Enhancing the Competitiveness of Pakistan’s Domestic Fan Industry

This report titled “Enhancing the Competitiveness of Pakistan’s Domestic Fan Industry” is a joint effort of the Pakistan Business Council (PBC), the Engineering Development Board (EDB) and the Pakistan Electric Fan Manufacturers Association (PEFMA). It is part of the PBC’s Make-in-Pakistan initiative and is based on existing secondary data / research on the sector supplemented with field interviews of vendors and firms in the Domestic Fan Industry in Pakistan.

Global Domestic Fan Industry:

The term domestic/household fan generally includes ceiling fans, table fans, pedestal fans, exhaust fans, and wall fans. As defined under international standards, a fan having a wattage below 125W is categorized as a ‘domestic fan’.

The global market for domestic fans has been expanding with domestic fans worth $6.1 billion sold in 2020. The industry posted a compound annual growth rate (CAGR) of 11.3% between 2016 and 2020 and sales are expected to touch $7.7 billion by 2023. China is the dominant domestic fan supplier with a global export share of 77.6%, followed by Malaysia (2.9%), and Taipei; Chinese (2.1%). The top domestic fan importers in 2020 included the USA (35.3%), Japan (5.3%), and Germany (4.0%).

Pakistan’s Domestic Fan Industry:

Pakistan’s domestic fan industry is primarily concentrated in the Gujrat and Gujranwala regions of Punjab. These two regions account for nearly 90.0% of Pakistan’s domestic fan manufacturing capacity. The total value of exports of the domestic fan industry was $24.9 million in 2020. Major export destinations for Pakistan’s domestic fans included Iraq (21.1%), Bangladesh (16.7%), and Oman (14.5%) in 2020.

In addition to existing markets, this report also focuses on potential markets for expansion which reveals that Pakistan has the highest untapped potential worth $928.0 million in the European region. Although domestic fans from Pakistan face zero tariffs in these countries, non-tariff barriers (CE markings) are stringent, and difficult to comply with. Other top potential markets other than Europe include countries in Africa, Asia, and the Middle East and these have export potentials of $122.8 million, $618.8 million, $262.0 million respectively.

Comparing Pakistan’s domestic fan industry to that of its competitors reveals that domestic fans manufactured in Pakistan are more competitive than those of India and China in terms of quality. However, Pakistani exporters are not able to offer competitive prices due to the high cost of production and heavy reliance on imported raw materials. Generous duty drawback rates and production-linked incentive schemes favor the domestic fan industry in India while China enjoys a lower cost structure due to economies of scale, availability of raw materials, and domestic testing facilities.

Major Reasons Identified for Lack of Competitiveness:

Absence of domestic supply of raw materials: Domestic fan manufacturers use around 50-60% imported raw materials such as Printed Circuit Boards from China, electric steel sheets, plastic, and so on. Major cost components of the industry are raw materials, which account for 70-80% of production costs.

Absence of skilled labor: The introduction of new technology in the fan sector is increasing day by day and industry is inducting the latest machinery for processes such as injection molding, die casting, CNC lathes, automatic presses, and stamping machines. To operate these machines and tools, well-trained manpower is required in increasing numbers.

Lack of institutional linkages providing R&D support: There is a lack of institutional linkages between the industry and academia. Novel trends in technology are therefore mostly demonstrated by large units who have in-house research and development capabilities.

Limited scope for manufacturing fans outside Gujrat and Gujranwala: Since manufacturing and local testing facilities have developed with the two clusters, there is limited scope for setting up manufacturing units outside the clusters.

Underutilized production capacity: Average production capacity utilization rate is between 40-70%.

Non-Competitive Regulatory Duties: Domestic fan manufacturers, who are unable to obtain import quotas, have to face significant Regulatory Duties (RDs) on direct imports of electric sheets. Furthermore, after removal of RD on exports of aluminum and copper, recyclers import discarded components/parts (such as compressors) and separate aluminum and copper to export in the form of ingots. As a consequence, local manufacturers have been facing an acute shortage of recycled raw materials.

Anomalies in the tax regime: Some of the imported inputs are not rightly classified and are hence subject to higher tariffs.

Risks in international businesses: Credit risk and exchange rate risk in countries like Yemen, Iraq, and low-end African and Middle Eastern markets and present, especially as Pakistan tries to comply with FATF requirements. Payment mechanisms in these countries are largely insecure, making exporters hesitant to do business.

Major Recommendations for Enhancing Competitiveness:

Advancing the local technical pool will improve industry competitiveness: The curriculum for skill development programs needs to be revised in consultation with relevant stakeholders including industry participants, PEFMA, and relevant government bodies. Courses and trainings on lathe machine handling, winding, die development, and fitting processes should be covered under the ambit of the Fan Development Institute (FDI).

Exports of recycled raw materials must be discouraged: Regulatory duty needs to be restored on exports of recycled metals such as copper and aluminum in order to support domestic industries in the engineering sector.

Special arrangements are needed for allocating import quotas of electric sheets: Cumulative quota needs to be given to domestic fan associations (i.e., PEFMA) or the larger vendors based on estimated production capacity of SMEs so they can make energy-efficient domestic fans.

Customs duties & levies on imports need to be rationalized: Proposed duty structure can be seen in Table 29 in the report.

Review of current duty drawback rate: The fan industry had submitted calculations of Duty Drawback at 8.0% but only 4.39% was approved. Industry is requesting a review & revision.

Difficulties in export receipts needs to be addressed: A smooth foreign payment mechanism is required to facilitate and promote exports, especially in high-risk countries. After Pakistan’s inclusion in the Financial Action Task Force’s (FATF) grey list, remittances through informal channels have become difficult and the SBP needs to develop a mechanism to facilitate Pakistani exporters facing this issue.

Access to finance needs to be simplified: By reducing collateral requirements and encouraging banks to look at cashflows as a basis for financing for SMEs. In addition, the SBP needs to simplify procedures, and provide alternate Islamic financing products.

Need for greater international presence: Government needs to finance participation in international trade fairs for fan exporters to allow exporters to display products in new markets and to build business contacts. This can be funded from the EDF. The government also needs to finance trade delegations to prospective markets, with meetings arranged by commercial attaches with prospective buyers.

TERF 2.0 for upgrading technology of fan sector SMEs: The last scheme was mostly targeted at larger companies. Concessional financing under TERF will allow SMEs in the sector to upgrade their plant and machinery, improve the quality of existing products, and enter new markets and new products.

Hiring of sector specialists in key markets: Hired specialists would work under the commercial attaché at Pakistani embassies in these markets. These specialists will act as a bridge between buyers in those markets and the fan sector in Pakistan

Support in obtaining international certifications / upgradation of local laboratories: There should be utilization of export development fund (EDF) to provide subsidies in order to cover certification costs. PCSIR, Lahore can be upgraded to provide testing facilities such as LVD test, EMC test, and test for RoHS which will reduce cost, time and ensure global acceptability of Pakistani fans.

Issue of tariff parity needs to be taken up with the government of Vietnam: Vietnam has been identified as a potential market; however, China enjoys a lower tariff due to the China-ASEAN FTA. This needs to be taken up by the Government of Pakistan to seek tariff parity with China

Vendor support & development: The electricity tariff should be reduced for fan vendors on that proportion of their production which feeds into the value chains of exporters.

Extensive marketing strategies to be adopted: A national brand-building program, along with digital marketing, and exchange of trade delegations needs to take place.

Adopt emerging trends: Such as Internet of Things (IoT) technology to control the parameters (speed and ON/OFF) of DC fans and application of bio pellets (renewable energy sources) in the casting process.

The PBC is a private sector not-for-profit advocacy platform set-up in 2005 by 14 (now 89) of Pakistan’s largest businesses. PBC’s research-based advocacy supports measures which improve Pakistani industry’s regional and global competitiveness. More information about the PBC, its members, objectives and activities can be found on its website: www.pbc.org.pk