CORPORATE WINDOW: A new auto policy needed for localisation

Before the reverberations of the ongoing conflict made their effect felt, the import of completely and semi-knockdown (CKD/SKD) kits by local car assemblers was likely to reach $2 billion by the end of FY26, amid robust vehicle demand and affordable auto financing driven by low interest rates.

As per data from the Pakistan Bureau of Statistics, imports of CKD/SKD have already reached $1.3bn in just 8MFY26, up from $575 million in the same period last fiscal year, signalling that assemblers have sizable advance booking orders for future vehicle deliveries. Total car sales in the above period were 97,900 units.

The highest-ever kits’ import of $1.67bn by the car assemblers was recorded in FY22, while imports during FY23 were $752m, followed by $797m in FY24 and $1.1bn in FY25. Car sales in FY22 were 234,180 units, which plunged to 96,811 in FY23 and 81,579 in FY24, and then recovered to 112,203 units in FY25.

From FY22 to July-February FY26, the cumulative kit import bill stood at over $6bn, suggesting very low localisation by both new entrants and old players on new models.

The rising import of CKD/SKD kits, thanks to past auto policy frameworks, is concerning, given Pakistan’s limited foreign exchange reserves and narrow export base

This rising import of auto kits is particularly concerning given Pakistan’s limited foreign exchange reserves and narrow export base, as rising imports directly contribute to a widening trade deficit and increase dependence on external financing.

Historically, CKD/SKD imports were intended as temporary mechanisms to support the development of domestic manufacturing capacity. However, instead of declining with industrial maturity, imports have steadily increased from FY22 to date, indicating that localisation has not kept pace with industry growth.

A key factor behind this imbalance was the auto policy framework of 2021–2016, which allowed new assemblers to import CKD/SKD kits at concessional tariff rates and to meet relatively relaxed localisation requirements. These incentives were initially aimed at attracting investment, increasing competition, and promoting technology transfer. However, the ground reality suggests otherwise.

Many new entrants have established assembly-based operations, importing major components from countries such as China and Korea while contributing negligible localisation within Pakistan.

Localisation in Toyota Corolla, Cross and Yaris has crossed 60pc, while locally made parts in Honda City stands at over 70pc, over 60pc in Honda Civic, 61pc in HR-V and 52pc in BR-V.

“Pakistan cannot achieve sustainable economic growth while expanding its auto sector on imports instead of localisation,” said Mashood Khan, an auto parts maker/exporter and Director of Small and Medium Enterprise Development Authority (Smeda).

Pakistan’s auto industry, Mr Khan said, is facing a growing structural challenge as the import of CKD/SKD kits continues to rise, leading to an import-driven assembly of vehicles. What was originally designed to promote localisation and technology transfer, which could not be achieved, instead increased reliance on imported components.

Rather than evolving into a value-added manufacturing sector, the industry is increasingly operating as a sub-assembly ecosystem, with minimal local content, he said, adding that “the auto policy intent was localisation; the outcome is import dependence”.

Pakistan’s auto market remains relatively small compared to regional economies, yet the rising import bill is placing disproportionate pressure on the economy.

The entry of Japanese, Korean, and Chinese brands has undoubtedly increased competition and improved consumer choice through better features, designs, and pricing. However, this has also highlighted structural weakness.

Beyond any doubt, this is a real fact: in the mid-80’s, Suzuki entered Pakistan and developed auto parts entrepreneurs, followed by two other Japanese players who followed suit by developing vendor bases. “We need the same spirit and encouragement from the new entrants for SME entrepreneurs,” Mr Khan said.

Now, many new entrants have yet to demonstrate meaningful progress in achieving localisation targets, technology transfer and vendor development, he lamented.

Lack of localisation directly affects Pakistan’s auto parts manufacturing sector, causing a decline in demand, lost growth opportunities, and stagnation in technological advancement.

That said, established industry players have demonstrated that localisation is achievable through consistent policy support and long-term commitment. They have successfully developed local supply chains, reduced import dependency and supported SME growth.

As the government prepares a new auto policy after the expiry of the 2021-2026 policy on June 30, 2026, it is essential to critically evaluate past outcomes and failures, the Smeda Director said. To make the new policy practical and realistic, the heavy sub-assembly model should be removed to prevent import-reliant models, and all new entrants must be induced to indigenise 30pc of the vehicle’s entire parts manufacturing within two years.

No discrimination should be made between existing and new entrants, and all corporate players should be governed by a single auto policy. This will foster competition, industrial growth, and high technological expertise, driving assemblers and auto parts makers to strive for higher exports.

There is also a need to link incentives to actual technology transfer and local parts manufacturing, and any policy gap must not be incorporated; the way forward should be defined with clarity in the policy. “If Pakistan does not strengthen local manufacturing, it will remain trapped in a cycle of borrowing to finance imports,” Mr Khan emphasised.

Pakistan must decide whether it wants to be an assembly-based economy or a manufacturing economy — the current trajectory cannot sustain both growth and stability, he said, seeking consistent policies for achieving industrial growth, focus on localisation, employment generation, and boosting exports.

The government needs to draft a new, objective auto policy now to address the shortcomings of the previous policy, he concluded.

Published in Dawn, The Business and Finance Weekly, March 30th, 2026