A Pakistan-Chinese automotive joint venture recently sold out six months’ production of its first compact sedan car within five days of market launch, a success that investors and analysts believe could pave the way for Pakistan to become an export base for Chinese right-hand-drive vehicles. The stock-clearing sale of 15,000 Chang’an Alsvin passenger vehicles is the latest in a series of headlines about joint ventures between privately held Pakistani conglomerates and Chinese state-owned automotive enterprises. The Alsvin is assembled at a US$136 million plant near the port city of Karachi owned by Master Chang’an Motors (MCM), established in 2017 as a 70:30 joint venture between the local Master Group and leading Chinese carmaker Chang’an Automobile. In addition to the 30,000 units a year of the Alsvin, it began producing two pick-ups and a multi-purpose vehicle in 2018. Shanghai-based SAIC Motor, owner of the British car brand MG, this month broke ground at the site of a US$100 million plant near Karachi which is expected to begin production of three small-engined sports utility vehicles, or SUVs, next year. China-Pakistan Economic Corridor faces new threats from militancy KA Hanteng Motor, a joint venture with China’s Hanteng Automobile, is building a US$50 million plant in Pakistan and is expected to start making 15,000 SUVs and passenger cars this year. Al-Hajj FAW, a Karachi-based joint venture formed in 2012, ramped up production of hatchbacks last year to 20,000 vehicles. When the Master Group proposed the joint venture to Chang’an Automobile in 2016, it did so with the ambition of leveraging the estimated US$60 billion China-Pakistan Economic Corridor (CPEC) to gain access to other Asian markets targeted for investment under the Belt and Road Initiative , MCM’s chief executive Danial Malik said. The CPEC is the single largest programme under Beijing’s Belt and Road Initiative to integrate China’s economy with developing countries. Under the first five-year phase of the CPEC, Chinese state-owned enterprises have built power plants generating 5,320 megawatts of electricity and 1,544km of motorways. Other projects under construction will add another 2,844 megawatts of power generation capacity and 1,456km of motorway, completing Pakistan’s north-south network. The motorways, once completed, will greatly reduce transit times for Chinese cargoes entering Pakistan either at the sole overland border crossing with the Xinjiang Uygur autonomous region, or through the Chinese-operated port of Gwadar on the Arabian Sea. “We came into Pakistan with a joint venture with Chang’an and this was under the umbrella of CPEC 2.0,” Malik said, referring to the second five-year phase of the programme under which Pakistan is developing special economic zones to attract Chinese manufacturers. “Since China is a left-hand-drive market, Chang’an was looking to develop a right-hand-drive manufacturing base and that is what we pitched Pakistan as – and as a country that we could then eventually export vehicles from China to other right-hand-drive markets” like populous Bangladesh and nearby Sri Lanka , he said. London-based automotive industry analyst Puneet Gupta said the development of a right-hand-drive manufacturing base was key to the profit growth of Chinese state-owned automobile manufacturers. After a decade of “phenomenal growth”, the Chinese market had “entered into a stagnation phase in the last two years,” said Gupta, an automotive research and analysis manager for IHS Markit, a UK-based data and information services provider. China’s US$62 billion belt and road project in Pakistan: a corridor to nowhere? “This made Chinese car manufacturers explore other markets and invest in neighbouring markets to regain the growth path. One of the most vital strategies is to explore the right-hand-drive markets like Pakistan,” he said. Pakistan’s potential as a strategic hub for Chinese carmakers has grown because of the extraordinarily close relationship between the evergreen allies, he said. Neighbouring India has opposed the CPEC since it was launched in 2015, on the grounds that it involves Chinese investments in the Pakistan-administered half of Kashmir . Since independence from British colonial rule in 1947, India and Pakistan have fought three of their four wars over Kashmir. China and Pakistan settled their dispute over the border between Xinjiang and Gilgit-Baltistan in 1963, a year after Chinese forces defeated India in a war over their disputed Himalayan border . The conflict reignited in the Ladakh region of Kashmir last June after Chinese troops seized several hundred kilometres of territory previously held by India. The stand-off in Ladakh prompted India’s government to introduce restrictions on Chinese investments, effectively ending any prospect of Chinese carmakers establishing a manufacturing base in the world’s largest right-hand-drive market. “Chinese companies need security clearance for investment in India so it has become difficult for them to do business and grow in India,” Gupta said. “This is the reason why we are seeing China moving towards the Pakistan market, which has potential to grow and is a right-hand-drive market.” MCM’s Malik said China’s automotive giants, having previously devoted themselves to satisfying domestic demand, only recently decided to focus on developing countries after finding that Japanese and South Korean carmakers had captured the markets in developed economies. “Similar to what they’ve done with consumer electronics”, Malik said Chinese automobile manufacturers were looking to attract consumers with cars and commercial vehicles packed with state-of-the-art features at “a very accessible price point”. This policy determined the runaway success of this month’s roll out of three variants of the Chang’an Alsvin in Pakistan. Consumers’ choices there were previously limited to a very narrow range of locally assembled Japanese cars – all of which are one or more generations older than the versions marketed in developed economies. As coronavirus bites, Pakistan looks to China for belt and road economic boost Toyota, Honda and Suzuki have enjoyed a virtual monopoly since they established joint ventures in Pakistan in the early 1990s and began assembling cars specifically for domestic consumption. Alternatively, Pakistani consumers looking for cars with more features and better technology buy imported used hatchbacks from Japan, which until two years ago would cost roughly 20 per cent less than entry-level models of locally assembled compact sedans like the Toyota Corolla and Honda City, and about 20 per cent more than hatchbacks and multipurpose vehicles made in Pakistan like Suzuki’s Alto and Wagon-R. This pricing formula was knocked off kilter by the 50 per cent depreciation of the rupee against the US dollar between 2018 and 2020, as Pakistan struggled with a balance of payments crisis sparked by its failure to grow exports as imported Chinese machinery flooded in for CPEC. The rupee-denominated price of Japanese cars soared by about a third as a consequence, and the gap between hatchback and compact sedan prices widened to the point that most middle class Pakistani families could no longer afford cars with boots. In the midst of this market shift, MCM took aim at the recently deprived market segment. “Our strategy with the Alsvin was to give the Pakistani consumer access to a sedan, because the way prices were going the entry-level sedan was out of reach for the general customer,” Malik said. “Not only did we bring a sedan that was accessible to the hatchback consumers of Pakistan. We also introduced features that were either not available in any sedan in Pakistan” or were only available in sedan models priced more than 35 per cent higher than the Alsvin. It is also the first car model manufactured in Pakistan powered by an engine designed to use low-sulphur Euro-5 standard fuel, which Pakistan’s government has ordered oil refiners to introduce as of this year. Other Pakistan-based manufacturers have yet to replace polluting Euro-2 standard engines in their vehicles. “Bringing those features to an entry-level sedan was the real wow factor and the consumers loved it,” Malik said. In comparison to the scale of China’s domestic market, the world’s largest, the probable sale of 30,000 Chang’an Alsvin compact sedans to Pakistani consumers appears relatively insignificant. Chinese automobile manufacturers sold 19.29 million passenger cars last year, falling for a third consecutive year. Sales were about 20 per cent less than in the peak year of 2017, according to the Chinese Passenger Car Association. Pakistani car makers, on the other hand, are forecast to sell about 200,000 cars in financial year 2020-21, which ends in June, down from peak sales of about 217,000 vehicles in 2017-2018. However, Chinese automobile sales in Pakistan are already much higher than Indonesia , where more than 800,000 vehicles were bought in 2019. Both right-hand-drive countries have populations well in excess of 200 million people. Pakistan’s government is consulting automobile manufacturers on a new policy framework approved in December to incentivise investment in electrical vehicle manufacturing, a key growth market for Chinese car makers. They have already announced plans to market and manufacture Chinese electrical vehicles in Pakistan as soon as tax incentives under the policy are finalised. The sticking point, according to MCM chief executive Malik, is that the entrenched Japanese car makers have sought to nullify any advantage to Chinese manufacturers by demanding the same deal for hybrid vehicles. Naturally, Malik sees his competitors’ lobbying as an impediment to the establishment of electrical mobility across Pakistan. He argued that Pakistan would benefit more by leapfrogging from combustion engines to electrical motors, similar to the way it prioritised nationwide mobile telephony coverage in the early 2000s over laying landlines in its rural areas. Once the arguments over Pakistan’s policy are cleared, MCM plans to expand production capacity at its Karachi plant – where a dedicated 2.5 megawatt solar power plant is under construction – to add a range of electrical vehicles. Under its Shangri-La plan launched in 2018, Chang’an Automobile is working towards building electrical versions of all its 30-plus models by 2025. “Definitely, it makes sense” for Chinese automobile manufacturers to use Pakistan as a manufacturing base for right-hand-drive electrical vehicles, IHS analyst Gupta said, “because Chinese players can easily import parts and assemble electric vehicles in Pakistan, and later on move to manufacturing as the market becomes bigger in the country.”