Pakistan’s automobile industry is entering a critical phase as policymakers prepare to introduce a new auto policy following the expiry of the 2021–2026 framework in June this year. While the sector has witnessed a revival in demand and expanded consumer choice, it remains heavily dependent on imported completely and semi-knockdown (CKD/SKD) kits — raising serious concerns about economic sustainability.

Before the recent geopolitical tensions began to impact markets, imports of CKD/SKD kits by local assemblers were projected to reach nearly $2 billion by the end of FY2026. This surge has been driven by strong vehicle demand, supported by relatively low interest rates and accessible auto financing.

According to data from the Pakistan Bureau of Statistics, CKD/SKD imports reached $1.3 billion in the first eight months of FY2026, more than double the $575 million recorded during the same period last year. This sharp increase reflects strong forward booking orders, with total vehicle sales during the period standing at 97,900 units.

Historically, the highest level of kit imports was recorded in FY2022 at $1.67 billion, alongside peak car sales of 234,180 units. However, subsequent economic pressures caused a decline in sales, falling to 96,811 units in FY2023 and 81,579 units in FY2024, before recovering to 112,203 units in FY2025. Over this period — from FY2022 to February FY2026 — cumulative imports of auto kits have exceeded $6 billion.

This trend underscores a structural weakness: despite years of policy support, localisation within Pakistan’s auto industry remains limited. Instead of transitioning toward domestic manufacturing, the sector has increasingly evolved into an assembly-based model reliant on imported components.

Policy Gaps and Structural Imbalance

A key factor behind this imbalance lies in past policy frameworks, particularly the 2016–2021 and subsequent 2021–2026 auto policies. These policies offered concessional tariffs and relaxed localisation requirements to attract new entrants and stimulate competition. While these incentives successfully brought in global players — particularly from China, Korea, and Japan — they fell short in achieving meaningful technology transfer and domestic value addition.

Many new entrants continue to rely heavily on imported components, contributing minimally to local manufacturing ecosystems. This stands in contrast to more established players, where localisation levels have exceeded 60–70 percent in several models, demonstrating that indigenisation is achievable with long-term commitment.

Economic Risks of Import Dependence

Pakistan’s growing reliance on CKD/SKD imports is particularly concerning given its constrained foreign exchange reserves and narrow export base. Rising imports directly widen the trade deficit and increase dependence on external financing — a cycle that has repeatedly strained the country’s macroeconomic stability.

What was originally intended as a temporary mechanism to nurture domestic manufacturing has instead become a permanent feature of the industry. The failure to transition from assembly to manufacturing has limited the development of local supply chains, stifled innovation, and restricted growth in the auto parts sector.

Industry experts warn that Pakistan’s auto sector is now operating as a “sub-assembly ecosystem” rather than a value-added manufacturing industry — a model that is neither sustainable nor competitive in the long run.

Impact on Local Industry and SMEs

The lack of localisation has had a direct negative impact on Pakistan’s auto parts manufacturers, particularly small and medium enterprises (SMEs). Reduced demand for locally produced components has led to lost growth opportunities, limited technological advancement, and weakened industrial capacity.

In contrast, earlier entrants into the market played a critical role in developing local vendor networks and nurturing domestic entrepreneurship. Replicating this model is essential if Pakistan aims to build a resilient industrial base.

The Way Forward: A New Policy Imperative

As the government prepares the next auto policy, there is a clear need for a fundamental shift in approach. Experts suggest that the new framework must:

• Mandate minimum localisation thresholds — such as achieving at least 30 percent local manufacturing within two years for new entrants
• Eliminate preferential treatment and ensure a level playing field for all market participants
• Link incentives directly to technology transfer and domestic value addition
• Strengthen regulatory clarity to prevent policy loopholes and ensure compliance

Crucially, the policy must move beyond incentivising assembly operations and instead prioritise the development of a full-scale manufacturing ecosystem.

A Strategic Choice for Pakistan

Pakistan now faces a critical decision: whether to remain an assembly-based economy or transition toward a manufacturing-driven growth model. The current trajectory — marked by rising imports and limited localisation — is unsustainable in the face of economic constraints.

Without decisive policy intervention, the country risks remaining trapped in a cycle of borrowing to finance imports, undermining long-term economic stability.

A forward-looking, localisation-focused auto policy is no longer optional — it is essential for industrial growth, employment generation, export expansion, and economic resilience.