Key Takeaways
- Pakistan’s new automotive policy aims to boost exports and domestic value addition.
- Manufacturers must export 12% of factory-gate production by 2029-30.
- The policy seeks to replace conventional localisation targets with domestic value addition.
Pakistan’s proposed Automotive and Auto Parts Manufacturing Policy 2026–31 marks a significant shift in the country’s approach to the automotive industry. Rather than relying on high tariffs and localisation, the policy now focuses on domestic value addition, exports, competition, and technological upgrading.
Under the new policy, car, jeep, and SUV manufacturers are required to export 12% of their factory-gate production value by 2029-30. Parts manufacturers are expected to increase their exports to $700 million by 2030-31, with combined automobile and parts exports projected at $1.58 billion in the final year and $4.59 billion over five years.
The policy also aims to reduce protection and eliminate regulatory and additional customs duties, while providing exporters with a drawback of local taxes and levies. Conventional cars will need a minimum domestic value addition (MDVA) of 40% by 2030-31.
However, the policy faces challenges. The proposed MDVA regime is criticized for using a weighted formula for materials, labour, and overheads, which may not accurately measure the actual value created. Critics argue that a simpler measure, such as factory-gate value minus direct and embedded imported content, would be more appropriate.
There is also a qualitative issue. A 40% MDVA from simple components, labour, utilities, and overheads is not equivalent to 40% from precision engineering, electronics, motors, and other sophisticated components. This potential contradiction highlights the need for a more nuanced approach to measuring domestic value addition.
Another challenge is the missing upstream ecosystem. While Pakistan produces some steel products used by automobile manufacturers, it lacks the breadth and scale of automotive-grade steel, petrochemical, engineering-material, and electronics supply chains found in successful automobile-producing economies. Much of this high-value content in modern vehicles will continue to be imported.
Pakistan’s domestic market remains small, with roughly 200,000 vehicles sold annually among numerous assemblers and models. This fragmented market makes it difficult to achieve deep localisation. A sophisticated supplier must recover the cost of dies, moulds, tooling, testing, and equipment over a large production run. Producing a specialised component for 3,000 or 5,000 vehicles annually is very different from producing it for 100,000 vehicles or a global platform.
The proposed policy contains a potential contradiction: it seeks deeper domestic value addition while allowing model proliferation that fragments the scale needed to achieve it economically. This scale contradiction poses a significant challenge to the policy’s success.
