Small and medium enterprises (SMEs) are a major source of employment generation in developing countries with a huge youth bulge, such as Pakistan.
However, the general industrial policies in Pakistan have been favouring large scale manufacturing (LSM) by offering them tax breaks, lower duties on imports and repatriation of profits to their parent company. All this contributes to a burgeoning import bill, depreciation of rupee, and inflation.
However, the situation could be off-set if the LSM sector is encouraged to indigenise through patronising local upstream SME. An example can be seen in the automobile sector which has been liberalised since 1980s, but whose performance is still under question.
Generally, automobile assemblers claim that 60-75 per cent of different vehicle parts are being manufactured in Pakistan. However, their claims raise a few interesting questions:
First, with such highly localised content why are the prices of vehicles still so high? This is even more confounding when these manufacturers cannot seem to match demand and buyers are forced to pay a premium if they want an immediate delivery of their vehicles.
It is about time that the auto policy was regularly debated in public for the benefit of all
Second, localised content is expressed in a percentage. But mechanical content such as engines, gear boxes and chassis have a major share in a vehicle’s cost, and there is a need to identlify how much these critical components have actually been indiginised.
Similarly, the level and rate of electronic indiginisation also needs to be identified as electronics are increasingly being integrated in vehicles nowadays. The increased localisation helps in reducing costs and counters the argument that repeated currency depreciation adversely affects prices.
Third, the levels at which manufacturers are involving local SMEs in their indiginisation efforts needs to be tracked. The involvement could include facilitating these entreprises through identification of suitable technologies, proper training, entering into long-term partnerships and sharing of technological resources.
Fourth is about understanding what technological indiginisation roadmaps were agreed between the Government of Pakistan (GoP), its concerned ministries, and the automobile manufacturers in 1980s; and whether these roadmaps have been visited over time in order to track their on ground implementation.
Recently, many internationally renowned brands have expressed interest in entering the local auto sector, with the GoP also in the process of granting licenses to new players. However, the new entrant’s indiginisation roadmap should be laid out, with a mutual understanding of the checks and balances which shall be put in place to monitor the agreed roadmaps.
Thus, it is imperative questions on the localisation effort, and performance of the automobile sector, are addressed along with their level of collaboration with local SMEs. It is about time that the auto policy is regularly debated in public for the benefit of all.
Published in Dawn, The Business and Finance Weekly, April 16th, 2018
