Cluster Development Initiative

The Fuel for

inclusive
growth
A project of Punjab Small
Industries Corporation in
Automobile Sector
collaboration with:
History of Auto Sector in Pakistan

1949 - First automobile assembling plant was

setup by General Motors Karachi; Products - SKD
Vauxhall passenger cars & Bedford trucks
1960 - Rover Jeeps & Massey Ferguson Tractors
were started to be assembled
M/s Honda Atlas was also setup in the mid 1960s
by the Atlas group, to produce Honda
Motorcycles.
1963 - Hyesons started assembly of Mack Trucks
1972 - Pakistan Automotive Corporation (PACO)
was established through nationalization of
industries by Economic Reform Order
1978 - M/s Millat Tractors started manufacturing
Messy Ferguson Tractors.
1982 - M/s Al Ghazi Tractors started
manufacturing Fiat Tractors.
1982 - Pak Suzuki Motor Company Ltd started
manufacturing Suzuki Cars.
1993 - Indus Motor Ltd started manufacturing
 Contd

1994 - Atlas Honda Cars Ltd started

manufacturing Honda Cars.
2000 - Smaller cars i.e. Cuore was introduced by
Indus Motor Company whereas Cultus and Alto
were launched by Pak Suzuki
2001 - Raja Motors introduced Fiat UNO diesel car
through technical collaboration agreement with
FIAT Italy
2002-2003 - Nexus Automotives signed Technical
Agreement (TA) with General Motors Corporation
to introduce Chevrolet cars at premises of
Ghandhara Nissan Limited followed by
manufacturing of Nissan Sunny by Ghandhara
Group
2005 - Adam Motors manufactured Revo, the first
Pakistani car. In 2011, Al-Haj FAW Motors (AHFM)
introduced Chinese 1000 cc FAW V2
 An overview of the sector

Production in 2014-15

1,699,76 45,862 4,744

4

152,524
30,154 933

(Source: IDEAS-Regional Competitive

Studies: Research Studies on Auto
Sector, Aug, 2016)
48,573 1,109
 Contd

Over 2000 manufacturers

Contributes US$6 billion to the national economy,
Auto parts depicts 16% of manufacturing sector of
Pakistan
6th largest manufacturing sector
Direct Employment over 200,000
Indirect employment approx. 1.6 million
Current share of in Gross Domestic Product (GDP) -
2.3%
Exports 2014-15 140 million $
Cluster presence:
Lahore
Karachi
The Contribution of the Automotive Sector towards
Pakistan Growth

The Parts manufacturing industries play a vital role

in contributing, immensely, in the supply of
components and sub components for the Defense,
electronics, textile and other important sectors of
Pakistan.

It is the most accurately Documented Sector in

Pakistan.
It is paying the heaviest taxes in true spirit.
It is contributing sizably in the Manufacturing growth
of Pakistan.
 Passenger Cars

Production 2014-15 approx. 150,000 units

Economies of scales is not achieved, industry is
operating @ 60% capacity
Annual production of approx. 500,000 units is required to
achieve economies of scale
Currently Pakistan do not export cars
Market share:
Pak Suzuki Motors Limited - 41%
Indus Motor Company (Toyota) 40%
Honda Atlas Cars Limited -19 %
The motorization index i.e. cars per thousand people in
2011:
Japan 454
Malaysia 340
China - 205
Sri Lanka 76
Thailand 74
Indonesia 40
India - 32
 Contd

Barriers to Growth

Demand
Large fixed costs over small volumes
increases price
Low income per capita restricts purchasing
power
Demand is skewed in favor of motorcycles

Investment
Lack of incentives for the industry to undertake
new investments
Frequent changes in government policy
between 2007-14 (approx. 30 changes) makes
it difficult for industry to plan:
Volumes
 Contd

Used car policy

Discretionary adjustments without planning &
prior notice to the industry
Depreciation allowance on used cars is more
favorable resulting in lower net price

Quality and standards

Standards framework is weak-no national
standards exists
Testing facilities are absent
Imports are not regulated for quality
Government is dependent on OEMs to define &
conform to their own standards
No product recall policy for important safety
failures
 Motorcycles

Production 2014-15 approx. 1.7 million

Economies of scales are achieved
112 assemblers
Market is distributed in top 10 assemblers with
Honda remaining on top due to quality
Motorcycle exports are approx. 1.4% of total
production volume

Barriers to Growth
Smuggling
Smuggling is the single most important barrier
Market is flooded with low quality parts at low
price
Local vendors struggle to compete smuggled
parts
Smuggling overrules any formal protection
 Contd

Valuation of imports
Customs duty on imported auto parts is based
on weight, when converted to units lead to
higher import duties
Rates of customs duty differ by country of origin
Japanese parts valued at higher rates compared
to parts from China

Export clearances
Administrative difficulties in getting export
clearances, especially Afghanistan
Previously motorcycle exporters could claim a
refund on duty drawback of 9% - 13% upon
production of receipt called Gurmik
Afghanistan has now computerized customs at
Torkham Gurmik discarded
FBR has refused to refund the duty drawback
without the Gurmik
 Contd

Standards
Two main institutions implement standards for
the motorcycle industry, Pakistan Standards
Quality Control Authority-PSQCA and
Environment Protection Authority-EPA
Lack of clarity between EPA & PSQCA
regarding responsible for monitoring and
implementing the 2 and 3 wheeler standards,
after devolution under the 18th constitutional
amendment.
PSQCA has so far set industry standards for 2
and 3 wheeler
Yet implementation remains a serious issue
No labs available in Pakistan that can check
compliance with Euro II standard
 Tractors

Production 2014-15 approx. 46,000 units

Industry is operating @ 50% capacity
2 major market players, Millat Tractors Limited
& Al- Ghazi Tractors Limited

Barriers to Growth
Standards
PSQCA is ill-equipped to set or enforce quality
and safety standards for any kind of vehicles

Licensing
Tractors are not exported directly, due to
licensing issues by the principals
Technical licensing agreements with principals
remain a major obstacle.
Al-Ghazi Tractors has taken up the matter with
Fiat tractors recently for export to neighboring
 Contd

Technology
Innovation is minimal
Pakistani tractors embody 2nd generation
technology, globally, tractors are at 7th
generation

Unstable government policies

Government has introduced many contested
policies
Policy changes have been frequent
Allied sectors are also not geared up to meet
global requirements e.g. diesel for Euro II
complaint engines is not available

Demand
Rising costs & lack of financing - shifted
ownership patterns
Skewed demand for tractor rentals
 Contd

Trade environment
Market for export exists in Afghanistan &
neighboring countries
Export potential not fully exploited -
inconsistent policies
Manufacturers can not avail rebates
direct exports are not possible
Iranian tractors have taken market
share in Afghanistan
 Indigenization

Indigenization levels in the local auto sector, 2006

(Source: IDEAS-Regional Competitive Studies: Research Studies on Auto Sector, Aug, 2016)
Total Auto Sector World Exports-CKD/CBU (2015)

LCV's
1%

Tractors Vehicles for

1% transport of goods
10%
Autoparts
26% Motor car
60%

Motor Cycles
2%

Source: PC-TAS
 World Exports Auto Parts

World Export
Market US$ 349.9
Czech Republic Canada $10.7
$12.5 billion, 3.60% billion, 3.10% Germany US$53.3 billion
Italy $12.6 billion, 15.30%
billion, 3.60%
France $14.4
billion, 4.10%
South Korea $23.1
billion, 6.60% United States $43.9
billion, 12.60%

Mexico $25.1
billion, 7.20%

China $28.3 billion,

8.10% Japan $28.6 billion,
8.20%
Source: WTEx
 SWOT Analysis
Strengths
Capability to produce low
volumes competitively and
capture niche markets
Presence of world class
automotive manufacturers in
each segment
Availability of low cost
human resource
OEMs quality standards are
largely achievable
High growth and demand in
the market
Good entrepreneurial skills
Good mechanical skills
Weaknesses
No long term vision or policy
Lack of Information Dissemination
(Technical know how, Information on
standards, Processing techniques,
Design criterias)
Product design & engineering
capabilities constrained due to
absence of economies of scale
Lack of Tooling and die
manufacturing facilities
Lack of skilled manpower for
modern machinery
Lack of well equipped facilities for
product testing and research &
development
High cost of utilities
High cost of financing and leasing
Availability of raw material especially
steel
Absence of membership in any

Opportunities
Potential for high market growth
due to wide gap in population to
vehicle ratio
Export potential in niche
markets
Domestic replacement parts
market (if smuggling curtailed)
Global spare parts market of
discontinued vehicles
Emerging Afghanistan, Nepal,
Bangladesh, Iraq, Sri Lanka
markets
Great potential all over the
world for tractors and trailer parts
market
Contd
Threats
Poor image of the country
Regional conflicts
Smuggling, under-invoicing
and dumping of auto parts
Phasing out of administrative
control under WTO regime
Continuous depreciation of
rupee against top world
currencies
 Cluster Distribution
PAPAAM
PAMA
Total members 302
PUNJAB Total members 22
Lahore 157
Gujranwala 12 PUNJAB
Sheikhupura 5
Lahore 7
Daska 2
Multan 2 Kasur 1
Bahawalpur 1
Sindh
Faisalabad 1
Muridke 1 Karachi 11
Sahiwal 1
Wazirabad 1 Hyderabad 1
Kasur 1
Sujawal 1
Sindh
Karachi 111 Capital
KPK
Islamabad 1
Peshawar 1
Capital
Islamabad 3
Baluchistan
Queta 1
 Auto Sector Value Chain
Inputs Process Marketin
Representation & g
Facilitation Institutional

Institution
PAPAAM

Financial
Buyers

MOI&P
LCCI
Distributors

Export Orders Wholesalers Retailers

Product
Specifications, Price, Tier1
Product quantity, Firms
Delivery Dates, Tier 3 Firms Tier 2 Firms Units = Trading
Destination Units = 1000 Units = 750 400 Shipping Firms
Organized
Equipment & Material
Supplier
Steels, Chemicals,
Hardware & Machinery,
Packaging Repacking Wholesalers Retailers
Infrastructure
Electricity, Gas, Roads,
Communication & Distributors
Logistics
Die & Mold

Direct
Machining

Treatment

Polishing
Forging

HR Export
Heat

Technology Universities,
Wholesalers Retailers
NAVTTC, PVTC,
TEVTA, Private
Educational Inst, Ustad-
Shagird

FEDERAL
GOVERNMENT BODIES
Policy Makers/M&E Service Providers
Engineering Development
Board-EDB
Board of Investment-BOI
environment & business
National Vocational &
Technical Training
Commission-NAVTTC
National Skills Information
System
Trade Development
Authority of Pakistan-
TDAP
CCP
Policy Makers/M&E
PITAC
Providing short-term Working for MSMEs also
trainings in auto sector
SMEDA
providing enabling
dev. services to SMEs
PCSIR
Extending testing
services to industries
PSQCA
Cluster Mapping
PROVINCIAL
GOVERNMENT BODIES
ASSOCIATIONS
Comprising OEM, Tier-1,
Tier-2 & Tier-3 Vendors
.
ACADEMIA
Service Providers PAPAAM-Auto parts PAMA-Assemblers PAMADA-Motorbikes Engineering Universities
PSIC TEVTA
SLMIS NAVVTTC
established APSC
Offers 3B.Tech, Y DAE, 2
Yr 1 Yr and short term
courses in auto sector
PBIT TEVTA
PVTC
Vocational Training
Provider also extending
OJT in auto sector
PVTC
PSDF
Providing short-term
trainings in auto sector
PSDF
 PSICs Role In Cluster Development

According to PSIC Act, 1973 PSIC has made strenuous efforts

for uplifting the industrial sector in the province and has taken
various initiatives for industrialization. PSIC has:-
Established 21 Small Industrial Estates where about 72,000
workers are earning their livelihood
Successfully completed its loaning schemes for target
industries
Established 7 common facility centres for industrial clusters.
The Cluster Development Initiative project is aligned to
PSICs mandate and on priority of World Bank under J&C
P4R.
 Cluster Development

What Clusters are? Objectives of CDI

Industrial Clusters are Driving productivity and
geographically proximate competitiveness improvements
group of inter-connected through key established Punjab
companies and export focused SME
associated institutions in manufacturing clusters.
a particular field linked by Building the support
commonalities and
infrastructure that underpins
complementarities.
collaborative and strategic
industry activity.
Addressing the comparative
shortcomings i.e. costly factors
of production, quality and
delivery inefficiencies, lack of
demand driven export
strategies.
 Under Performing Clusters

Support
Institution Service
Provider Firm
Supplier Firm

Support
Firm Institution
Service Firm
Supplier
Provider

Firm Local
Firm Government Firm
Supplier

An underperforming cluster consists of many firms and

local (support) institutions, but it does not display clear
linkages among the different entities.
 Performing Clusters

Public Private Partnership

Backwar
Forwar
d
Linkages Supplier d
Firm Linkage

Consortium
s

Export
Global
Supplier
Raw Buyers
Materials
Suppliers
Firm
Firm Supplier
Firm Firm

Larger Final
Equipment Firm Markets
Suppliers Firm Firm

A performing cluster is
Public Private Support Institutions well organized with strong
linkages between a
multitude of actors.
 Coordination Coordination Cluster
Costs Costs
Development:
lack of trust & The Intervention
social capital, and
functioning institutions Logic
to enforce
contracts and laws

Isolation of SMEs as main barrier to growth

Cluster Initiative
Foster build trust & social
linkages capital
Facilitate strengthen governance
consensus
building
mechanisms
Joint Actions External Economies
Collective Efficiency

Improved cluster performance

Pro-poor growth
 Cluster Development Initiative

The CDI will address three general deficiencies in the SME

industrial sector in Punjab:
An absence of mechanisms for key industry sectors to
Scope identify and prioritise sectoral impediments and
& opportunities, and develop potential responses;
Approach An absence of mechanisms and resources for these
industry sectors to support projects that address the
identified impediments and opportunities across groups
of SMEs;
Lack of a developed market for SME support services

By creating such services and mechanisms, SMEs would

be assisted in two directly relevant ways:
Improving their production processes - delivering
productivity gains
 Targeted Clusters

Apparel
Sectors Leather
which can
be expected Surgical instruments
to have Sporting goods
clusters
which would Sportswear
be Gloves/pads
candidates
for selection Music Instruments
Cutlery
Auto Parts
* This list does not preclude other sectors, and different clusters within the same sector (but
specializing in different product spaces) can be considered.
 Cluster Development Initiative

Lifting the Trajectory of SMEs

CDIs
Objective:
Population of Firms

1. Increasing the No. of SMEs

2. Facilitating Growth of SMEs
beyond existing scale
3. Long-term Productivity
Enhancement

Small Enterprises Medium Enterprises

 Value Chains in Focus

Lbr. Reg.

Tax
Fin.

1 2 3
Gap
Domestic Value Chain
R&D Global Value Chain

Cert.

1 2 3
Enhanced
Value Greater Integration in Global Supply Chains
MEETINGS WITH
STAKEHOLDERS /
VISITS
VISIT OF PITAC on 26-01-2017
VISIT OF PSQCA on 26-01-2017
VISIT OF PCSIR on 02-02-2017
VISIT OF PAAPAM on 09-02-2017
VISIT OF PAAPAM with UNIDO Team on 27-2-2017
Participation in PAAPS EXPO Karachi on 3-5 March 2017
Thank You