
increased significantly over time compared to the

1,520,124
1,370,005
1,358,643
sale of 2/3 wheelers (see Figure 2). The
government’s objective to make cars affordable 820,217

772,046

766,733
has not transformed into reality because car sales

216,786

207,630
185,781
181,145
in 2021 stood almost at the same level as in 2015.
151,134

151,182
118,830

118,102

96,455
On the external front, government imposed high
duties3 to restrict people from importing cars,
adoption of import substitution policy and 2013 2014 2015 2016 2017 2018 2019 2020 2021

protection of domestic assemblers (see Figure 3)4. Source: Pakistan Automotive Manufacturers Asscociation

The customs duty5 on the import of spare parts

Figure 3: DUTY ON IMPORT OF
ranges from 30 percent to 100 percent depending VEHICLES (USD)
upon the engine capacity. 30,000 27,940
25,000 22,550
2. Foreign Investment in Auto Sector 18,590
20,000
13,200
15,000
The regional conflicts and domestic economic
10,000 6,000
uncertainty emanating from short-term policies 4,800
5,000
have taken a toll on the foreign investment in the -
country. Pakistan being the fifth most populous
country and subsequent business opportunities
has failed to attract foreign investment, as
Pakistan ranked 110th of 140 countries by scoring Source: Federal Bureau of Revenue (FBR)

3
https://www.fbr.gov.pk/vehicles/51149/131187.
4
https://fbr.gov.pk/vehicles/51149/131187.
5 First Schedule to the Customs Act, 1969 (Updated up to 30-06-2021), FBR.

5
51.36 points out of 100 on the 2019 Global
Competitiveness Report published by the FIGURE 4: FOREIGN DIRECT
World Economic Forum. The proportion I N VESTMENT IN PAKISTAN (USD
IN MILLIONS)
of foreign direct investment in auto sector FDI FDI in Auto Sector

2780
is negligible (see Figure 4), an indication

2561
2407
2393
of flawed government policies and
protection of auto assemblers. The ratio of

1362
FDI in auto sector to total FDI in 2015 was

988
6.5 percent, declined to 2 percent in 2017,

113
64
rose to 8.3 percent in 2019 and then

50
48
46

19
declined to 2 percent in 2020. The entry of 2015 2016 2017 2018 2019 2020
new investors, expansion of the scale of
Source: State Bank of Pakistan
operation and establishment of
manufacturing plants depend upon the demand of vehicles, which depend upon the price of
vehicles and oil. As the prices are high and demand is low, auto manufacturers are reluctant to
establish manufacturing plants. The reluctance of foreign investors can also be attributed to the
energy crisis and infrastructure bottlenecks.
The efforts of the governments to entice FDI in the automobile sector remained confined to
assembly units, did not contribute to quality enhancement and the transfer of technology. Such
kind of FDI is market-seeking FDI whose sole purpose is to create space in market. In contrast,
the focus of government should be to attract efficiency-seeking FDI which prompts research and
development to improve productivity, which ultimately leads to domestic manufacturing.
3. Auto Sector Financing
The growth of the auto sector can be
FIGURE 5: OUTSTANDING
gauged from the financing acquired by the CREDIT TO AUTO SECTOR (RS IN
manufacturers and the consumers in the BILLIONS)
297
face of higher demand. The auto financing
by consumers has increased tremendously
216

211
194

from an outstanding credit position of

150

Rs.85 billion in 2015 to Rs.297 billion in

112
85

2021, an illustration of high demand (see

53

50
11.7

Figure 5). In contrast, auto financing by

33
29
19

9.9
8.4

21
20

7.0
5.9

6.0
5.8

manufacturers has shown an increase

from an outstanding credit position of 2015 2016 2017 2018 2019 2020 2021
Consumer Manufacturer Policy Rate
Rs.19 billion in 2015 to Rs.33 billion in
2021. The policy rate plays a significant Source: State Bank of Pakistan

role in the amount of borrowing, borrowing of consumers and manufacturers increased by Rs.65
billion and Rs.2 billion with a decline of 2.6 percent in policy rate from 2015 to 2017 while
borrowing of consumers and manufacturers increased by Rs.17 billion and Rs.21 billion when

6
policy rate increased by 5.7 percent from 2018 to 2020. The growth of auto sector can be
augmented by influencing consumer demand and production through lower policy rates.

4. Trade of Auto Sector

FIGURE 6: AUTO SECTOR
The performance and growth of auto EXPORTS OF PAKISTAN (USD IN
MILLIONS)
sector can be assessed from the extent of

34.0
27.7
trade being carried out with the regional

26.8
21.4
partners and the world. The exports of

18.5
17.3

17.1
16.9

16.5
16.5

15.5
15.0

14.6

14.4
auto sector stood at $56.3 million in
2014, declined to $38.8 million in 2017,

5.4
4.8

4.7
3.4

2.7
2.4

1.7

1.6
1.6

1.3

1.2
1.0
0.6

0.5
and then increased to $50.5 million in
2020 (see Figure 6). The major 2014 2015 2016 2017 2018 2019 2020
6 Export of Cars Export of Tractors
components of exports are cars ,
tractors7, motorcycles8 and auto parts9. Export of Motorcycles Export of Spare Parts

The tractors and auto parts are the major

exporting exportable items of the auto FIGURE 7: AUTO SECTOR
industry. The exports of auto sector have I M P ORTS OF PAKISTAN (USD IN
MILLIONS)
declined from 2014 and this is a

1396.4

1320.2
manifestation of a fall in competitiveness. 1009.0
In contrast, the imports of the auto sector
891.5

860.3
789.7
stood at $1 billion in 2014, rose to $2
703.3

billion in 2017 and declined to $1.1

346.3
307.8
227.2

195.4

193.4
188.0

183.8
139.8

139.6

132.9
111.9
110.5
104.8
100.4

billion in 2020 due to a fall in demand

85.7

81.1
74.7

71.0

61.4
58.9

49.7
from COVID19 (see Figure 7). Pakistan
is the major importer of cars which shows 2014 2015 2016 2017 2018 2019 2020
Import of Cars Import of Tractors
that there is a higher domestic demand,
Import of Motorcycles Import of Spare Parts
which domestic industry can meet and
expand if the regulations and tariffs are rationalized. Pakistan has the potential to increase the
exports of tractors and auto parts instead of focusing on exports of cars in the short term if the
trade is allowed and subsequent transfer of technology takes place. In the long run, Pakistan can
achieve comparative advantage through trade liberalization in cars also. However, if the trade
remained restricted through higher tariffs and prices remain high through taxes, then the domestic
auto industry will never become competitive and auto companies will never establish
manufacturing plants rather will remain confined to assembly plants.

6 HS- 8703 (Motor cars and other motor vehicles principally designed for the transport of persons, incl. station wagons and racing cars)
7
HS- 8701 (Tractors)
8
HS-8711 (Motorcycles, incl. mopeds, and cycles fitted with an auxiliary motor, with or without side-cars; side-cars)
9
HS- 8708 (Parts and accessories for tractors, motor vehicles for the transport of ten or more persons, motor cars and other motor vehicles
principally designed for the transport of persons, motor vehicles for the transport of goods and special purpose motor vehicles)

7
 5. Regional Opportunities
The auto industry of Pakistan can benefit from the demography and geography, as the country has
the potential to emerge as a trading hub. The auto industry can be made competitive internationally
by decreasing the prices of cars, tractors, motorcycles and auto parts, which is only possible
through liberalizing trade. The imports will increase in the start, but the increase in exports will be
in greater proportion due to the transfer of technology. Pakistan has upgraded infrastructure,
developed Gwadar port and overcame energy bottlenecks as a result of investment through China
Pakistan Economic Corridor (CPEC). The membership of the Shanghai Cooperation Organization
(SCO) and South Asian Association for Regional Cooperation (SAARC) enabled Pakistan to
expand relations in the region. The strengthening of relations with South Asian and Central Asian
states by providing them access to Gwadar port and inviting them for bilateral trade agreements
will not only benefit our auto industry but our whole economy. Pakistan has preferential trade
agreements with Afghanistan, Sri Lanka, Iran, and is currently establishing trade agreements with
Uzbekistan and Tajikistan. Pakistan has the potential to export tractors, motorcycles and auto parts
to Afghanistan, Bangladesh, Maldives, Turkmenistan, Sri Lanka, Tajikistan and Uzbekistan, as
these countries are importers of auto products. Bangladesh, Sri Lanka and Uzbekistan are major
importers of cars (see Figure 8), Bangladesh, Sri Lanka, Turkmenistan and Uzbekistan are major
importers of Tractors (see Figure 9), Bangladesh and Sri Lanka are Major importers of motorcycles
(see Figure 10), and Bangladesh and Uzbekistan are major importers of auto parts (see Figure 11)
in the neighborhood and present opportunities for our auto industry to expend not only for domestic
consumption but also for regional exports.

FIGURE 8:IMPORT OF CARS (000 USD)

649,609
633,805
547,363
501,617

485,590
481,390

475,139
440,137
437,966

331,560

319,238
236,812

155,293
149,102
124,847

116,069
80,120
69,637
66,356

64,563
49,493

32,790
25,656
25,025
22,956

21,777

20,192
9,331
6,961
4,877

4,686
4,522
0

2016 2017 2018 2019 2020

Source: Trade Map, International Trade Center

8
 0
0 18,866
62,527 12,891 15,756
191,039 8,850 9,777
186,271 3,915 48,529
110,969 26,611
25,631
108,516
299,173 151,518
128,325
327,931 158,656
138,283
334,572 121,917
149,212

2016
211,256 96,518
132,110

AFGHANISTAN BANGLADESH
112,226
101,820

AFGHANISTAN BANGLADESH
2016
81,428

2016
222,646 70,664
79,850
250,493
81,370
40,100

2017
202,095
SRI LANKA

59,340 46,750
52,945
2017

SRI LANKA
47,559

2017
1,726
2,618 7,087
713
3,265 7,992
430
9,830

2018
3,024 746
12,754
2018

3,644
MALDIVES

2018
4,629 170
2,054

4,212 20,052
33,592 83,284
52,223 1,103
57,607

2019
2019

1,584

2019
19,586
Source: Trade Map, International Trade Center

Source: Trade Map, International Trade Center

298 63,289
17,086

Source: Trade Map, International Trade Center

461 48,455
16,628

20,904 323 7,951

2020
2020

369 11,131
FIGURE 9:IMPORT OF TRACTORS (000 USD)

20,923

2020
20,535 533 17,216

FIGURE 11: IMPORT OF AUTO PARTS (000 USD)

20,766 1,245 10,696
FIGURE 10: IMPORT OF MOTORCYCLES (000 USD)
TURKMENISTAN TAJIKISTAN

17,435 426 13,799

MALDIVES TURKMENISTAN TAJIKISTAN

728,125 186 22,885
960,002 476 105,152
841,127 816 206,412
911,960 2,939 96,617
UZBEKISTAN

UZBEKISTAN

9
Highlights of New Automotive Policy 2021-2026
The government incorporated several measures in the Finance Bill 2021 keeping in view the
coming auto policy to increase the production of vehicles to approximately 300,000 in the current
fiscal year 2021-22 and up to 500,000 by 2025. The policy will focus on restricting price surges to
protect consumers from auto dealers and to improve the safety features of the vehicles assembled
in the country. The policy also aims to encourage auto assemblers and manufacturers to export
vehicles and auto parts. The main highlights of the upcoming auto policy are illustrated in Table2.
Table 2: Highlights of New Auto Policy

Target Description Steps

 For vehicles up to 1000cc, the
government has removed Federal Excise
Make small cars more affordable
Meri Gari Duty (FED), and Additional Customs
for the mid-tier socio-economic
Scheme Duty (ACD) on locally manufactured
class
cars.
 Sales Tax from 17 to 12.5 percent.
 Decrease of Rs. 104,458 – Rs. 142,388 in
the prices of cars below 850 cc
 Decrease of Rs. 112,118 – Rs. 186,375 in
the prices of cars from 1001-1500 cc
Decrease car prices to increase
Car Prices  Decrease of more than Rs 169,958 in
car ownership.
prices of cars in 1800cc category
 Decrease of more than Rs 229,458 in the
prices of cars in 2000cc and above
category.
 The condition of 30 percent value addition
has been introduced on imported raw
materials and components to be used for
the manufacturing of vehicles in the
Localization Promotion of domestic industry.
country.
 The government will update the localized
manufacturing of auto parts every six
months.
 A Tax of Rs. 50,000 to Rs. 200,000
whereby the first registration is not in the
name of the person who booked the
vehicle.
Prevention of consumers from
Own Money  Compulsory payment of KIBOR+3%
higher prices charged by auto
Elimination mark up by manufacturers on delivery
dealers.
beyond 60 days.
 Maximum upfront payment on booking
not to exceed 20 percent of the invoice
value at the time of booking.

10
 To improve and ensure road  17 shortlisted regulations will be
safety, basic safety measures implemented in a phased manner over a
Safety
such as brakes, steering, tires, period of the next three years.
Measures
lights, safety belts, airbags, and
collision safety will be met.
 Exports targets for the manufacturers will
To promote Expansion and be up to 10 percent of the import value by
Exports establishment of manufacturing the end of five years of this proposed
plants. policy.

Higher number of EVs in the  Customs Duty (CD) of 1 percent on

local market would encourage specific parts for electric vehicles.
Electric
auto companies to invest in the  Customs duty of 10 percent on import of
Vehicles
relevant infrastructure in CBUs of EVs.
Pakistan to facilitate EVs.

The ADP 2016-21 and ADP 2021-26 are similar in vision but fail to address the real issue i.e. high
cost of vehicles, operational inefficiencies of auto companies, absence of technological innovation
and mechanism for localization of components. Tax cuts and higher tariffs on imports of parts will
not encourage auto companies to start manufacturing locally. The decision to manufacture vehicles
actually depends on the annual sales of vehicles and profit margins. The present import duties on
parts and sales tax have made the vehicles expensive and unaffordable on one hand and restricted
the transfer of technology on the other hand. The country lacks the technology to produce complex
components of vehicle like engines, transmission, braking systems, gearbox etc. domestically at
present. The tariffs and taxes would have worked if the companies were doing research and
innovation to enhance efficiency. But, in the absence of technological advancement, the removal
of trade barriers is the only policy that can bring down the prices, augment car sales and motivate
the auto companies to start manufacturing in the country. Moreover, the auto policy should
encompass the mechanism to promote localization of components, which both policies have failed
to address. Although the removal of tariffs will put an extra burden on the current account balance
for few years, but when the actual demand for vehicles and comparative advantage will be realized,
the auto companies will move towards local manufacturing of vehicles.
Development of Auto Industry in World
There are many success stories in the world where auto industry has developed and now holds a
major share in their respective gross domestic products (GDP). The analysis will help to
comprehend the policies adopted by the countries to promote domestic manufacturing of vehicles
instead of confining to the assembly.

1- Automobile Industry of Thailand

The evolution of automobile industry in Thailand started from import substitution policy to global
integration, which resulted in becoming largest producer and exporter of CBUs and auto parts in
ASEAN and 12th largest in the world. The production capacity of the country was 160,280 in

11
1989, reached 2 million in 2019 and now stood at 1.4 million in 2020 due to lower demand and
lockdowns from COVID-19. The number of auto companies were 12 in 1989, has now surpassed
20 with Toyota being the largest manufacturer in the country. The annual auto industry exports of
Thailand stood at $21.4 billion in 2020 compared to $1.2 billion in 1999.

The unique feature of Thailand’s auto policy was the Local Content Requirement (LCR) in which
domestically assembled vehicles had to use locally produced parts in some percentage of the total
value of the vehicle, which proved to be successful compared to the other developing counties who
only opted import substitution policies. The chronological developments in the auto policy are
illustrated in Figure 12. The backward linkages of the auto industry were promoted through
complete tax exemptions to the domestic manufactures of parts. The gradual increase in the tariffs
along with the increase in share of local manufactured parts in the assembly of vehicles enabled
the domestic manufacturing of vehicles. From 1960 to 1998, the government of Thailand opted
import substitution policies along with alluring investment in the manufacturing of parts and LCR,
and was successful in transforming assembly operation to manufacturing and enhancing the
competitiveness of the local manufacturers. From 1998 onwards, the process of global integration
started and the Thai government honored its commitment under the World Trade Organization’s
(WTO) agreement on Trade Related Investment Measures (TRIMS), becoming the first
developing-country WTO member to do so. The LCR was also abolished from January 2000.

Figure 12: Chronology of Automobile Industrial Development Policy

1985:
1960s: 1991:
LCR for passenger cars
Tariffs on CBUs ( Cars 60%, Announcement of National
increased to 54%.
Vans 40%, Pick up Trucks 20%). Car Policy and start of local
List for compulsory and non-
Tariffs on CKD kits ( Cars 30%, production of the diesel
compulsory parts
Vans 20%, Pick up Trucks 10%) engine.
introduced.

1974:
Implementation of local
content requirement (LCR)
Assembled vehicles must use
locally produced parts to
atleast 25% of the total value
of the vehicle.
1983:
Intermediate inputs
imported by firms exporting
more than 30% of production
were exempted from import
duties
1994:
Domestic auto parts
suppliers of assemblers
were exempted from all
taxes to promote backward
linkages of auto industry.
LCR requirement of 70 %

1978:
1997:
Ban on imports of CBUs and
1982: Abolished local ownership
duty of 80% on imports of
CKD kits. LCR requirement for all requirement on foreign-
vehicles set at 45% invested projects and ban
Later Tariffs of 150% on
on new assembly plants
imports of CBUs.

12
 2- Auto Industry of Malaysia

The auto industry of Malaysia is another example of successful transition from assembly of
vehicles to the manufacturing and subsequent exports of vehicles. The Malaysian automotive
industry is the third largest in Southeast Asia, and the 23rd largest in the world, with an annual
production output of over 500,000 vehicles and market worth of over $20 billion. The automotive
industry consists of 27 vehicle producers and over 640 component manufacturers. The auto
industry of Malaysia was similar to Thailand’s in terms of tariff protections and import substitution
policies till 1970s (see Figure 13). The automotive industry was established in 1963 and protective
tariffs were imposed in 1966. The production of vehicles stood at 104 in 1980, rose to 604,281 in
2019 and declined to 522,573 in 2020 due to COVID-19.

The auto industry of Malaysia has remained highly protected but the localization of parts and
domestic manufacturing has resulted in significant growth of the sector. The unique feature of the
Malaysian auto industry is the manufacturing of vehicles by 2 state owned companies. This has
contributed to the domestic manufacturing of the parts and growth of allied domestic industries.
Figure 13: Chronology of Automobile Industrial Development Policy

1984:
1966:
Protection of National Car 1984:
Tariffs on CBUs (30% to 80
% depending upon engine Tariffs on CBUs (80% to 150 % Exports of Proton
capacity) depending upon engine
Agreement signed with car
capacity)
Tariffs on CKD kits and parts dealer in U.K. for the exports
( 20%- 30%) Tariffs on CKD kits and parts
(40%- 60%)

1972:
Implementation of
localization Policy
Vehicle must have 10
percent of the locally
produced content
1983:
Announcement of National Car
company(Proton)
Joint venture signed between
Mitsubishi and Industries
Corporation of Malaysia
1991:
Announcement of Second
National Car company (Perodua)
Production started in 1994 with
same level of protection as
Proton

1979: 1995-2005:
1982:
Implementation of Deletion Protection
Program Increase in local Content
Tariffs on CBUs (140% to 300%)
Ban on the import of 200 Localization of parts was
increased from 10 percent to 35 Tariffs on CKD kits and parts
parts that were produced
locally percent. (40%- 80%)

Conclusion
The transformation of an economy requires a review of past and contemporary policies adopted
by the governments to overcome the shortcomings, remove barriers in the operation of economic
activities, and make sectors of economy productive and internationally competitive. Prices play a
cardinal role to augment the competitiveness of industries and therefore, rationalization of taxes,

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removal of trade barriers, and elimination of complex and long procedures are inevitable to
facilitate the transfer of technology. Globalization and subsequent intertwined economies can only
prosper through the promotion of trade liberalization policies, as protectionism has failed to bring
productivity and efficiency to the industrial sector of Pakistan.

The decades of protection have failed to bring efficiency into the auto industry and assemblers are
still demanding protection from the government. The auto policies have failed to promote linkages
with domestic industries and subsequent localization of components. Elongated protection
diminishes incentives to ameliorate operational efficiency and enhance productivity as manifested
by auto companies in Pakistan. The limited scalability of operation and market size of auto industry
have failed to illustrate any comparative advantage. Therefore, it is adequate to say that the auto
policies have been unsuccessful to produce the intended results with no possibility of recovery of
losses suffered by consumers in terms of high prices and redundant technology used in vehicles.
The consumers have to wait for months for the delivery of vehicles, which implies that even
assembly of vehicles is not carried out efficiently. Furthermore, the policy of protection should be
revisited and companies should face international competition so that they either innovate and
survive or exit the industry to allow better allocation of resources in other areas.

Policy Recommendations
To make the auto industry efficient and competitive, following policy suggestions10 are in order
1- First, rationalization of Pakistan’s taxation policies is needed, in particular its customs tariff
and other auto-related policies, including import of used cars. More specifically, the
following policy decisions are recommended:
 The policy of indigenization, euphemism for import substitution, should be abandoned.
 Unification of tariffs on completely knocked down packs (CKD) irrespective of the engine
capacity, original equipment components and replacement parts at a single rate.
 Reduce customs duty on CKDs and auto-parts to less than 10 percent so that the auto
industry is in a position to import from the most economical sources.
 Maximum tariff on the import of vehicles in CBU condition should not exceed 25 percent.
 Gradually reduce import duty on cars and motorcycles to make them more competitive.
 The import of used vehicles be allowed subject to proper mechanism of valuation.

2- There is a need to look at some successful models of regional and bilateral agreements
involving auto trade, and encourage local industry to negotiate similar agreements with
their Indian counterparts.

10
Recommendations adopted in this report are taken from the book “Regional Connectivity” by Mohsin Kamal &
Javed Hassan.

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3- Prioritization of the sub-sectors of auto-manufacturing that have a comparative advantage.
This would have to be a collaborative effort between the Government of Pakistan and the
manufacturers.

4- Set up a joint public-private sector body to control quality of exported goods.

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