Pakistan's Auto Industry at a Crossroads

As the protective gap between imported and locally assembled vehicles narrows, the industry warns that billions in investment and tens of thousands of jobs are at stake.

Pakistan's automobile industry has entered one of its most uncertain phases in over a decade. As part of the government's tariff rationalisation commitments under the International Monetary Fund programme, the protective gap between imported completely built-up vehicles and locally assembled completely knocked-down vehicles has been sharply reduced to just about 15 percentage points.

While the objective is to liberalise trade and gradually expose domestic manufacturers to greater competition, the industry argues that the reform has fundamentally altered the economics of local vehicle assembly. The chief financial officer of a car company, speaking on condition of anonymity, noted that the change has narrowed the protection available to local manufacturers who invested under two previous auto policies.

For decades, Pakistan's automotive policy relied on tariff protection to encourage companies to assemble vehicles locally rather than import finished vehicles. That protection justified billions of rupees invested in assembly plants, tooling, localisation and vendor development. Reducing tariffs on imported cars has fundamentally altered the economics of local vehicle assembly, making local CKD assemblers potentially uncompetitive against imported CBUs.

The CFO argues that this shrinks the incentive to manufacture domestically, putting tens of thousands of jobs at stake. "Existing manufacturing capacity may become idle, and the vendor industry will face closures while pressure on meagre foreign exchange reserves will rise," he warned .

An Anomaly in the Tariff Structure

Ali Asghar Jamali, chief executive officer of Indus Motor Company, says the revised tariff structure has created an anomaly where importing a fully built car is actually cheaper than importing CKD kits for local assembly . "While this current inversion temporarily disincentivises assembling cars locally, I expect the government will step in soon to rectify this anomaly," he said.

Industry players warn that if importing a finished vehicle becomes almost as attractive as assembling it locally, investment will naturally move away from production. Syed Nabeel Hashmi, former chairman of the Pakistan Association of Automotive Parts and Accessories Manufacturers, argues that tariff reform should not come at the expense of domestic industry .

"Tariff rationalisation should improve competitiveness, not eliminate the economic case for manufacturing in Pakistan," Hashmi said. "If importing a finished vehicle becomes almost as attractive as assembling it locally, investment will naturally move away from production."

A Threatened Ecosystem

The issue extends well beyond tariffs. Pakistan's automotive industry supports an ecosystem of more than 2,000 parts manufacturers and tens of thousands of skilled and semi-skilled jobs. A sustained shift from local assembly towards imports would reduce demand for domestically produced components, discourage investment in localisation and technology transfer, and weaken industrial capabilities that have taken decades to build.

"At a time when Pakistan urgently needs industrialisation, foreign direct investment, exports and productive employment, an import-biased tariff structure risks rewarding trading activity over domestic value addition," the CFO noted .

Policy Vacuum Compounding Uncertainty

The timing has amplified the industry's concerns. The tariff rationalisation has taken effect just as the Auto Industry Development and Export Policy (AIDEP) 2021-26 expired on June 30 . With its successor yet to be finalised, investors are left without a clear roadmap for the future.

While the broader auto policy is finalised, the government has extended the one per cent sales tax concession for locally assembled smaller electric vehicles until June next year . Incentives for hybrids, however, have lapsed. Sales tax on locally assembled hybrid and plug-in hybrid vehicles above 1,400cc has increased to 25%, replacing the earlier concessional rates of 8.5% and 12.5% . Consequently, hybrid technologies now face a tax burden much closer to conventional internal combustion engine vehicles following the withdrawal of concessional sales tax.

"This effectively stalls the rollout of locally assembled hybrid vehicles by wiping out their price advantage over comparable ICE models," the CFO said. "Several manufacturers have already suspended CKD imports until there is greater policy clarity. Clarity is essential because automobile manufacturing is a long-term business. Investors commit capital for 15 to 20 years."

A Path Forward

The government's room for manoeuvres is constrained by its commitments under the IMF programme. Nevertheless, a more balanced approach may still be possible. Industry representatives argue that if the previous concessional sales tax rates cannot be restored, hybrid vehicles, particularly plug-in hybrid electric vehicles should at least be taxed at the standard 18% rate rather than the higher rate currently applied . Such an approach would preserve some incentive for hybrid technologies while remaining more consistent with fiscal constraints.

As Hashmi noted, regional competitors continue to deepen their manufacturing base using industrial policy. India, for instance, continues to attract major investments, including Maruti Suzuki's reported 35,000 crore commitment for a new manufacturing facility in Gujarat. Pakistan, by contrast, risks sending the opposite signals.

Pakistan's automotive industry is at a critical juncture. The government's tariff rationalisation commitments under the IMF programme have fundamentally altered the economics of local vehicle assembly, creating uncertainty for investors and threatening the livelihoods of tens of thousands of workers in the sector.

The industry argues that trade liberalisation, if pursued without complementary industrial policies, can weaken domestic manufacturing capacity rather than strengthen competitiveness. The broader strategic question is what kind of automotive industry Pakistan wishes to build.

Pakistan needs a credible long-term automotive strategy that provides policy certainty, maintains meaningful incentives for localisation and technology upgradation, and supports the transition to cleaner mobility. Without such a strategy, the industry risks losing decades of progress, while the country's broader industrialisation goals remain out of reach.