Without offering any self-reflection on why the auto sector in Pakistan is so underdeveloped, stakeholders at Pakistan Automotive Manufacturers Association (PAMA) recently highlighted several reasons for the significant decline in sales as FY20 rolls in. It is the usual set of suspects: currency devaluation, higher taxes (FED and customs duty), recession in global markets, higher leasing rates due to monetary policy tightening, higher overall inflation as well as unfavourable government policies such as recent documentation drives. But these are short run causes for the demand-supply gap in the sector. In fact, it would be remiss to not reflect on the reasons for the long-term stagnancy of the industry because let's face it: the industry has hardly grown.

In FY07, the industry peaked at 180,000 passenger car sales after which the decline kept on coming. The next time the industry reached this number was over a decade later in FY16. After crossing the elusive 200,000 unit mark in FY18, the sector is all set for another plunge downward. Compare this to India nearly tripling its passenger car production between 2005 and 2018 selling nearly 3.5 million units today. What is the reason for the lack of demand in Pakistan when, on the face of it, the middle class expansion and rising consumer incomes warrants a proportionate, if not an equal increase in car production?

Consider this. Over the past year or so, as currency depreciated, automakers raised prices over every few months. Also consider that, by their own estimates, the industry has laid off over 10,000 jobs in the vendor market due to the recent demand decline. Then consider this: just last week, Pakistan Suzuki further raised prices by 4-6 percent since the last price hike. Across the border, Indian automakers are slashing the price tags by 5 to 15 percent on cars because of the lethargic demand. Unlike their Pakistani counterparts, they would rather keep plants running. And that is the difference. The Indian industry is growing because automakers are active. And they have to be, because there is competition.

The government in that country is also more forward thinking. Automakers in India will soon be implementing new safety regulations as well as Euro-VI emissions standards as per the government's new policy. Here at home, quality standards are nearly missing. After three decades, we are still talking about strengthening the Pakistan Standards and Quality Control Authority (PSQCA) and haven't been able to make any headway. Automakers in Pakistan make the cars they want, at the quality they want.

In fact, with only three players monopolizing the space, automakers control their capacities and prices with no market competition to speak of, which would allow cars to be affordable. Recall that there are also significant duties on fully built car imports so competition from imports is also missing. Because of this control, there are very few middle class cars in the market, with only one player providing them. Since the industry was not tapping the growing market at all over the years, satisfied in its reach toward the highest income households, production remained flat. And as we know, that alone is the cardinal sin if an industry wants to increase localization. After all, investment in localization comes with volumes.

The industry today is in a pickle due to the dramatic weakening in demand, but it does not offer itself any prescriptions, or develop any contingency plans. For instance, it could explore exporting markets, or join hands in regional or global value chains (read more: “Automotive half-life (II)", Dec 16, 2019). Of course, these require heavy investment from parent companies, as well as changing brand strategies globally but without reaching this ability to compete worldwide, Pakistani automakers will never really grow as much as they could. Certainly, not while tapping such a small share of the domestic market, and that too by design. At long last, when volumes remain on the same level, any major thrust toward import substitution will not be possible. Will their current mindset evolve as competition from new (and non-Japanese) entrants kicks into full gear? There is certainly hope.