Our manufacturing opportunity

For the last 5 months, I have undertaken the arduous task of renovating my home. Much to the discomfort of family members, I have rather foolishly persisted with the endeavour. Although it is difficult to foresee success in this adventure, at least not to the satisfaction of my wife and my mother, I have managed to gain some knowledge about the building sector in Pakistan. The main insights have sadly been about the complete absence from the market of locally manufactured products used in the finishing of homes and buildings. Other than basic commodities like cement, steel bars and paint, I have not found anything locally produced which I could use. Mind you, I wasn’t looking for anything fancy- only normal products which would be within my limited budget. In this piece, I want to explain how the domestic market for these products is an opportunity for local entrepreneurs and how they could generate value for themselves by creating new demand in many similar sectors.

Let’s begin with my findings. I started the search with floor tiles and compared locally produced tiles with imported ones as well as marble. While the marble was locally made, it was expensive and time-consuming to install. I therefore decided to procure floor tiles and evaluated available options. But apart from a few low-quality local tiles, there was nothing available and the contractors and tilers recommended that I go for imported tiles. From expensive top-end Spanish or Italian tiles to the lower end Chinese one, everything was readily available. I could easily find a product to match my quality and price requirements. Next up, I wanted wood for my doors and windows. I didn’t have to bother much here because I learned that there is limited availability of local wood. But much to my surprise, along with the wood, we are also importing locks, handles, door hinges and stoppers- basically everything else required for a door or a window! 

Onto electric lights-from small basic LEDs to slightly nicer bedroom lights are all imported, mostly from China. Even companies which used to produce lights and bulbs in Pakistan have switched to importing from China! I then looked for fabric for curtains and sofas assuming this would definitely be locally made since Pakistan exports these products. But the retailers told me another story- no one wants to buy Pakistani fabric because it cannot match the quality of imports from countries like China and Turkey. Does that mean we do not export home textiles anymore? I found out later that we do, but we have been operating at the lower end of the market and have been unable to add value to our product line, thus losing market share in the domestic as well as export markets.

Naturally, from the consumers’ perspective, it is okay to buy imported products as long as their needs are being met. It makes perfect sense to be able to procure whatever meets your price and quality requirements. Any preference for local products would be based upon the capacity of the local producers to meet consumer needs.  The contractors, craftsmen, traders and retailers all smiled when I persisted to ask about local products. At the end of my queries, they would just shrug and say they don’t use or stock local products and don’t know where I would find them. 

This brings me to the bigger question: why are we not producing locally? There must be valid reasons for the local entrepreneur to stay away from the domestic markets for all these products. And this is not only restricted to the building industry; the same phenomena cuts across most industries in Pakistan. In my work across different sectors, I have often found management teams talk about per capita consumption of their product or service and how further investment cannot be made unless the market is large enough. This is a simple number which is derived by dividing the total sales of a product by the population. So if we are looking at the market for automobiles, for example, we would take the total sales of all local car producers plus imports and divide this by the population. You would then compare this number with the per capita car ownership in other countries. You could do the same with air conditioners, refrigerators or anything . But there is a fundamental problem with this simplistic analysis. It takes the historic number but ignores the market development opportunity that the low per capita actually represents. Let me illustrate with the example of the Tata Nano in India. When Tata motors decided to engineer a car for the low-income Indian consumer they did so by flipping the logic of the per capita numbers. They challenged themselves to develop a car at a price point which will attract the lower-income groups who perhaps wanted to trade up from motorcycles. They did not see the lower market level as an impediment and instead took it as an opportunity to create an entirely new market of previous non-consumers. I have not followed Nano’s success but I looked at the price point today on their website; it sells for approximately USD 4000 compared to the Suzuki alto (same engine size) in Pakistan which sells for almost double that amount!

Pakistani entrepreneurs need to flip the logic of the numbers and create new markets which match local capacities with affordable price points for the domestic consumer. Granted that public transport should be the first choice for the ordinary citizen, but if there is to be automobile production in Pakistan, it must not be restricted to low volume high-end cars. Producers in high growth economies with sizable populations have first established themselves in the local markets with affordable products. Japan did this in the ’60s, followed by South Korea a couple of decades later and now we have seen China on the same path for the last 30 years. In fact, China still carries the label of inferior quality and cheap prices although it has now started offering high price variants in many industries. But whatever the volume/price equation is, it is made to work for the domestic market first. This allows producers to establish a large volume base from which it can upscale quality to address export market requirements. This is not rocket science and Pakistani manufacturers need to learn and adapt accordingly.

Understandably, entrepreneurs and investors feel nervous when considering entry into sectors which are difficult to quantify as consumers purchasing power remains a mystery. But while these opportunities come with their unique set of challenges, entrepreneurs who take the plunge stand to create new growth engines and reap considerable returns while solving problems for the community. This is what the larger groups in Pakistan who have the capital and management depth ought to be planning as they develop their future strategies. On the policy side, the recent direction of reducing imports cannot be sustainable unless consumers are offered viable local alternatives. Governments need to encourage local production not by restricting imports but by enabling entrepreneurs to take advantage of the opportunities presented by the domestic market.