At a panel on firms and growth organized by the State Bank, the Pakistan Business Council (PBC) and the International Growth Center (IGC) on Monday, motorcycle manufacturer Atlas Honda's CEO Saquib Shirazi defended passenger car makers and opined that they should be cut some slack. The support comes as no surprise, though it lays in stark contrast to his own admission of how fast the motorcycle industry has successfully grown over the past few decades relative to the other segments, particularly passenger cars and commercial vehicles. This growth he credits to the motorcycle industry's motivation to increase volumes (which was done through increased competition!) But he went on to say that “cars are a different subject".

But are cars really a different subject? Why is it that a motorcycle company like Atlas Honda that faces considerable competition from new players and dumped imports continues to grow in volumes and be the market leader while peers in the passenger cars segment remain on the same volumetric level as they were a decade ago? It would seem that the difference is mostly in the business model, and that government policies have not exactly helped in giving car assemblers that required push.

Let's agree on the outset that subsequent governments have done an alarmingly poor job of keeping policies consistent for automakers. The deletion programme ran from 1985 to 2006 where the industry enjoyed tariff protection from imports so that it could reach significant localization.

However, volumes did not come, many targets remained unmet and the program was cut short (due to WTO requirements under Trade Related Investment Measures). It was replaced by a tariff based system that ran from 2006 to 2012. This new policy came with no localization targets and tariffs on non-localized parts had favorable duties compared to localized parts. The industry still enjoyed protection from Completely Built Unit (CBU) imports, though the rates did rationalize over the years. The government also kept an inconsistent import policy for used cars—sometimes raising the age limit to 5 years, up to 10 years, and then down to 3 years. Inconsistency in policy is no doubt bad for business.

Having acknowledged that though, the industry has continued to enjoy significant protection given no real avenues for competition. Now even though there are no localization targets set by the government, it has always been a tacit understanding that localization should improve. And it should for economic reasons. So far, the indigenized parts are limited to low value-add cosmetic parts such as metal sheets, interior trims, seats, batteries, wheel rims etc. The more functional parts that require precision engineering, are more value-add, and costlier including engines and transmissions are still imported. Obviously, this means, in order to assemble any vehicle, automakers require high-cost part imports and remain vulnerable to the exchange rate. This in turn has caused OEMs to raise prices and keep a vast majority of the population out of the car market.

While it is true that in general, there is no harm in using imports—particularly raw material and intermediate goods—for local production (after all, not everything can be produced domestically), the progression in the auto parts industry has been dullard and low-tech. This has led to three decades of price monopoly, stagnant volumes, restricted capacity and lack of variety (read more: “Automotive: Hindsight is 2020", Jan 3, 2020).

They could contend that localization of high-end parts hasn't happened due to the lack of volumes, but it is in fact muddying the truth. In fact, demand has mostly remained higher than supply—particularly during the times when economy was growing. But at growing demand, capacity of firms remained (maybe deliberately?) restricted, which automatically kept volumes down.

The clear difference then between a motorcycle assembler like Atlas Honda and passenger car assemblers is that competition pushed the former to up its game, increase capacity while keeping quality at a consistently high level to ward off any new player that could chip away at its market share. Meanwhile, automotive OEMs continued with the status-quo.

Right now, auto assemblers fear imports because imported cars are simply better. But if local assemblers were making the best possible product at a price level that was affordable, consumers would choose the local car, especially given their already well-established inclination toward Japanese cars. Local cars are always preferred because of after-sale services, parts availability, and easier maintenance. Why would any car buyer prefer an imported car over a local one if both were giving them the same level of utility?

With new players up and coming in the automotive market, it is clear that current OEMs will have to work harder to convince consumers they want to stay. They will have to invest back into the business and bring the capacity required for prevailing demand, and ultimately get the volumes that are needed to localize the sophisticated parts. They will have no choice but to. That said, the government will also have to stick to one policy and see it through, eventually leaving the market open for firms to optimize and compete. It cannot abandon one policy and bring a brand new one, or introduce ad-hoc import policy measures as a slap on the wrist. But for now, let's agree that cars may be a different subject, but for very different reasons than broadcasted.