Electric Cars and Their Impact
Electric Cars and Their Impact
Electric Cars and Their Impact
(Group 10)
Danish Muhammad Azhar 24110227
TABLE OF CONTENTS
SUMMARY ………………………………………………………………………………………………. 03
INTRODUCTION…………………………………………………………………………………………04
MARKET STRUCTURE……………………………………………………………………………….05
FEASIBILTY………………………………………………………………………………………………10
RESEARCH METHODOLOGY……………………………………………………………………..11
ANALYSIS………………………………………………………………………………………………….12
CONCLUSION…………………………………………………………………………………………..16
APPENDIX……………………………………………………………………………………………..17
ADDITIONAL BIBLIOGRAPHY………………………………………………………………….18
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PROJECT REPORT
Summary:
Due to the increased environmental concerns, many countries are planning to undergo a
hybrid shift and electric vehicles would play a vital role in this plan. Pakistan has also
decided to take these concerns seriously and play their fair part in protecting the environment.
Thus, it is taking actions and devising practical policies to ease this hybrid shift. The report
discusses the current market structure of automobile industry of Pakistan and some relevant
details which would make it easier to grasp the on-ground situation. Furthermore, the report
highlights the dire need and external benefits along with the demand and supply prospects.
We also discussed the feasibility of electric cars in current state and steps taken to enhance it.
Lastly, there is a comprehensive analysis of the impact of electric cars on consumers, existing
market and the economy as a whole.
The research methodology involves both primary and secondary research. The primary
research included an extensive survey and interview from a car market executive to derive an
analysis using microeconomics principles and concepts. In addition to that, credible sources
from the web were taken for secondary research.
The research concluded that import of electric cars will make both, consumer and economy,
better off as consumer will have higher consumer surplus by paying lower tax. Moreover,
there will be low dead weight loss, and the environment will get better by internalizing the
externality. The economy will nourish by lowering the petroleum import bill and a more
conducive working environment, but it also faces the threat of unemployment in petrol car
industry as the labor mobility from petrol to electric will be very difficult. Thus, it is
recommended that instead of making single sided policy for import of electric cars,
government should also consider the pre-existing auto industry and make policies for a
paradigm shift so that non EV industry does not struggle.
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INTRODUCTION
With the “electric vehicle boom” being on rise in the world backed by its environment
friendly technologies, it is of no surprise that Pakistan is also considering this option to
reduce its car combustion and pollution rates. Environmental crises have become a central
theme on the world stage, and the move towards renewable and sustainable energy sources is
what clearly is a need of time. Although the electric car industry is not completely new to the
Pakistani market, it can still be categorised as a work in progress. With multiple factors in
place such as strong presence of big non-electric car giants in the market, low propensities to
consume, growing motorization, poor politico-economic framework and COVID-19 with its
devastating effects on the economy, the market for electric cars and its future feasibility
brings due challenges for one to study. This report will unpack the need and impact of the
electric vehicle industry vis-a-vis a strong analysis of the market, backed by empirical
findings.
The 2016 automobile policy by the government gave incentives for new entrants by
lowering the barriers to entry in the market. These incentives benefitted both, local car
manufacturers and importers, by reducing the tax duty and lowering the import duty for
CBUs (completely built units). Incentivized by this policy, some new players came in the
market, such as Kia and Hyundai, targeting the high-end customer segment of the market
while United Motors and Pearl Motors targeting the lower end segment of the market.
Despite the huge rate of motorization in 2018, multiple factors changed in 2019 for the
automobile industry. The big three car companies (i.e. Honda, Toyota and Suzuki) used to
import engines and transmission for their partially local manufactured cars (arguably the two
most expensive components of car). With the rise in dollar price by 55%, production cost for
these companies increased significantly and so did their prices. Due to an ever-increasing
dollar price, the increase in car prices after every six weeks became norm. Moreover, with the
COVID-19 breakout, people’s propensities to consume decreased. Suzuki recorded a loss for
eight consecutive quarters which resulted in the company discontinuing their star seller for
past 25 years, Mehran. Others like Toyota and Kia launched their new less expensive variants
to fit the pandemic hit market (Honda is also following the suit next year).
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However, what was noticeable was that none of the above-mentioned car giants offered
electric or at least hybrid vehicles. All electric cars on roads are imported for individuals by
local car dealers as CBUs. Amidst this current scenario, came the National Electric Vehicles
Policy (NEVP) that changed the dynamics for electric cars in Pakistan. Electric car
companies started pouring in which included world famous ‘MG Group’ and ‘Baic’ alongside
luxury car giants such as Audi joining the league with its “E-tron”, Mercedes with its plug-in
hybrid models and BMW with its “i8” and “i3” cars.
MARKET STRUCTURE
Since the last four decades, Pakistan’s automobile industry has been an oligopoly with only
three main manufacturers, Toyota, Honda, and Suzuki, and some small manufacturers such as
FAW offering cars with salient features to their specific target market. This helps to imply
that there is no collusion within the industry and the industry is not a Cartel. Moreover,
since their targeted market segments are different from each other, both in terms of the socio-
economic status and preferences, companies like Suzuki, have a ‘unique dominant strategy’
due to their popularity and lack of substitutes. However, in the case of two companies
targeting the same customer segment such as Honda and Toyota, due to interdependent
strategies the domino effect comes into play when one company decreases price or introduces
new variants , but when company increases price, rival company tries to hold its prices to
make the other company lose market share. All these efforts to achieve ‘Nash equilibrium’.
Oligopolistic tendencies do not apply to EVs because they are imported individually by the
customers and thus only comprise of a minor percentage in the car market.
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The air quality of Pakistan is deteriorating; hence it urges the public to shift towards
environmentally friendly lifestyle. Cities in Pakistan are ranked very high in the air pollution
index. In 2019, The PM2.5 concentration was six times more than the WHO exposure
recommendation in Pakistan. The graph below shows the air quality of major cities in
Pakistan
One of the greatest reasons to advocate for the introduction of electric vehicles has been how
they are environmentally friendly and can reduce emissions of primary pollutants which are
responsible for environmental challenges, such as smog and acid rain. Electric cars can be a
possible solution for this growing environmental problem as 22.5% of the total emissions in
Pakistan are from transport. This feature of electric cars being ‘environmentally responsible’
and reducing negative externalities of non-electric vehicles, while also serving as an equally
comfortable mode of transport makes it seem worthy to invest in.
The graph given below shows the exponential rate of motorization in Pakistan. From 2000
to 2015 there was a 268% increase in the number of vehicles on road. The rise in
motorization led to the increased demand for petrol that is imported, causing import bill to
rise massively and the air pollution which came about as a result of tail pipe emissions.
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On the contrary, electric cars do not use petrol as a source of energy. This saving on fossil
fuels and the import bill are extremely important given that in 2019, petrol was the 4th largest
import for Pakistan adding $2.2 billion to the import bill. Thus, the need for a steady shift to
electric cars is urgent to lower country’s import bill and to prevent fossil fuel depletion. The
following graphs illustrate increase in the rate of depletion of fossil fuels all over the world
because of increased motorization.
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SOCIAL COSTS:
While the demand of a product depends on multiple endogenous factors, price of substitute
goods serves as an important element of study for our report. Due to the extreme surge in
price of non-electric cars due to dollar rate combined with an ease in the import policy under
the NEVP, prices of second-hand electric cars are now comparable to locally produced upper
middle tier cars (sometimes even less). However, the price of new electric cars is still very
high as compared to non-electric cars. In our primary research conducted, the largest
proportion of survey group pointed out the budgetary constraint and unavailability of
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charging ports as their main reason for not purchasing and electric car. Thereby, it can be
derived that since demand for electric cars is responsive to price, the demand is elastic.
Other important reasons which affect the demand include expenditure of owning a car, taste
in cars, and expectation from a car. The reasons for owning an electric car stemmed from
how they were cheaper after the initial buy in terms of maintenance and had high
performance.
Given the NEVP, if the government succeeds in providing charging ports on important
roads, then the demand is supposed to substantially increase. Moreover, 4% of ads on
Pakwheels website are of EVs, which depicts greater consumer interest in this car category
and this hypothesis, people respond to incentives, was also supported by our survey.
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As for supply, then main source would be the import of electric vehicles. After the
introduction of the NEVP, the import procedure has been made quite hassle free and many
car dealers are already showing their interests as Toyota sets to launch “Toyota cross” which
is electrically powered. It is forcasted that since demand is increasing, price would increase
too and supply would follow the suit and so the government is already signing MOUs with
chinese companies for electric cars.
FEASIBILTY:
Despite this increase in global demand, the feasibility of electric cars in Pakistan remains to
be a question. As Pakistan is a developing country, economic and social challenges stunt the
growth of the electric cars. The first question is financial feasibility which is already
discussed in the demand section of the report (second hand electric car import is the best
option). Secondly, the literacy rate in Pakistan is 60% which shows that 40% of the
population is illiterate (The Nation, 2018). A major section of the population is unaware of
the potential benefits that electric cars offer in comparison to petrol vehicles. Another reason
why people do not opt for electric cars is because of the pessimism that exists pertaining to
the charging time needed and its relation to the driving range. Fourthly, the next big concern
was electricity, its continuous availability, and its escalating prices. Furthermore, the
availability of infrastructure and charging ports is limited and serves as a hindrance to
electrification of transportation in Pakistan.
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To combat these problems, the NEVP was introduced in 2020 which gave certain incentives
(EXHIBIT 1 OF APPENDIX). These incentives include lowering the GST on electric cars
from 17% to 1%. To address the electricity issue, the government is offering a ‘lower rate of
electricity for charging station operators.’ It also aims to establish a charging port after every
three kilometres in major cities in the country. The intended goals of NEVP are summarized
in the table below.
This policy offers economic benefits, along with climate improvement actions. The reduced
taxes and increased investments allow an opportunity for our electric vehicle industry to
improve. The policy aims to cut down air pollution, and aims to shift 30% of the vehicles to
EVs by 2030 (theicct.org, n.d.). Recently, the first electric charging port has been launched in
Islamabad, by Pakistan State Oil (The Express Tribune, 2020). Government of Pakistan is
planning to establish 24 charging units across the country (TLTP, 2020).
RESEARCH METHODOLOGY:
The research methodology for our report can be divided into two categories:
Primary Sources
1. Survey to unpack the report question and collate data to draw derivations.
2. Interview with commercial head of CARFIRST Mr. Anas Zavary to get insights from
his thoughts.
NOTE: LINK TO BOTH, THE SURVEY AND THE INTERVIEW, ARE AVAILABLE IN
THE APPENDIX.
Secondary Sources
Our secondary research comprised of data sources after intensive research from
Google, ranging from research reports of Pakistani government to international
statistics and analytics papers. Citations have been mentioned on the work cited page
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ANALYSIS:
The key group affected the most by introduction of electric cars in Pakistan will be the
consumers. In our primary research conducted, the largest proportion of survey group pointed out
that budgetary constraint and unavailability of charging ports are the main reasons for not purchasing
and electric car. Thereby, it can be derived that since demand for electric cars is responsive to price,
the demand is elastic.
Moving on, electric cars are a positive externality and they have external benefits (better
environment, lower petrol import bills, economic growth etc.) associated with them which can also
help them to drive their demand high at a socially optimum value. Moreover, the government is
already giving tax relief on their import so this socially optimum value and increase in demand
become more prominent. Our survey supports this claim, as a clear majority believes that EVs are
answer to certain negative externalities:
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Given the scenario after NEVP, government has significantly reduced import taxes to incentivize
public for the purchase of EVs. Furthermore, charging ports are installed, thus hybrid shift is
underway cause majority is willing to make the switch if this happens:
This will lead to a larger market surplus and a lower deadweight loss due to lower taxation and
market efficiency will increase. It is actually a win-win situation for the consumer and the economy
of the country as both will be better off because consumers will get a better car a lower price and
cleaner environment while petroleum import will also be reduced.
The current car market in Pakistan has an oligopolist market structure with few major
players dominating the market and having the ‘price making’ power. The market currently is
static in terms of purchase of electric cars for reasons discussed above in the report and that is
evident by the survey results shown below:
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This conception is developed that EVs will either take the market share of petrol cars or
develop a separate market for themselves. Of course, the petrol car companies will not like
any of that hypothesis to come true. Sales of these businesses will be negatively affected,
leading to downsizing of labor in the industry and putting at stake the jobs of the 1.8 million
people that the car industry employs. Thus, a tradeoff has to be made keeping in mind this
opportunity cost. However, claiming that an immediate negative shock will be experienced
by the existing car industry is a simplistic notion because the elasticities of demand have to
be rightly calculated so that prices of electric vehicles are targeted rightly.
Summing it up, due to ease in import, the supply curve of cars will shift to right which will
benefit the consumers and market engagements but the existing car companies will suffer
from decrease in demand due to shifting trends and once they evolve, they would also
become a proper stake holder in this regard.
A rational approach for the existing car industry would be to pursue a rigorous R&D policy
and develop their versions of semi electric/ hybrid cars if not fully electric so to compete with
electric vehicles and maintain their place in the market.
The Economy
The context of the Pakistani economy is multi-dimensional. With the country facing high
unemployment, inflation and other politico-economic problems, the introduction of a policy
for EVs and having it implemented is a tiresome task in the first place, let aside dealing with
its consequences. The explicit cost of electrification of transport might only seem like
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charging ports and low tax revenues, but the implicit cost includes the decline of the
existing car industry if suitable measures are not taken to introduce electric cars in an
evolutionary manner rather than a revolutionary manner.
The non-electric car market contributes to 3.5% of GDP of Pakistan which, if affected
adversely by a new substitute car industry could be a great threat to the already shrinking
GDP of Pakistan. Furthermore, the car industry in Pakistan has been slow in terms of
adopting new technologies and the transfer of ‘technologically forward’ skills amongst its
labour force. 1.8 million people are employed by this industry and if the import of electric
cars or even an electric car industry sets up in Pakistan, the risk of labor being unemployed is
high in the Pakistani context where the unemployed pool already stands at 4.45% (Pakistan:
Unemployment Rate from 1999 to 2020, Statista). Labour mobility in the industry is low
with labour being unaware about technological advancements so to reduce this negative
effect, policy makers will have to ensure that labour is made well suited for the EV industry
to thrive. The negative effect on the economy has to be reduced by the government by
conducting a cost-benefit analysis in the backdrop of the economic crisis and develop policies
that seek to make electric vehicles a sustainable and economically feasible concept in
Pakistan.
Thus, the debate on whether the introduction of electric cars will have a positive or negative
effect on the existing car industry can be put at stop if policy makers realize that to bring
about a value chain of electric vehicles, there needs to be a paradigm shift in how electric
vehicle penetration is to be carried about. Measures such as just strategizing the
electrification of transportation are single sided policy program and require that equal
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attention needs to be given to the existing car industry so that sudden downward shocks are
not experienced by present stakeholders, those too during the COVID-19 crisis.
CONCLUSION:
Conclusively, it can be said that if electric cars become more common, both consumers and
economy will be better off but there remains a question mark on the future of existing car
industry. Policy of environmentalism and rigorous economic growth are inter-tied with each
other because only with the protection of the environment will true economic benefits be
maximized and the level of optimum welfare for the society will be achieved. Strategizing the
policy properly, setting up a well-directed framework and making the policy ‘all inclusive’
for all stakeholders will yield the highest results.
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Uddin, M., 2020. Pakistan’s National Electric Vehicle Policy: Charging Towards The
Future | International Council On Clean Transportation. [online] Theicct.org.
Available at: <https://theicct.org/blog/staff/pakistan’s-national-electric-vehicle-
policy-charging-towards-future> [Accessed 30 November 2020].
APPENDIX
(https://docs.google.com/forms/d/e/1FAIpQLScgOBSibs_UbY3_-DVZbLEO-gvBp2yGC-
RxgT03s20gpZA5JQ/viewform?usp=sf_link
https://drive.google.com/file/d/1_azz3gv-t-
3puR0RsHFcxDRCDKzsRzqK/view?usp=sharing
Additional bibliography
The Express Tribune. (2020). First electric vehicle charging station begins functioning in
Islamabad. [online] Available at: https://tribune.com.pk/story/2256933/first-electric-vehicle-
charging-station-begins-functioning-in-islamabad [Accessed 30 Nov. 2020].
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