Price Fixing

be produced. Such a scenario leads to reduction in production, eventually resulting in shortages across the board. As shortages increase, an informal market develops, wherein medicines are sold at a considerable premium, or are of dubious quality, since the gray market starts actively supplying the same.

The government is obsessed with fixing prices, whether that be of the most basic staples, fuel, or medicine – it wants to meddle in the market, and thereby disrupt supply chains in the process. Thousands of years of evidence clearly demonstrates that price fixing never works, and often results in shortages, or creation of an informal market, that hurts consumer welfare.

Pharmaceutical products have complex supply chains. Most raw material is imported, and thereby remains susceptible to depreciation of the PKR. Processing is done locally, and that is susceptible to changes in overall cost of doing business, whether that be electricity prices, or inflation, etc. Product pricing is a mix of all these factors, after adding on top a ma rgin – the latter being a function of competition in the market.

Over the last two years, the PKR has depreciated by more than 70 percent, whereas compounded inflation has been in excess of 40 percent. As the cost of production increases, it makes logical sense to increase prices to at least cover for such costs. However, if the price is fixed by the government, and price reviews are done at the highest level of the government on an ad-hoc basis, then the pricing strategy completely fails. If a price remains lower, or even at cost of production and distribution, then there is no economic incentive for medicine to

It is estimated that more than 1,200 pharmaceutical products stopped production because it did not make any economic sense to continue producing products at a loss. If we look at production level data, over the last two years, production of tablets dropped by 25 percent, whereas the production of syrups dropped by 17 percent. This is in an environment where the population continues to grow, resulting in significant contraction in availability of medicine on a per capita basis. As production stopped, so did production units, resulting in loss of jobs. Due to a classic policy error of fixing prices, not only did the consumer lose out, but employment also got decimated. In simpler terms, slightly expensive medicine is better than no medicine.

An unintended consequence of fixing prices is a signal that is sent to the market that discourages investment. It makes no sense to invest in a sector where the producer does not have any pricing power. This has resulted in significant divestment from the sector given lack of growth opportunities due to a restrictive, and anti-competitive regulatory environment. As our population continues to grow at one of the highest rates in the world, we need more investment in the healthcare sector, and not less. Policy measures that actually lead to divestment, rather than investment harm the long-term healthcare prospects of the country’s population.

There is an argument that if prices are not fixed then that may lead to price gouging. It is essential to understand that price gouging can only exist if a market is not competitive. It is the responsibility of the government, and the regulator to create an enabling environment for a competitive market. The government should only be in the business of providing an enabling environment, and ensuring stringent quality controls. Creating an environment where there is more investment in the sector, such that we not only meet local demand, but also develop backward integration through investment along the pharmaceutical value chain is critical for long-term sustenance, and growth of the healthcare segment.

Investment in backward linkages can potentially insulate pricing from depreciation of PKR while also enabling price stability. If the government wants price stability, and if it wants medicine prices to actually reduce in real terms, it needs to create a more competitive market, and we can never have a competitive market with consistently debunked notions of price caps. n

By Daniyal Ahmad

Apple CEO Tim Cook paid a visit next door this April, to cut the ribbon in Mumbai and New Delhi as India welcomed its first Apple stores with exultation and sanguinity. The air was redolent with the sound of animated chatter as the event marked the evolution of Apple’s involvement in India. A new chapter in a relationship dating back to 2017 when India enticed Apple to outsource iPhone manufacturing. A relationship that has even led to Apple rivalling arch-rival Samsung in adopting India’s PLI’s scheme to net the country over $9 billion in phone exports this fiscal year alone.

We observed with bated breath and a twinge of envy as our rival made these strides. How did India manage to pull this off? How did it convince the world’s most valuable company to invest? These were just some of the many questions that ran through our minds as we witnessed the spectacle.

Our mobile industry, in contrast to its Indian counterpart, currently stares into the abyss. A paucity of raw materials and components has debilitated the industry, and its inability to open letters of credit portends a complete shutdown.

As Cook left India with a note expressing his eagerness to return, it was clear that India had made a lasting impression. For us looking on with envy, this only added insult to injury. The contrast couldn’t be more pronounced. It was hard not to imagine what it would be like if these stores had opened under the guise of Lahore’s minarets and not Delhi’s, or peppered with the briny zephyr of Karachi and not Mumbai. How did we let another opportunity slip through our fingers? Does April’s situation offer a chance for reflection on our capabilities and limitations? In this momentary lapse in mobile manufacturing, we can ask: Should we expect Tim Cook on our shores anytime soon or will we repeat history by supporting an inferior industry?

Pakistan’s tryst with mobile manufacturing

For the sake of brevity, our story begins in 2019 with the creation of Transsion-Tecno Electronics: a joint venture between China’s Transsion Holdings and Pakistan’s Tecno Group. The company was to manufacture Transsion’s Itel, Tecno, and Infinix brands in Pakistan.

The very next year, the Engineering Development Board (EDB) doubled down by unveiling the Mobile Device Manufacturing Policy (2020). It aimed to facilitate mobile phone manufacturing by offering incentives such as:

• Regulatory duties and fixed income tax waived on CKD/SKDs for mobiles up to $350

• Higher fixed income tax on $351-$500 category by Rs 2,000 and $500 by Rs 6,300 on CKD/SKDs

• Measures to prevent misdeclaration

• 3% R&D allowance for local manufacturers exporting mobile phones

• Sustained tariff differential between CBU and CKD/SKD

• Local industry to follow a roadmap for localising value chain

The EDB granted licences to 30 compa- nies to partner with international brands to locally manufacture mobiles. It even enticed global giants like Samsung, Xiaomi, and Oppo to partner with local partners such as Lucky Motors,Tecno Pack Electronics, and Exert Tech respectively.

If you think the policy resembles another sector’s policy framework under the EDB’s purview, you’re right. It’s uncannily similar to the automotive industry. However, the policy hit the ground running.

Locally built phones’ production numbers shot up from 290,000 to 24.6 million in 2021, based on Pakistan Telecommunication Authority’s (PTA) statistics. Despite the economic crisis in 2022, mobile producers still churned out 21.94 million units. These numbers may seem large, but there’s still room to grow. Pakistan’s total number of cellular subscribers has only grown year-on-year.

Total cellular subscribers rose to 194.58 million at the end of 2022, with an average annual increase of 10.7 million between 2017 and 2022. These 10.7 million subscribers are completely new customers. This means companies can target existing customers and are also guaranteed 10.7 million new customers every year based on the past half-decade trend.

It seems like an incredibly lucrative business. The only thing grander than its potential are the towering claims it has made regarding its position in Pakistan’s economy. “This is a sunrise industry, bursting with opportunity. With proper nurturing, it has the potential to generate a staggering $10-15 billion in export earnings,” declares Muzzaffar Hayat Piracha, CEO of Air Link Communication and Senior Vice Chairman of the Pakistan Mobile Phone Manufacturers Association. Piracha’s Air Link is one of 30 licensed companies that manufacture mobile phones in Pakistan both directly, and through its subsidiary Select Technologies.

“Given a free hand, we could contribute $10-15 billion to the exchequer in export earnings over the next 3-5 years. If we follow Vietnam’s example, then over the next 5-10 years we could even earn $40-50 billion,” Piracha elaborates. For context, Pakistan’s exports for

Muhammad Naqi, CEO of Premier Code

FY 2021-22 stood at $31.782 billion according to the Pakistan Bureau of Statistics (PBS).

Trouble in paradise

“Not even a single rupee worth of letters of credit (LC) can be accessed, leaving us without raw materials needed for production. The industry teeters on the brink of closure,” warned Piracha. “In all honesty, the industry has already shut down. The question is whether it will collapse entirely. Major global brands like Samsung and Xiaomi stand poised to abandon Pakistan,” Piracha continued.

So what’s the solution? “If we are granted LCs again, then the sector will resume production. It was booming,” posits Piracha.

We could end the article here; we have chronicled this nascent sector’s journey. But this moment of halt begs the question: what are we even doing here? This sector has come out of nowhere for most of us and makes mind-boggling claims.

How many of us knew that our Samsung phones are made here? Or that they’re made by the same company which makes the KIA Sportage? This lapse in production is our opportunity to ensure our Samsung phones don’t suffer the same fate as their estranged

Calling the export bluff

Profit has scoured State Bank of Pakistan’s (SBP) and PBS’ trade data to find the value of mobile phones exported, but came up empty-handed. This is odd because mobiles are listed as an easily identifiable import item. So why isn’t the reverse true?

“If it isn’t a listed item, then the volume probably doesn’t merit it,” says Dr Aadil Nakhoda, Assistant Professor at IBA. Profit searched for any export data, and could only find three instances. The PTA highlighted how Inovi Telecom had exported to the UAE in August 2021 and December 2022. The only other instance relates to Razak Dawood lauding Air Link for exporting locally built mobiles to the UAE in September 2021. And that’s about it. This is a far cry from the $1 billion that the industry aimed to achieve by June 2022.

While some suggest sinister reasons for why local companies are not exporting, Profit suggests an alternative. In their current capacity, they simply cannot.

Hayat Piracha, CEO of Air Link Communication

Tempering expectations

The UAE and ‘African countries’ are the only cited markets where these phones have been exported. Piracha claims phones are also being exported to Saudi Arabia and Oman, but this cannot be corroborated. Maybe it’s just him exporting there?

“Let’s examine the markets touted as export destinations. The Middle East is a highend market dominated by Apple and Samsung. A phone made directly by Samsung in Vietnam is cheaper than one made through a joint venture (JV) in Pakistan. They can directly export phones from their subsidiary in Vietnam to the Middle East and reap the profits themselves. Why share profits with a local partner in Pakistan?”, says Muhammad Naqi, CEO of Premier Code.

Naqi’s Premier Code is one of the 30 mobile phone manufacturing companies. However, it has gone the mobile route alone rather than entering a JV with any international manufac- turer like most others in the industry.

“Looking at Africa, Egypt is also big on manufacturing. Samsung and Nokia have their own manufacturing centres there. Even if our local players could beat Samsung and Nokia in terms of costs, African countries are bound by free trade agreements. If you export to Africa, how would you have a cost advantage against a company based there?” Naqi adds.

The lack of a potential cost advantage, and subsequent un-exportability raises the spectre of comparison with the one industry that mobile manufacturers ideally want to stay clear of: the automotive industry.

Automotive industry part deux?

“Mobiles are a necessity, cars are a luxury,” declares Piracha.

“Your phone is your lifeline. Forget it at home? You turn back. But no car? No problem. Catch a ride, pedal a bike, hop on a bus, or hail a rickshaw,” Piracha adds.”The mobile industry boasts massive volumes, unlike automotive which has never exported anything. With $10-15 billion in potential exports, localisation is inevitable,” Piracha reflects. Piracha draws comparison with the automotive industry by using the word ‘necessity’.

“Cars are essential too. How can you label a Mehran a luxury?” asserts Nakhoda. “The Mehran was an affordable alternative to a motorcycle. It was the people’s car. But with each price hike, it slipped out of reach for the average person,” Nakhoda adds.

“Why do they crave import duties on mobiles if they’re essential goods? How can there be a tariff on a necessity? If the government imposes duties on flour or sugar one day, they could vindicate it by claiming these goods are necessities. It’s preposterous,” Nakhoda exclaims. “If mobiles are necessities, are we establishing value chains that will never produce iPhones or other high-end phones? It’s mind-boggling,” Nakhoda questions.

The comparisons transcend mere slip of tongue and accidental coincidences. They align with technical capacities too.”Localisation? At best, you can only localise 10-15% of a mobile’s value. Certain things cannot happen in Pakistan,” Naqi asserts.

“Take chipsets. The investment required is astronomical. Even if you could muster the funds, the water needs are immense. Manufacturing chipsets is a water-guzzling industry and Pakistan is water-scarce. The clean water requirement means it’s a non-starter,” Naqi explains.

“LCD screens? The market isn’t big enough for anyone to consider manufacturing here. Only five to six companies in the world make LCDs. Setting up manufacturing in Pakistan would require massive investments that local groups can’t undertake. Samsung invested $500 million to set up its LCD plant in India. Their government gave rebates and concessions which ours would struggle to match,” Naqi elaborates.

“And cameras for phones? Those also cannot be made in Pakistan,” Naqi adds. Naqi’s outlook is grim. Nakhoda doesn’t mince words: ‘If they can’t cut it on cost, they won’t export. They’ll just lobby to jack up duties and cash in on domestic margins. It’s a tale as old as time - it happened in automotive and mobiles could be next,”.

The situation is quite bleak. However, not having a sector is easier than scrapping one. It’s also not as if the sector is left gasping for straws. It’s new, there are underlying realities that favour it. Do they know it is the question?

Dr Aadil Nakhoda, Assistant Professor at IBA

What about our Tim Cook moment then?

Naqi pulls no punches: “This industry is headed for an automotive-style trainwreck if we don’t get our act together. We need robust policies and a serious push for localisation. If we’re importing $14.75 billion in raw materials to hit $15 billion in exports, what are we really exporting”?

There are several low-hanging fruits ripe for the picking in the sector. According to PTA’s statistics, half of Pakistan’s mobile users have feature phone users. These phones, with their relatively simple manufacturing vis-à-vis smartphones, provide opportunities for economies of scale. Phone manufacturers are cognisant of this. The majority of locally made phones are feature phones. The disparity in scale between feature phones and smartphones raises questions about potential synergies between the two segments. However, the silver lining is that smartphone production could increase to meet unmet demand if LCs for import become obtainable as Piracha claims. Even if the idea seems far-fetched amidst the current crisis.

“If the principal’s skin is not in the game, they will not work on localisation, exports, or technology transfer,” asserts Naqi.”We can start working on patents and intellectual property rights in the processes that have been brought over. Once we start incorporating these, localisation in terms of the value of the mobile phone will increase,” he elaborates.

“A low-hanging fruit is how India enticed chipset manufacturers to set-up their testing centres,” Naqi reveals. “They initiated the process of having companies outsource their labour to India,” he adds. “This was followed by R&D labs, and eventually other large-scale processes. India leveraged Foxconn to convince Apple to increase their investment in India,” he continues.

The clock is ticking. Staring at our neighbour green with envy won’t do us much good if we remain silent spectators.

The mobile manufacturing industry stands at a crossroads, teetering on the precipice of triumph or tragedy. Can it achieve cost advantages and fulfil its promises to export? The stakes are high. Pakistan cannot afford to nurture another industry that relies on taxpayer largesse. It cannot have another nascent industry, dubbed a sunrise industry, become a foundering rather than delivering on its promises. This momentary lapse in production provides opportunities to discuss what the sector is, what it should be, and most importantly what it absolutely should not be. n