Analysing the new auto policy

Pakistan’s proposed Automotive and Auto Parts Manufacturing Policy 2026–31 marks an important shift. Rather than measuring success mainly through localisation behind high tariff walls, it seeks to link future support to domestic value addition, exports, competition and technological upgrading. That is the right direction. The question is whether the proposed instruments can deliver the ambitious outcomes attached to them.

The policy reportedly requires car, jeep and SUV manufacturers to export 12 per cent of factory-gate production value by 2029-30, while parts manufacturers are expected to raise exports to $700 million by 2030-31.

Combined automobile and parts exports are projected at $1.58 billion in the final year and $4.59bn over five years. Conventional cars would need minimum domestic value addition (MDVA) of 40pc by 2030-31, protection would decline, regulatory and additional customs duties would disappear, and exporters would receive a drawback of local taxes and levies.

Instead of aiming for car localisation, Pakistan should be focusing on scaling up automotive components

Measuring what matters

Replacing conventional localisation targets with domestic value addition is welcome. A moulded plastic part may use imported polymers; a stamped body part may use imported specialised steel; an electronic assembly may consist mostly of imported components. The economic question is how much Pakistani value has actually been created and how much foreign exchange has been saved or earned.

The proposed MDVA regime is therefore a step forward, but it would be better measured simply as factory-gate value minus direct and embedded imported content, rather than through a weighted formula for materials, labour and overheads.

There is also a qualitative issue. Forty per cent domestic value addition from simple components, labour, utilities and overheads is not the same as 40pc from precision engineering, electronics, motors, power electronics and other sophisticated components.

The proposed policy therefore contains a potential contradiction: it seeks deeper domestic value addition while allowing model proliferation that fragments the scale needed to achieve it economically

The missing upstream ecosystem

This points to a fundamental constraint. Pakistan produces some steel products used by automobile manufacturers, but 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. A 40pc MDVA target may be achievable in accounting terms, but that would not necessarily mean Pakistan has developed a globally competitive automobile supply chain.

The scale contradiction

Pakistan’s most serious constraint may be scale. The domestic market remains small, while brands and models have proliferated. Roughly 200,000 vehicles sold annually are divided among numerous assemblers and models. That is hardly conducive to 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 therefore contains a potential contradiction: it seeks deeper domestic value addition while allowing model proliferation that fragments the scale needed to achieve it economically.

Contract manufacturing can improve assembly-plant utilisation, but the bigger opportunity lies in common components and platforms. Policy should encourage original equipment manufacturers (OEM) to source standardised motors, battery modules, electronics, braking systems, castings, forgings and other parts from common Pakistani suppliers where feasible.

New entrants should bring an export mandate, meaningful technology, or enough volume to strengthen rather than fragment the supplier ecosystem.

Another source of scale

The scale argument looks different for replacement parts. Pakistan has an installed base of roughly 5m cars and light vehicles, besides tractors, trucks and buses. Most are internal-combustion vehicles, and many will remain on the road for years, creating substantial recurring demand for replacement components.

An ageing fleet needs filters, brake and suspension components, bearings, belts, hoses, gaskets, electrical parts, lamps, radiators and many other items. Some are model-specific, but many share materials, processes and technologies across vehicles. This installed base can therefore provide component manufacturers with the scale that new-model proliferation denies them.

This creates a potentially attractive progression from a domestic replacement market to international aftermarket to global OEM supply chains.

The international aftermarket is far larger than Pakistan’s domestic market and less dependent on a vehicle manufacturer allocating Pakistan a particular export model. A competitive Pakistani producer of filters, rubber components, forgings, castings, brake or suspension parts, wiring products or precision-machined components can sell across brands and markets. The five million vehicles already on Pakistani roads may therefore matter more to auto parts than the roughly 200,000 new vehicles assembled annually.

Can exports be mandated?

The proposed export obligations are bold but difficult. Making exports a condition of continued protection has merit: an industry protected for decades should eventually show that it can sell competitively abroad. But governments cannot create export competitiveness simply by inserting an export percentage into a manufacturing licence.

Most Pakistani assemblers are part of global OEM networks. Their principals decide where models and components are produced and which plants supply which markets. The principal may already serve nearby markets more cheaply from Thailand, Indonesia, India, China or another high-volume centre. New automobile investment receiving policy concessions should therefore ideally come with a commitment from the foreign principal to integrate Pakistan into its global sourcing network.

Without that, a 12pc export requirement could produce waiver requests, subsidised exports or transactions designed mainly to satisfy regulation.

Opportunity of exporting parts

Pakistan does not necessarily have to export large numbers of complete cars to build a successful export-oriented automotive industry. A supplier serving replacement demand for parts from millions of Pakistani vehicles has a stronger case; if it can then supply the international aftermarket or a global OEM programme, the economics change dramatically. That suggests the $700m parts-export target may be more attainable — and more valuable — than trying to force complete-vehicle exports.

Let competition provide the final test

Perhaps the most consequential element of the proposed policy is the gradual reduction in automobile tariffs and elimination of regulatory and additional customs duties. This provides the ultimate discipline.

The real test of decades of protection is whether domestic manufacturers can offer Pakistani consumers vehicles and components comparable in quality and price to imports, while creating genuine domestic value and earning or saving foreign exchange. The policy moves closer to asking these questions than its predecessors.

Perhaps we have been asking the wrong question. Instead of “How much of a car can we localise?”, we should ask: “Which automotive components can Pakistan make competitively at scale for millions of vehicles already on its roads — and then sell to the world?”

The author is a former CEO of Unilever
Pakistan and of the Pakistan Business Council

Published in Dawn, The Business and Finance Weekly, September 14th, 2026