Electric Vehicles (EV) are coming to Pakistan and existing automakers are not happy. Much has already been said about the long-term gains of introducing battery run vehicles, especially for a country which spends precious dollars for fuel imports and is trying to tackle a budding environmental crisis on its hands (Read part I, Nov 27, 2019 and part II, Nov 28, 2019). But introducing EVs involves a wide range of incentives and benefits that the government will provide to new investors which is making folks in some quarters squeamish.
To review, the policy will allow CBU import of EV cars (as well as parts) at zero duty for a period of five years while only one percent sales tax will be collected from EV assemblers for seven years. Registration of the vehicles and token tax will also be free on prospective buyers. Benefits under the Auto Development 2016-21 policy also apply to new entrants in electric vehicles except the EV policy gives further benefits. In addition, used EV imports will also be allowed for the first two years. The policy states: “this time will give local auto manufacturers to prepare their EV development plans and will also help acclimatize local consumers with a lower upfront cost and in establishing charging infrastructure.
Understandably, existing players and any new entrants would be miffed. The new entrants are still trying to establish themselves from the ground up. They have just introduced new vehicles to the market, but almost simultaneously as they did, Pakistan was hit with another of its twin deficit crises. This dramatically shrank the demand in the economy for many consumption goods, with passenger cars and vehicles on top. Introducing new vehicles—that are by no measure cheap—to a slowing down economy with the average car buying watching his purchasing power deplete is not the outcome of the best laid plans.
In fact, new entrants together with traditional assemblers must now wait for the storm to clear. The former will be hoping to get a return on their investment soon while the latter will have to stave off the competition and attempt to retain their market share. Even if EVs were not coming, existing assemblers should be going back to the drawing board and hatch a more sustainable plan for survival. But EVs will no doubt make it more challenging.
As the economy trudges out of its most recent pit, and EV policy goes into execution stage, so many new and used imported EV vehicles will be allowed into the market at considerably cheaper rates due to tax relaxations. This could easily turn consumers away from combustion engine cars. Though a mammoth charging infrastructure will be required for any substantial move towards electric vehicles, do recall that batteries can be charged with solar panels as well. They don't necessarily have to be connected to the grid. Even though the capital costs associated with electric vehicles (including batteries) are high, tax breaks can really get the ball is moving enticing a new type of investor—one that does not have to necessarily be an expert in EV assembling. In fact, charging stations can be installed in most public spaces including offices, homes, restaurants, shopping malls etc. This welcomes a new kind of investor, one that has the space and has the funds available.
The implementation of the EV policy definitely puts a dampener on plans made under the AIDP 2016-21 because it is considerably raising the stakes. New players now have to compete with cheaper imports of new and used cars, aside from the already established network of existing assemblers.
The only question here is whether the EV policy will actually materialize in its current form. There are some obvious challenges: electric vehicles are not tested in the market and most conversations are based on international experiences so one: will volumes come as fast as they are expected? Remember that no EV assembler will localize a vehicle without the expected volume. They could easily just import at zero duties and enjoy sales tax breaks for five years and exit the market. Two: will consumers be receptive to battery run vehicles after using combustion engines for as long as they can remember? And three: will lower cost of running and maintenance (in the future) justify the higher cost of capital associated to EVs (in the present)?