Enhancing the Competitiveness of Pakistan’s Refrigerator Industry
To get a deeper insight into challenges faced by industry, the PBC has initiated a series of sectoral studies with...
To get a deeper insight into challenges faced by industry, the PBC has initiated a series of sectoral studies with the ultimate aim of increasing the competitiveness of sectors in which Pakistan has a presence. This report titled “Enhancing the Competitiveness of Pakistan’s Refrigerator Industry” is the first in the engineering sector series.
The refrigerator industry is a subcategory of the home appliance industry and is a part of the engineering sector. It got established in Pakistan in the 1980s and has undergone major shifts since then.
The global refrigerator industry is segmented primarily into two types of refrigerators based on cooling technology i.e., direct cool and no frost/frost-free refrigerators. Direct cool refrigerators are generally more popular in South Asia, Africa and the Middle East while frost-free refrigerators have greater penetration in the Americas and Europe. Global demand for refrigerators has been witnessing a consistent increase with revenues expected to reach USD 114 billion in 2023 with a Compound Annual Growth Rate of 2.5 percent over the period 2020 – 23.
China is the largest refrigerator market with a 23 percent share in value terms followed by India (11 percent), and the USA (8 percent). In export markets, the top exporters for refrigerators include China with a market share of about 29 percent followed by Mexico (17 percent), Thailand (7 percent), Turkey (6.6 percent), Korea (6 percent), and Poland (4.5 percent). Top importers include the USA with a share of 21 percent in world imports of refrigerators, Germany (6 percent), France (4.5 percent), the UK (3.8 percent) and Canada (3.3 percent)1.
Pakistan’s Refrigerator Industry
The refrigerator industry in Pakistan contributed around 2.5 percent to the country’s GDP in 2018-19. Pakistan’s refrigerator industry is well established and has reached a level of maturity where some exports have taken place to regional markets and the industry is confident that given the right policy framework, they can capture a sizeable portion of the regional markets in the coming years. Domestic production of refrigerators in the last 10 years has been between 1 and 2 million units per annum with production in 2019 estimated at 1.03 million units. The current domestic demand for refrigerators has reflected the economic conditions within the country where an IMF program followed by the Covid-19 pandemic has brought the economy to a standstill. A policy framework that encourages domestic manufacturers to tap into growing regional markets will, therefore, potentially allow local producers to reduce their dependence on just the domestic market.
Pakistan is a market for direct cool refrigerators with a share of around 95 to 98 percent of all refrigerators sold. The demand drivers for the industry include rapid rural-urban migration, electrification of villages, and a general improvement in living conditions. The market is expected to grow further as a penetration rate at 42 percent is much lower than regional and global averages.
Pakistan had small exports of refrigerators i.e., USD 2.8 million in FY 2018-19 and exports have witnessed a downward trend since FY 2013-14. Imports of refrigerators were USD 257 million which is mainly driven by imports of components (such as compressors, heat pumps, and other parts).
Measuring Industry Competitiveness
This study uses a hybrid of top-down and bottom-up approaches for measuring competitiveness at the industry level. The top-down approach employs comparing global competitiveness indicators as well as calculating competitiveness indicators at the industry level while the bottom-up approach relies on interviews of individual manufacturers to understand their perspectives on the industry’s competitiveness.
Pakistan performed much poorly than India and China on global competitiveness indicators such as trading across the borders, logistics performance, and global competitiveness indicators. It reflects the relatively weak institutional framework available in the country and below-average governance. Factors such as time to import and cost compliance for imports are impacting the refrigerator industry in Pakistan because of the industry’s dependence on imported raw material. Improvements in the real effective exchange rate (REER) reflects the improvements in competitiveness for exports while imports become more expensive.
The industry-specific indicators also portray the current non-competitive position of Pakistan’s refrigerator industry in the global arena. A declining export market share, comparative disadvantage, and a low level of competitiveness on Vollrath’s indices of competitiveness when compared with regional and global competitors plagues the refrigerator industry of Pakistan.
The bottom-up approach used in this study includes interviewing individual manufacturers and aggregating their responses at the industry level. The responses were systematically recorded against attributes of the augmented Porter’s diamond model for firm’s competitiveness which are summarized as follows:
This report briefly covers government policies as applicable to the refrigerator industry. These policies are not specific to the refrigerator industry but focus on the engineering sector as a whole. The list of relevant SROs and policies are as follows:
Strengths: The core strength of Pakistan’s refrigerator industry is the ability to competitively manufacture direct cool refrigerators which matches the demand of less developed countries. Unlike other engineering goods, Pakistan remains competitive in manufacturing refrigerators of international quality which are competitively priced.
Weaknesses: High dependency on imported raw material (around 85%) and technology reduce margins to a large extent, moreover, lack of an international brand restricts entry into international markets.
Opportunities: Lower penetration rate of appliances and improvements in power availability in the domestic market provide scope for further expansion of the market to cater to increased demand. A competitive exchange rate and surplus capacity of the domestic industry are favorable factors for entering regional markets.
Threats: Supply-side disruptions for imported raw materials are a continuous threat to the industry. Entry of large Chinese manufacturers with deep-pockets and enjoying duty-free access to plant & machinery can seriously impact the viability of current players. Exchange rate volatility and continuous economic slowdown also threaten the demand for refrigerators. Other threats including shifts in consumer preferences and unknown acts of nature like COVID-19.
The PBC is a private sector not-for-profit advocacy platform set-up in 2005 by 14 (now 83) 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
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