AUTOMOBILE INDUSTRY
The Federal Ministry of Industries and Production unveiled the new energy vehicle (NEV) policy for the years 2025-2030 earlier this month. This marks a significant moment in Pakistan’s automobile industry, as the NEV policy, with its ambitious goals, aims to encourage the industry and users to shift towards environmentally friendly vehicles to decarbonise the country’s transport sector.
This has been further supported by a NEV levy on all Internal Combustion Engine (ICE) and Hybrid Electric Vehicles (HEVs), indicating a clear focus by the government on promoting the use of electric vehicles in the country.
The automobile industry has made significant strides in improvement over the last decade. Following the introduction of the Automotive Development Policy (2016-2021), numerous global companies entered the Pakistani market, breaking the nexus of the traditional Big Three in Pakistan's automobile industry. This increased competition among firms enabled the introduction of new vehicles in Pakistan, particularly in the C-SUV segment, which was previously absent from the local automobile market.
The enforcement of safety and security measures in line with global standards, as outlined in the Auto Industry Development and Export Policy (2021-2026), along with the mandate to export a share of production, has contributed to the industry's growth in Pakistan.
Despite the significant improvements, numerous pressing issues still persist. High and ever-increasing costs of production, low production volumes, delayed vehicle deliveries, and vulnerability to external shocks such as exchange rate devaluation and import restrictions are among the major issues that continue to impair the growth of the automobile industry.
Numerous vehicles are available in the Pakistani automobile sector in the B segment and above categories, with a recent influx of hybrid C-SUVs in the last couple of years. However, the entry-level A segment remains a highly untapped market. In addition, the continuously rising costs of vehicles have made automobile ownership much more difficult for the general public. The only 660cc engine capacity vehicle now costs over Rs3.0 million, meaning that even the cheapest of vehicles in Pakistan are unaffordable for a majority of the population. As a result, just based on pricing alone, the automobile industry’s consumer base is limited to just a small percentage of the population.
While the government’s resolve to actively participate in the global transformation towards decarbonising road transport through the increased use of electric vehicles is commendable, the increasing cost of ownership for ICEVs and HEVs in Pakistan’s context will prove detrimental to the automobile industry.
Automobiles in Pakistan are already highly taxed on top of high production costs, which have, to date, limited vehicle ownership in the country. The production capacity of vehicles increased beyond half a million vehicles annually, but the production remains around 200,000 to 250,000 vehicles in a good year. Increasing the cost of ownership for these ICEVs and HEVs through the NEV levy will further reduce the vehicular affordability. Considering that EVs cost significantly more than similar ICEVs or HEVs due to their newer technology and higher costs, they remain affordable for an even smaller proportion of the population.
The path for the automobile industry beyond the junction is difficult but clear: innovate and increase production to make automobiles -- whether ICEVs, HEVs or EVs -- affordable for a larger population of the country
This leaves the automobile industry at a crucial junction, where, although the government is making efforts to promote EV adoption, they remain a financially unviable option, particularly due to the high upfront cost. On the contrary, ICEVs and HEVs, which remain relatively high in demand but have undergone repeated price hikes, have been further taxed, making them more expensive for consumers and potentially impacting consumer affordability, which in turn may affect demand for these vehicles. So what must the automobile industry do?
The automobile industry must now aggressively aim to increase production in Pakistan to achieve economies of scale, enabling them to lower the sale prices. Although a number of automobile parts production has been localised, the localisation remains restricted to low-value and low-tech parts. High-tech, high-value parts, such as engines, transmissions, and other digital components and features, are still completely import-dependent. A major bottleneck in production of these high-value parts in Pakistan is the low production volume. It requires at least a million vehicles produced annually in Pakistan to make investment for the production of these high-tech and high-value parts in the country financially feasible.
The automobile industry must therefore look for integration into the global value chain for auto parts produced in Pakistan, therefore, being able to increase their overall production to the levels where investing for high-tech and high-value products is possible. Export of automobile parts and automobiles will allow the industry to lower their per unit cost making automobiles affordable for a larger proportion of the population.
As the government of Pakistan, in line with global efforts, supports the electrification of road transport, it is pertinent that the automobile industry undertakes measures to make EVs a financially viable and practically favourable option for automobile aspirants.
In addition to reducing the upfront cost by lowering production costs and achieving economies of scale, which in turn reduces the sale price of vehicles, the automobile industry must also invest in R&D, particularly to find innovative solutions to the barriers limiting the shift towards EVs. The major barricade in the transition is undoubtedly the upfront cost, for which producing batteries at lower costs to reduce the vehicle price is essential. To tackle the issue of range anxiety, being able to maximise travel distance in smaller battery sizes with lower charging times will also pave the way for EV adoption in the country.
The industry-academia collaboration for R&D and innovation is essential if Pakistan is to achieve the targets for EV transition as laid out in the NEV policy 2025-2030, as it is not just a matter of vehicle affordability for the public but also about the growth of the industry in the country.
The path for the automobile industry beyond the junction is difficult but clear: innovate and increase production to make automobiles -- whether ICEVs, HEVs or EVs -- affordable for a larger population of the country.
The writer is a research fellow at the Pakistan Institute of Development Economics (PIDE). He can be reached at: mshaafnajibpide.org.pk