Focus turns to developing electric vehicle industry

Market fragmentation will prove to be biggest stumbling block

ISLAMABAD: The whole world is moving towards electric vehicles (EVs), especially the industrialised and industrialising countries.

There are targets of 30% market share in sales of EVs in 2030. Reportedly, deliberations are going on in Pakistan between the government and different stakeholders for preparing an EV policy.

There are commercial interests which are pushing for customs duty concessions under the garb of new technology. There are also people who think that EVs are the first and last chance to enter into what they call real automotive manufacturing.

EVs are a good development as they reduce air and noise pollution, if nothing else transfers pollution from roads and population to the less populous hinterland where electric power plants are located.

Electric vehicles face immense barriers to entry into Pakistan

Currently, imported petrol and diesel will be substituted by electricity produced from imported coal, LNG and even furnace oil. If renewable electricity is produced, there may be a net reduction in pollution, irrespective of location. In that case, there are foreign exchange savings as well.

Thus, there is a need for a more considerate pace of policy development than a hasty approach that appears to be in the making.

An EV policy, and for that matter all similar policies, should serve two purposes - consumer interest and economic development.

Consumer interest implies value for money in terms of product quality, performance, reliability and after-sale service. Economic development would be served by new employment opportunities, local content, technical and technological development, trade and foreign exchange savings or earnings.

There are some unique reasons for Pakistan to enter into EV segment. Purportedly, there is a capacity surplus in electricity generation, which may sustain for five to seven years. This would bring down fixed capacity charges and possibly bring down generation costs.

As there are good possibilities of night-time charging of EVs, it will further improve capacity utilisation and bring down tariff.

 

There can be two approaches - one of laissez faire, allowing all kinds of EVs and wondering which one emerge as market leaders as has happened in the automotive market, more or less, and continues to happen. It fragments the market and destroys chances of industrial development.

The other approach is of trying to have some control over product proliferation, limit it to rational and useful product diversity and allow induction with check and balances. India adopted the latter approach and is now exporting automobiles and parts to the tune of $6 billion per year and has sector sales of $66 billion.

Admittedly, Pakistan’s market size is much smaller. However, proportional benefits could have accrued, had suitable development-oriented policies been adopted.

The story of Pakistan’s automotive sector is a mixed one. There has been some development in deletion programmes that have been followed and significant vendor industry has developed providing employment and business opportunities and furthering technical developments and capabilities. The negative side of the issue is that monopolies develop, prices increase and product quality stagnates due to sticking to one or limited number of products and models. That is the sacrifice one has to make or a midway be found in this respect.

The automotive industry is scale-sensitive and product proliferation divides the market into unviable lots worthy of local production as the market size is small due to low personal and national incomes.

Localisation

It is impossible to expect localisation in a few years as is being proposed by some enthusiasts or new entrants. It takes time and effort to do so. A five-year programme modelled on the deletion programmes already being implemented would be feasible.

There is always a risk that later day relaxations are sought and customs duty advantages find ways into the pocket of companies and not into the intended purposes.

Lessons learnt should be incorporated into the new policy. This would require active involvement of those who have been handling it along with new blood and thoughts thereof.

China has got an opportunity worldwide to enter into the EV sector. Automotive is a difficult sector to enter against competition from well-established market players.

Auto parts makers criticise electric vehicle policy

However, there has been some kind of laissez faire in China in this sector. There are more than 400 EV companies in China and the Chinese government has a hard time dealing with the situation.

It has consequences for product quality and country image that the government there has been trying to build for years. There is a spillover of this into developing markets. All kinds of products and parties have become interested in the sector, creating the risks and circumstances mentioned earlier.

Petrol demand has been increasing at a rate of around 20%, which would put a lot of strain on foreign exchange reserves in coming years and is doing even now. Thus, EVs along with renewable electricity can go a long way towards solving these problems.

Bikes

Motorcycles should not be ignored in EV considerations. Motorcycles consume 50% of the total petrol requirement. Pakistan is the fifth largest market of motorcycles in the world after China, India, Indonesia and Vietnam.

There is a scope of competition among two or more electric motorcycle manufacturers. In fact, existing companies may be encouraged to enter into this sub-sector.

Similarly, there is a good market for conversion of newer buses into EVs. Conversion industry has come of age in Europe and the US.

The objectives of development of local industry often militate against the introduction of that product itself. Local manufacturing invariably demands monopolistic policies and protection, which results in an increase in prices and lowering of efficiency, at least in the short to medium term. In the longer run, however, costs are recouped.

The same has happened in the case of automotive industry in India. Solar PV manufacturing in India is expensive than international levels, despite a large emerging solar demand. Who pays or should pay for the protection - consumer or government - is a policy question.

In the current circumstances, the government cannot afford it. Also, the IMF has least sympathy with development of the local industry. It prefers trade. The least, the government can do is not to allow market fragmentation.

An ideal solution may be to introduce and manufacture EVs under a CPEC programme. For the first time, one would see a good possibility of protecting the EV market from fragmentation. China has helped Pakistan earlier in technology ventures such as HMC and others.

A third component under SEZ is being deliberated. This would provide a robust opportunity to enter into this sector. There is a scope of mutually compatible commercial interest on the two sides.

The Ministry of Commerce and Planning Commission should put their acts together to formulate an appropriate project proposal in this respect.

Concluding, it is the market fragmentation that would prove to be the biggest stumbling block in the development of EV industry which should be avoided at all cost.

The writer is former member energy of the Planning Commission

 

 

Published in The Express Tribune, June 17^th, 2019.

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