Large Scale Manufacturing of pakistan

8/17/2019 Large Scale Manufacturing of pakistan

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20. Large Scale Manufacturing for Growth

20.1. Introduction

The manufacturing sector grew at an average rate of 8 percent from the sixties to theeighties, but fell to 3.9 percent during the nineties. This was mainly caused by reduction ininvestment levels due to lack of continuity and consistency in policies. Political instabilitylaw and order position in the major industrial centres, transport bottlenecks, as well asunreliability and inadequate availability of power supply at affordable rates were additionalfactors pulling down the sector.

The sector has shown impressive recovery recently and has grown at a compoundrate of 10.9 percent per annum during 2001 – 05, with Large Scale Manufacturing (LSM)

growing even faster (Fig 1). Political and macroeconomic stability, rationalisation of tariffs,increase in investments, improved utilisation of productive capacity, and growth in demandfor manufactured products, resulting from higher exports and consumer financing havebeen the major factors leading to this growth. Share of manufacturing in Pakistan’s GDP iscurrently 18.2 percent, and production costs have come down because of higher volumes.

Fig 1Manufacturing Share of GDP, and Growth in Large Scale Manufacturing (LSM)

Pakistan’s manufacturing industry is heavily dominated by food, textiles andapparel, and leather industries to the extent of over 50 percent. The share of textiles and itsderivatives in exports was as large as 67 percent in 2003-04. Other major segments in

manufacturing include chemicals and pharmaceuticals (15.2 percent) , basic metal industry(7.7 percent), nonmetallic mineral products (5.1 percent), machinery (4.6 percent), cement(4.4 percent), automobiles (4.4 percent). Automobiles, electronics, cement, fertilizers andtextiles have all showed cumulative double digit growth during the last three years.

An important feature of the engineering sector is the level of competence reflected inlocal design and local content, (with deletion levels of 80 – 100 percent in electrical goods,56–89 percent in automobiles and motor cycles, and 75-100 percent in domestic appliances).

The share of high technology goods in Pakistan’s exports, however, is under 1percent, which is indicative of an obvious neglect or inability to exploit a major opportunity,

since engineering goods make up 63 percent of world trade in 2003, with electronicscontributing nearly half of this value.

Share of Manufacturingin GDP

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20.2. Global Trends

A major global re-structuring is underway in manufacturing. This has taken the formof re-location and shifting of manufacturing, design, and service activities from olderindustrialized countries to developing countries where cost reduction can be affected

without compromising reliability. In some newly industrialised Asian countries, suchactivities have generated major global players and conglomerates, who offer complete end-to-end services in the supply chain, whether as manufacturers of piece parts and systems, orproviders of manufacturing related services.

The second major shift in world trade relates to the technological content of thetraded items, be they manufactured goods, or services; the share of resource based and lowtechnology goods is decreasing, that of medium technology such as automobiles is nearlyconstant, while that with high technology content is increasing (Fig 2).

Fig 2

Thirdly, the sheer scale and volume of manufacturing being undertaken in Chinahas produced a completely new paradigm in large scale manufacturing. China is slowlyturning into the world’s workshop and factory, with enormous appetite for raw materialsand energy resources. While the long term impact of this activity on the very nature ofcompetitiveness will be interesting, its short terms may be devastating to some economies.

Globalisation is throwing up different challenges for different countries and regions.While many countries like Pakistan are welcoming re-location of manufacturing, the older

industrial powers are facing the threat of de-industrialisation. This has forced countries,which would normally not be associated with government interventions and policies, tonow actively promote new ‘Enterprise’ Plans to protect their manufacturing base.

20.3. Objectives

Pakistan has to make important strategic choices to ensure sustainable growth in themanufacturing sector in a rapidly changing and challenging international competitiveenvironment. This requires massive structural changes rather than a marginal change, a shiftin the production paradigm to technology and knowledge based industrialization, with afocus on the quantitative and the qualitative growth of an integrated and competitive

industry in the private sector. The inefficiencies of import substitution must give way to anexport led strategy.

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Over the next five-year period, Pakistan envisages an average annual growth rate of11.3 percent in the manufacturing sector, with investments reaching Rs.1,485.0 billion. Thiswill be accompanied by diversification of the manufacturing sector, where the share ofknowledge and technology intensive engineering, electronics, pharmaceutical, chemical andnon-metallic mineral products, would be strengthened and enabled through fiscal and tariff

means as well as building of alliances with international partners.

Sectors and products with comparative advantage such as textiles, food and agro-processing would similarly be fostered. These measures and policies are expected to raisethe share of manufacturing sector in the GDP from 18.2 percent in 2004-05 to 21.9 percent in2009-10 in percentage terms, and from Rs 1073 billion to Rs 1835 billion in 2010 in absoluteterms. The share of large scale manufacturing would correspondingly rise from 12.5 percentto 16.2 percent.

It is necessary to move out of the ‘low skills equilibrium’ which traps bothindividuals and employers in a low expectations and low productivity environment. A

focused policy thrust, supported by adequate resources, will be adopted for raising thethreshold levels of the technology and skills base which will result in better productivity andquality. However, this need to be accompanied by diversification, as well as physical andsocial infrastructure, standardization, and certification to match the growth requirements.

Pakistan is not regarded as business friendly country, even though it costs less tostart a business and run it than, say, India. Nevertheless, improvements are to be made asregards the facilitation mechanism, reduction of procedures, intrusive inspection laws, andco-ordination of policies at the federal and provincial levels.

The private sector is the key stakeholder in the growth strategy, and would receive

its due emphasis, while the role of public sector would be that of a catalyst and an efficientregulator to ensure competitive market structure. The focus of the government’s industrialmanufacturing policy will be on getting the policy making process right. Only in this waycan private and public sectors come together to solve problems in the production sector, andhence formulate the tools and mechanisms needed to overcome constraints and exploitopportunities.

20.4. Issues

The manufacturing sector still revolves around the traditional low value addedindustries, whose share in world trade is either declining (resource based and low

technology goods) or nearly constant (medium technology goods). An efficient, internationalquality supply chain, which is so essential for local industry to flourish, is missing, partlydue to insufficient scale economies, and partly due to bundling of raw material, parts andmodules by the multinationals in their assembly oriented companies, which discourage alocal vendor industry.

A factor to be noted is the generally low investment in upgrading technology ordiversifying into emerging markets, products and processes. In 1998, Pakistan paid only US$20 m in royalty and technical fees, compared with US$ 2.4 b for Malaysia, US$ 2.3 b for S.Korea, US$ 200m for China and US$ 180 m for India.

Earlier, manufacturing had been hindered by anomalies in the tariff structure; rawmaterial was taxed more than finished goods. This has fortunately been rationalized in thelast few years making value addition more profitable than mere trading or smuggling, and



the impact is visible in several sectors of the industry. Other bottlenecks in meeting thedesired targets are:

i) Productivity Levels: A serious constraint in achieving globalcompetitiveness has been the low productivity which is endemic to Pakistan’s

industrial sector. Without the development of a widely embedded skills base,competence and ability to meet global trading challenges cannot be achieved.

ii) Skills. Pakistan is facing both a skills shortage, and skills gap in key moderntechnologies. This reduces optimum operation of plant and machinery.

iii) Inadequate and Unreliable Power and Energy Supplies. This forces firms togenerate their own power which can tie up as much of 12 percent of thecapital while power outages are estimated to cost nearly 6 percent in terms ofannual production. Pakistan has been actually suppressing demand for quitea long time; this factor in poor competitiveness ratings is duly recognized andthe Energy Security Plan for the next 25 years is expected to address it in a

comprehensive manner.iv) Saturation of Capacity. Many key sub-sectors such as steel, automobiles,

fertilizer, paper and paper board, chemicals are fast approaching fullcapacity because of growth in demand caused by increased exports andconsumer financing. Much of the plant and machinery is obsolete, andrequires modernization and investment as has taken place in the textilesector. Without investment and expansion, plans for growth can be adverselyaffected.

v) Transport and Communication Infrastructure. Current road and railnetwork is inadequate even for immediate demands, and even more poorly

maintained. Data shows that only 30 percent of the funds required foreffective maintenance are actually made available. Port congestion and portcharges are high add to the cost and lower competitiveness.

vi) Certification and Standards. While some progress has been made, many ofmanufactured products still lack proper certification for quality and safety,which hinders their wider acceptance locally as well as globally. This will beaddressed in the MTDF.

20.5. The New Industrial Framework: Policies and Strategies

It is planned to aim for accelerated industrialisation capitalising upon national

strengths and mitigation of weaknesses, whether endemic or specific to a sector. Thechallenge for Pakistan is not to rediscover industrial policy, but to re-deploy it in a moreeffective manner in the national, regional, and global context. The policy framework will bebased upon the advanced industrial economies, where focus is on the entire value chain;The provision of facilities for public testing laboratories and public R&D, vocational andtechnical training, dissemination of sanitary and phytosanitary standards, infrastructureand communications, are all necessary inputs which are regarded as a public good for themanufacturing sector.

Value addition in products and processes will be strengthened through backward andforward linkages, productivity levels will be increased through human resource development,

technical and vocational training, and research and development will be strengthened.



While conventional wisdom requires the role of government to be restricted toprovision of necessary physical, social, technological and financial infrastructure andregulatory framework, empirical evidence shows that diversification is unlikely to take placewithout directed government action, and the required policy will ultimately need to embedprivate initiative within a framework of public action that encourages restructuring,

diversification, and technological upgrade beyond what can be generated by market forcesalone.

General Strategy: All sectors have been opened for private sector investment, andequal treatment will be available to foreign and local investors; however, the basic thrust ofthe MTDF will remain manufacturing and technology driven growth within a frameworkwhich encourages scale economies and agglomeration and can take cognizance of the failureof the entrepreneur to re-structure and diversify.

i) Diversification and Pioneering Industries: The first objective is to diversifythe manufacturing mix and generate new areas of comparative advantage.Incentives will be available for new activities, whether they are ‘new’products, processes or technologies, so that the range of activities areexpanded. This should be clearly distinguished from incentives for SMEswhich relate to size, rather than growth of specialization. Enterprisesspecially those engaged in light engineering, or those in sub-sectors declaredas ‘pioneering’ industries (Annex 1), will be encouraged to foster jointventures and re-location of activities to Pakistan. Apart from bringing in newactivities, incentives for process and productivity enhancement can helpdeclining sectors make a transition to better productivity. Such incentivesmust be time bound, with clear monitoring benchmarks such as productivitygrowth rates and levels, or exports.

ii) Industrial Zones, Corridors, Clusters and Estates. Present urban/industrialcentres cannot accommodate the expected increase in industrial andmanufacturing activities. Industrial corridors , estates, and industrial parksare therefore planned to be set up by Provincial Governments along themotorways, expressways, and railways with full support of the FederalGovernment. These will contain all physical and social infrastructure, andwill be designed to have built-up area, utilities, communications present forimmediate occupation and use.

iii) Strategic alliances, Technology Transfers, License Fees: Acquisition oftechnology, promotion of technology-based small firms, reducing the cost ofcommercialization of locally generated technology, reducing the cost ofintroducing new products and promotion of venture capital will be keystrategies to meet the objectives of MTDF. The government will facilitatestrategic alliances within the country and between Pakistani and foreignentities, so as to complement and increase competitiveness.

iv) SMEs: Special incentives are planned to be offered to Small and MediumEnterprises (SMEs) by the state to upgrade existing skills, processes andtechnologies, as well as in becoming part of the international supply chain.Such SMEs have a major role in employment generation in the country.

v) Knowledge and Technology Base: The structure and content of educationaland technical delivery will be modified to encourage broad based education,economically usable skills, and lifelong learning as required by the new



industrial culture. Firms that establish technical or vocational traininginstitutions will be eligible for an investment tax allowance of 100 percent fora fixed period.

vi) Industry Academia Linkages: Business Development Units (BDUs) will beencouraged in Universities, so that fruitful academia-industry partnershipcan evolve. This will also help feed back funds into universities from earningsthus generated.

vii) Engineering Consultancy / Design : Considering Pakistan’s size, there arefew engineering consulting or design groups firms in Pakistan. These firmscan be helpful in market analyses, forecasting, as well as the selection andadaptation of policies and technologies. Government will encourage suchfirms in a variety of ways.

viii) Certification and Testing: Product ratings and approvals based oninternational quality benchmarks and accreditation will be actively pursued.

ix) Transport and Communication Infrastructure: Development of transport,communication and storage infrastructure is essential for economic growth,whether in services or manufacturing. Apart from major social benefits, theyprovide the means for movement of goods and services. The MTDF plans toprovide fast, efficient and affordable physical communication links (roads,railways and ports), through partnerships with the private sector.

x) Legal & regulatory Framework: The wider issue of Intellectual PropertyRights (IPRs), or fast, efficient and transparent dispute resolution is perhapsmost influential in determining the access of technology and foreigninvestment through strategic alliances, or sub-contracting from within oroutside the country, and will be tackled on the highest priority to complete itsconformance with international conventions.

xi) Foreign Companies with Headquarters in Pakistan: A whole set ofincentives is offered to companies that open their operational or regionalheadquarters , regional distribution centers, and international / regionalprocurement centers, rather than simple country wide representative offices

xii) Cost of doing Business: Even though various measures have helped reducethe cost of doing business, there is still need for further reduction in the taxrates, labour levies, utility prices, and generally to improve administrative,labour, and fiscal policies to improve function and transparency.

xiii) Attracting Investment: Pakistan needs to initiate major changes and reformsin land rights, contract enforcement, tax administration, customs proceduresand intrusive inspection by labour inspectors and social welfare agencies toreduce their nuisance value.

xiv) Private Sector R&D: In the private sector, innovation and R&D would beencouraged through incentives such as reduced tariffs on import of R&Dequipment and supplies, deduction of annual non-capital R&D expendituresand human resource development costs from taxable income.



20.6. Prominent Sub-sectors.

The leading sub sectors show a mix of promise and opportunity as well as certainconstraints.

Textiles and Garments.

This group holds the biggest share of manufacturing in the country as well as inexports contributing 10.5 percent to GDP, 68 percent to exports and employing 38 percent ofall industrial workers in 2003-04.

In anticipation of potential opportunities for Pakistan's exports in the post-textilesquota environment, and to move towards greater value addition, the sector has undergone amajor transformation with nearly US$ 4 billion invested since 2000 in new technologies andmachinery. Currently, the share of yarn and fabrics in textile exports has declined from 70percent in the nineties to 30 percent in 2003, with made-ups taking the rest.

The economies of agglomeration and cluster effects are important factors incapturing externalities and spillovers, and reducing costs of production. Four Textile Citiesand Two Garment Cities are planned to be set up during MTDF. These will be equippedwith quality testing laboratories, design centres, and warehousing facilities apart fromexcellent communications and other infrastructure.

Other major constraints and challenges at present are:

i) Contamination of cotton due to improper picking and storage, hence lowvalue addition

ii) Low technology base and antiquated machinery in the ginning segment,which needs major re-building and modernisation

iii) Making continuous bleaching process more widespread, without whichhomogeneous and uniform dye fixation becomes difficult

iv) Review of policies of protections given to the local man made fiber industryand raw material, which increases cost of blended fabrics.

v) Need to shift to processes and technology for higher density fabrics, bymoving away from existing power looms to high speed shuttle-less looms, air

jet looms and projectile looms.vi) Low size of design base,. Computer Aided Design ( CAD)vii) Wider compliance for ISO 9000 and ISO 14000 is required.

Blended fabrics and garments or ‘high performance wear’ materials are increasingtheir share of world trade, A major challenge to textile and garments exports is appearing inthe form of non-tariff issues such as social and environmental compliance, which is beingresorted to by major importing regions such as the EU and USA. It would be necessary,therefore, to reduce tariffs on high quality dyes and dyes not made in Pakistan. This wouldassist meeting environmental barriers to exports.

Agro-Processing Industries.

The Agro-processing industries comprise food, beverages and tobacco industrialgroups accounting for 22.7 percent of total value added in the manufacturing sector, Foodindustry accounts for 13.8 percent, beverages 1.6 percent and tobacco manufacturing for 7.4percent of the manufacturing value added. Vegetable ghee and sugar accounts for 3/4th of





The auto industry is a medium technology industry presently catering mainly to thedomestic market, with 44 units engaged in assembling, supported by over 850 tier-I vendorsand around 1200 tier-II vendors engaged in manufacturing auto parts. Around $ 300 millionhas been invested by the OEMs & vendors during the last 3 years with another $ 390 millionplanned during 2004-06 to cater to increasing demand. Local production capacities has built

up significantly leading to higher indigenization levels and a sharp increase in exports ofauto parts to over US$ 30 million in 2004.

The major threat to the sector lies in inconsistent policy framework which can lead todistortion in duty structures and reduction of investment in long term projects.

Electronics

The Electronics industry is one of the world’s fastest growing industries and a keyenabler of growth and innovation, underpinning many important industries includingautomotive, information and communication technologies (ICT), consumer and household

goods, defense, biomedical applications and other scientific equipment and devices. Its shareof world trade was the largest of any sub-sector, being nearly one quarter, or US $1.5 trillion,in 2004. It is ideally suited to the demands of 21 st century economies, with least requirementfor capital, space and electric power. It is also relatively clean environmentally comparedwith other industries and employs a large proportion of women and graduates. Electronicswas also a major engine of growth in the economies of the East Asian ‘Tigers.

Earlier, the nascent Pakistani industry had been nearly destroyed between thesmuggler and the tariff structure, since the latter favoured finished goods over raw material.With rationalisation of tariffs, and liberal consumer financing, the electronics industry hasgrown rapidly in recent years, with nearly one million TV sets, 300,000 PCs, and a quarter

million DVD units produced in the country in 2004. Several local brand names haveappeared (only 60,000 TV sets were produced in 2000)

The larger volumes of production have resulted in the development of a vibrantvendor industry, with major opportunities in sub assemblies and modules.

There is enormous scope for indigenous development and manufacturing ofswitching equipment, computers, modems and routers, broad-band Internet services. It isplanned to help develop an international quality indigenous supply chain, and to raise theshare of electronics in the output of the manufacturing sector from under 3 percent atpresent to 10 percent in 2010 and to 20 percent in 2020.

20.7. Institutional and Infrastructure Support

National Productivity Organization (NPO) will provide a permanent platform forcultivating awareness and leadership training in Six Sigma, TQM and APQP. It will expandits programme for workshops on quality and productivity enhancement so as to inculcatequality culture.

The Pakistan Standards and Quality Control Authority (PS&QCA) will be reinforcedand similar authorities will be established at the provincial level under its auspices. ThePakistan Council for Scientific and Industrial Research (PCSIR), Plastic Technology Center(PTC), Pakistan Industrial Training and Advisory Centre (PITAC) and Automotive Testing

and Training Centre (AT&TC) will be made more productive, focused and industry-oriented.



While the ISO 9000 and 14000 certification process has been going on for severalyears,, the use of Urdu on the shop floor and in Quality Manuals can go a long way inspreading productivity and quality in industry.

An essential aspect of technological up-gradation requires focus on engineering

design, and modeling for quality & reliability. Greater use of computerization in businesses,CAD/CAM, industrial instrumentation and controls, are in high demand to warrantaddition of these subjects in Universities and becoming a regular feature of their BusinessUnits.

With a view to promoting R&D activities, government will expand university-industry linkages, provide income tax relief on R&D expenditures; income tax exemption ondonations; weighted tax deductions for sponsored research programmes; accelerateddepreciation on local technology-based plant and machinery; customs duty exemptions forR&D institutions; and national awards for outstanding R&D achievements andcommercialization.

New industrial sites and clusters that are fully serviced with world-class quality ofinfrastructure, telecommunication services and utilities, will be developed to introduce theculture of ‘reduce, reuse, and recycle’. Common Facility Centers (CFCs) have beenestablished in the country in several sectors to provide access to new processes andtechnologies and as a trigger for further innovation.

It is estimated that Pakistan could save up to 16.5 percent of the cost of exports byimproving its trade and transport logistics systems. An additional all-weather road length of80 thousand kilometres will need to be developed with focus on inter-connecting roads tothe less-privileged rural areas to accomplish the objective of industrial development.

Major investment will be required to strengthen railways transportation capacitythrough quantitative and qualitative improvement in rolling stock, revamping of signalingand modernization of communication systems. Involvement of private sector, even withoutcomplete privatization, has potential for improving efficiency and investment in railways.

Efficiency of port operations in Pakistan has remained low. According to a study, thefreight handling costs at the ports in Karachi and Qasim are 20 percent more expensivecompared with modern regional ports, because of excessive cargo handling charges and lowlabour productivity. In an effort to cut the port handling charges and make them morecompetitive, the system will need to be modernized and procedures streamlined and

simplified.

20.8. Required Investment, Private and Foreign:

Over the next five years period, Pakistan envisions to have an average annual growthrate of LSM to be 13.4 percent with an investment of Rs. 1485.0 billion in the manufacturingindustry. An amount of Rs 8.0 billion will be spent through Federal PSDP for skilldevelopment, productivity improvement, together with capacity for R&D, qualitystandards, and accreditation. The share of manufacturing sector is expected to rise from 18.2percent in 2004-05 to 21.9 percent in 2009-10. The corresponding changes in the variousprominent sub-groups are at Annex 2



Annex I

Pioneering Industries

Manufacturing Design Services

1 • Industrial Materials basedon local minerals

• Special alloys

• Carbon fibers

2 • Pharmaceutical Chemicals

• Dyes

• Pesticides

3 Biotechnology

4 • Light Engg

• Pressure Vessels

• Traction Equipment

• Machine Tools ( NC, CNC)

• Industrial AutomationMachinery

5 • Electro-medical Devices

• PCs & Peripherals

• Automotive Electronics

•

Electronics & Sensors

• Multilayer PCBs

• Communications(Fiber/electronicinterfaces, Cell phones,Modems, )

• IndustrialPlants/Processes

• Textiles

• Graphics

• VLSI/Chips

• Food Preservation

• Certified Seeds

• Industrial MaterialTesting &Certification

• Digital Archiving

• Call centres

• CAD services &digital conversions



Annex II

Changes in the Shares in the Manufacturing Output (Percentages)

Industrial Group 1999-2000 2009-10

Food industries 13.8 10.9

Beverages 1.6 1.3

Tobacco manufacturing 7.4 5.2

Textiles and Wearing Apparel 26.5 24.8

Lather and leather products and footwear 1.3 1.2

Wood, Furniture and Paper and Paperboard 1.5 1.5

Chemicals 21.2 23.4

Non-metallic Mineral products 7.5 7.4

Engineering products 14.8 19.6

Others 4.4 4.7

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Large Scale Manufacturing of pakistan