Despite a challenging environment in the traditional industry sector, the pharmaceutical and technology sectors are emerging as strong growth drivers for the economy
Pakistan’s economy has experienced some significant issues in the recent past, but thanks to several factors, including government-led changes in pricing and taxes and increased international investment, strong growth is expected in some of the country’s leading industries, including textiles, telecommunications, automobiles, and pharmaceuticals.
Textile manufacturing is the mainstay of Pakistan’s economy, which isn’t surprising considering the country is the world’s fourth largest producer of cotton, the third largest yarn producer, and the third largest consumer of cotton. The value chain in textiles is made up of 10 industrial sub-sectors, and all of these sectors are interdependent: the finished product from one sub-sector becomes the raw material for the next sub-sector. It begins with cotton growth and picking, then on to ginning, spinning, weaving, knitting, processing, and stitching.
The industry employs more than 10 million people, which is 40% of the industrial labor force, throughout the production and processing stages. It receives about 40% of the banking credit extended to the country’s manufacturing sector. And textile manufacturing accounts for around 8% of the country’s GDP and more than 50% of its exports value.
In addition, it generates billions of dollars in economic activity, a sum that has been increasing over the last year or so. In August 2015, textile exports recorded double-digit growth of 11.24% compared to the same time one year ago. While August 2014’s total was $889 million, August 2015’s total was $1.02 billion, due to a substantial increase in proceeds from cotton cloth, raw cotton, bed linens, yarn, and ready-made garments.
The industry does face challenges. Other countries, like Bangladesh, can earn greater profits than Pakistan through importing Pakistani cotton and then re-exporting it after processing it and making final retail products. While farmers in other countries have received subsidies, Pakistan’s farmers have not, which has resulted in distorted prices. The sector also grapples with a lack of skilled human resources and a low employment rate of women in the garment sector.
The industry does face challenges. Other countries, like Bangladesh, can earn greater profits than Pakistan through importing Pakistani cotton and then re-exporting it after processing it and making final retail products. While farmers in other countries have received subsidies, Pakistan’s farmers have not, which has resulted in distorted prices. The sector also grapples with a lack of skilled human resources and a low employment rate of women in the garment sector. Information technology is under-utilized and inventory control systems are generally poor. Worldwide, the textile industry’s focus is shifting more towards manmade fibers, rather than natural fibers, while Pakistan’s industry uses mainly cotton.
Infrastructure is another major area of concern, as it is problematic or even absent in some areas. For example, in the Punjab region, where around 65% of the country’s industrial units are located, energy supplies in the area are unpredictable. The physical and institutional infrastructures at sea and dry ports need a overhaul. The legal infrastructure is redundant in many places, with numerous parallel and overlapping regulations that only increase production and management costs.
The Pakistani government recognizes the many areas are in need of improvement, and it has committed to building up the industry via its Textiles Policy 2014-19, which contains a generous financial package of PKR64.15 billion ($613 million). The extensive policy has a few central elements that are particularly noteworthy. Some of this money is set aside for workers’ skill development, textile exhibitions, and major textile awards. One of the policy’s goals is to double textiles exports, boost exports to $26 billion, and create three million more jobs by 2019.
The Federal Textile Board has been restructured to better address and resolve the issues that the industry faces, with the majority of members now from the private sector. Additionally, for 2015-2016, the custom duty assessed on eligible textile machinery is zero, which should enable businesses to better afford purchases that can increase or streamline their productions.
The Ministry of Textile Industry also seeks to help via initiatives that involve many government ministries and divisions, including Finance, Petroleum and Natural Resources, and Commerce. The Climate Change Division is working on helping cotton producers meet buyers’ desire for “Better Cotton,” an initiative that trains farmers to reduce their use of pesticides, water, and fertilizer. By 2020, 30% of the world’s consumed cotton will come from “Better Cotton” farms, and Pakistan wants its farmers to be among those providers.
Three years ago, 93% of all mobile phones shipped to Pakistan were feature phones, not smartphones, as the country lacked the network needed to support smartphones, even though some users did own them. The creation of 3G/4G networks across the country has changed mobile phone usage since then. In the first quarter of 2015, smartphones made up around 30% of all mobile devices shipped to Pakistan. This is up from 25.3% in the fourth quarter of 2014, and from 14.7% in the first quarter of 2014.
As of July 2015, there were 14.6 million 3G and 4G mobile users in Pakistan, but that is only about 10% of all mobile subscribers in the country. The mobile phone penetration rate is 75%, so one-quarter of the country still has not purchased any mobile device. Those who already have a mobile device may still choose to purchase a smartphone to take advantage of the new networks. This degree of market penetration, combined with the availability of 3G and 4G networks, means that Pakistan’s telecom industry stands to experience significant development and growth. It is estimated that by December 2016, there will be 40 million smartphones in Pakistan.
Over two million users look at purchasing a phone online each month, and cell phone companies in Pakistan are trying to capitalize on this. In September, Google hosted Google’s Tech Mela, a 10-day shopping festival that featured many new cell phones and specials. Attendees could purchase tablets, data bundles, and personal tracking devices. Participating companies included Samsung, Microsoft, Huawei, PTCL, Rivo, TPL Trakker, Innjoo, Infinix, Intex, Telenar, and Zong.
Pakistan’s leading vendor is QMobile, with a market share of around 58%. Nokia and Voice are the runners-up at 17% and 5%, but many new vendors are coming into the market to take advantage of its upswing. Huawei, for example, gained a 7% share of the market in the first quarter of 2015 due to a buyer-pleasing balance between features and pricing.
The telecom industry did experience a setback fairly recently. The Pakistan Telecommunication Authority required that all SIM cards be biometrically reverified, in an effort to curb terrorism. Members of the telecom industry had to purchase equipment specifically for biometric reverification, install it, and then use it to biometrically identify all SIM card activations through the National Database and Registration Authority’s database. They then passed these costs on to consumers, which resulted in a market slowdown.
However, the major hurdles of the biometric reverification process have been crossed, and now that companies own the equipment and know how to use it, the market should continue to grow. Companies in the industry can encourage this growth by showing consumers how to use smartphones and how the devices can improve their lives, while remaining sensitive to consumers’ economic concerns.
The automobile industry, which employs around 3.5 million people in Pakistan, is experiencing long-overdue growth. Part of this is due to interest rates. Auto loan rates are currently around 11% (annual), compared to the previous high rate of 20%, so consumers are more willing and able to purchase vehicles. The country’s overall economy is another positive factor, as it is at a seven-year high.
This optimism is reflected in sales figures. A study released in June by Carmudi showed that more than 58% of car dealers in the country saw an increase in sales in the previous twelve-month period. Experts believe that around 165,000 vehicles will be sold in 2015, which is close to the amount sold in 2012.
Another sign of the industry’s growth is in vehicle manufacturing. In April 2015, Yamaha Motor began building motorcycles at its new facility in Bin Qasim, outside Karachi; this is the first time in seven years that Yamaha Motor has assembled motorcycles in Pakistan.
Globally, 80% of customers looking for a new car and nearly 100% of customers looking for a used car begin their search online. In Pakistan, however, only 30% of buyers use the internet to gather information before buying a vehicle. The rate of internet usage among sellers is lower: 25% of dealers have reported using websites to reach potential customers, while Facebook is used by about 17% of dealers. More car dealers prefer to advertise offline, mainly in newspapers, at a rate of about 42% of dealers.
As people’s access to the internet grows, in part due to the increase of 3G/4G networks in Pakistan, the number of Pakistan’s dealers using the internet to reach buyers—and the number of buyers using the internet to find vehicles—should increase dramatically. This is one way in which substantial financial industry growth could take place if dealers and customers are ready to take advantage of this new sales avenue.
Pakistan’s pharmaceutical industry is the world’s sixth largest, with a total market size of PKR220 billion. It directly employs 70,000 people and indirectly employs 150,000. Though the sector’s workforce is significantly smaller than that of the textile or automobile sectors, it is still able to meet 70% of Pakistan’s demand for pharmaceutical products, in terms of volume, by domestically producing analgesics, anti-depressants, herbal and homeopathic medicines, and penicillin. Other needed pharmaceutical products, such as cancer drugs, are produced in other countries and then imported.
The industry’s cumulative annual growth rate has been around 12% for the last three years, and this is likely to increase due to several factors. Pakistan has a high rate of population growth, with more than 50% of its population under the age of 19. The average life expectancy is rising. In addition, the World Bank has approved a loan for approximately $100 million for financing health reforms in the Punjab region, which should increase the number of people who have access to quality health services. Healthcare spending overall is expected to increase from PKR521.91 billion in 2012 to PKR986.53 billion by 2017.
Perhaps most notably, the government is finally allowing pharmaceutical companies to raise prices for the first time since 2001, with the exception of certain medications whose prices could be raised through a hardship allowance. The government’s strict regulations of how prices can be raised and to what degree, combined with Pakistan’s growing economy, should keep prices in check so that consumers can still purchase them while allowing pharmaceutical companies to recoup their production costs and increase their profits. Thus, the pharmaceutical industry offers opportunities for both domestic and international investors.