Wednesday January 19, 2022

Silver lining amidst anarchy

January 15, 2022

LAHORE: Covid-19 related value chain disruptions and subsequent persistent increase in transport costs induced Pakistani electronic manufacturers to localise as many components and parts as possible. The foundation has been laid to shift from assemblers to electronic manufacturers.

This is a silver lining amidst anarchy in most manufacturing sectors and guidance for other manufacturers to go for indigenisation for permanent survival.

Electronic industry in Pakistan is relatively new in our country. It started in a planned way during the first three years of Musharraf regime, when the duties and taxes on electronic components were drastically slashed to pave way for assembling television, split air conditioners, refrigerators, microwave ovens and water dispensers.

Local assembling plants effectively checked the import of these gadgets, though smuggling of these products continued. Some assembling plants were commissioned in collaboration with foreign brands; mostly Chinese and few local brands were also introduced.

Assembling did lower the import bill of these gadgets to some extent, but unlike the auto sector, these assemblers failed to develop a local vendor base to cut the costs further. It suited all assemblers to import even those components that could be easily produced in the country like the plastic body parts and some mechanical components.

The presence of around a dozen large scale assemblers assured healthy competition in the market and facilitated the consumers to choose from the available product range based on prices.

Over time, some assemblers established their niche in some products. Some excelled in television, some in air conditioners and some in refrigerators to become market leaders in these products.

Today Gree, Orient, Dawlance, Kenwood, PEL and many others are household names in Pakistan. All are managed by Pakistani entrepreneurs (Dawlance though has been purchased by a Turkish company).

Covid-19 was as much a shock for the electronic producers as for all other industries depending on import of components from various global sources. Most of the components of electronic gadgets were imported from China.

The value chain disruption did impact their production, but more than that, the abnormal increase in transport costs was unbearable for them. The cost of a 40 feet container from China increased from $900 to $8,500 after the pandemic, said Chairman, Pakistan Electronic Manufacturers Association, Muhammad Farooq Nasim.

He said the assemblers thought that freight would normalise after a while, but it did not happen. The industry then contacted auto vendors of plastic components to produce plastic bodies and body parts for the electronic industry. They expressed inability to do so due to capacity constraints.

Nasim said it was after that, that the industry decided to commission technology to produce components. He said almost all assemblers have invested heavily in this regard.

The plastic body, plastic components and some metal parts are being produced locally. These parts cost 27-30 percent less than imported parts. He hoped that the cost would come down when the investment made in commissioning plants was recovered in three years.

The industry has made a beginning, but producing components in-house is less efficient than outsourcing the components to different vendors. A vending base is likely to develop in due course.

Assemblers and manufacturers of electronic gadgets would ultimately find it more efficient to merge their in-house vending capacities together to benefit from economies of scale. The electronic industry of Pakistan has entered a new era, which would reduce the import bill of numerous electronic components.

The demand for electronic gadgets is constantly increasing in line with the increase in the number of households every year. The size of the industry is over Rs350 billion.

It has continued to grow in thick and thin. The FBR collected Rs125 billion revenues from the electronic industry that was double the revenues of Rs65 billion a year earlier. Part of higher revenues could be attributed to depreciation of rupee, but a sizable growth in industry was also a major contributor to revenues.

Nasim said that last fiscal, the industry sold air conditioners worth Rs120 billion. Refrigerator sales were in the range of Rs90-100 billion. Television sales netted the industry Rs40 billion. Pakistanis also bought washing machines worth Rs60 billion in a year. Microwave oven and water dispenser sales were Rs10 billion and Rs5 billion, respectively.

He said television was the most smuggling prone electronic item. It has been almost curbed after the government eliminated the duty on picture panels.

After the inclusion of electronics in Schedule 3 of Sales Tax it is now compulsory to print the retail price of each product on its packing. The PEMA keeps an eye on all retailers to ensure that they do not sell non-tax paid products.

After the elimination of smuggling, consumers are still cheated by informal small assemblers that import kits from abroad and paste labels of famous brands like Samsung and sell them as smuggled television.