Market Entry Strategy

The best way for U.S. manufacturers and suppliers to penetrate the Pakistan market is to utilize the benefits of the network services and programs of U.S. Export Assistance Centers (USEAC, visit www.export.gov/comm_svc/eac.html) in association with the U.S. Commercial Service at the U.S. Embassy in Islamabad, Pakistan. Seeking the assistance of USEACs before exploring an opportunity in this market is highly encouraged. We recommend that U.S. firms use an agent/distributor relationship with a locally registered company. Many foreign manufacturers and suppliers appoint one or more agents/distributors to cover the entire country; at times foreign principals work through a regional office to cover this market. Several U.S. firms cover Pakistan through their Dubai, Singapore or London offices.

Using an Agent or Distributor

Many foreign firms in Pakistan appoint local agents to provide market intelligence and to facilitate distribution. These agents typically work on a fixed commission, which can range from two to 10 percent for plant and equipment purchases and from 15 to 20 percent for spare parts. Commissions may be computed on f.o.b., ex-factory, or c.i.f. basis, as mutually agreed. Some agents prefer to have suppliers quote net prices to them and they, in turn, add the commission to arrive at their selling price. Other agents operate as consultants on a retainership basis, receiving their fee regardless of the volume of total sales.

Probably the most common arrangement is the exclusive agency agreement, under which the supplier agrees to neither appoint another dealer/distributor, nor to negotiate sales through any other party. In return, the agent is barred from handling similar items produced by other companies. Under this arrangement, the agent receives commissions on all sales of the product regardless of the channels through which the order is placed. The agent often imports and stocks the spares most frequently required by the end-users. Agency agreements typically extend for a term of one to three years and generally require 30 to 90 days notice by either party for termination. Overseas suppliers may look after the interests of their local agents in various ways. For example, the principal may arrange separate payments to the local agent in order to provide after-sales service during and beyond the warranty period. The principal often compensates the local agent for providing technical and administrative support services not directly related to any specific sales transaction.

The Commercial Service of the U.S. Department of Commerce (USDOC) can provide assistance in locating potential agents and representatives abroad through its “International Partner Search (IPS)” and “Gold Key” services available through U.S. Export Assistance Centers in the United States. The "International Company Profile" (ICP) can provide background information on individual agents.

Establishing an Office

A business in Pakistan may be organized as a sole proprietorship, a partnership, or as a public or private limited company. Foreign investors generally establish limited companies as required under the Companies Ordinance, 1984. They must register with the Securities & Exchange Commission of Pakistan (SECP). Company registration offices are located in each of the provincial capitals and also in Islamabad and Multan. The promoters of any proposed company must also obtain confirmation from the SECP that the proposed name of their company is not deceptive, inappropriate, nor identical to the name of an already existing company.  A company making any public offer of securities for sale or intending to issue capital is required to obtain approval from the Controller of Capital Issues (CCI). 

Companies are also required to register with the Income Tax Department of the Central Board of Revenue and obtain a National Tax Number (NTN). Within 30 days of establishment, foreign companies must file the following documents with the Registrar of Joint Stock Companies, Ministry of Finance:

1. a certified copy of the charter, statutes, or memorandum, and articles of association of the company;
2. the full address of the registered or principal overseas office of the company;
3. the names of the chief executive and directors of the company;
4. the names and addresses of persons resident in Pakistan who are authorized to accept any legal notice served on the company.

Franchising

The concept of franchising is gradually gaining acceptance in Pakistan, especially in the hospitality sector. Several major U.S. hotel chains, along with seven major U.S. restaurants, and two U.S. car rental companies are currently represented in Pakistan through franchisees.  Franchising provides U.S. companies with a fairly swift way to enter the market without a major capital commitment. By operating through local franchisees, U.S. firms can gain access to local expertise and significantly reduce the problems of adjusting to an unfamiliar business environment.  However, franchising in Pakistan is not without drawbacks. Potential areas of tension between franchiser and franchisee include quality control, intensity of marketing efforts by the local franchisee, and possible conflict of interest on part of the franchisee. The local affiliate may end up as a competitor once the franchise agreement expires or is terminated.

A key consideration in establishing a franchise operation in Pakistan is quality control, particularly if the enterprise proposes to use locally produced items. In Pakistan, all imported food items, particularly meat items, must be certifiably "Halal" (slaughtered in accordance with proper Islamic ritual). Selection of a franchisee is critical because usually it involves a long-term relationship. Prior to entering into an agreement with a local company, U.S. firms may commission an ICP on the local company, by paying the appropriate fee to their local district office of the U.S. Department of Commerce. U.S. firms are, of course, advised to identify a number of candidates and evaluate each carefully.  The franchise agreement must be carefully drafted to protect the interests of the parties. The franchiser must be able to retain some direct control over operations, even after transfer of business and technical know-how. Crucial elements of the franchise agreement include territorial coverage, duration, franchise rate, and protection of trade secrets, quality control and minimum performance clauses. The U.S. firm should ensure that its patents and trademarks will be registered in its own name rather than that of the franchisee.

Direct Marketing

Until recently, direct marketing in Pakistan was limited to direct mail advertising, with leading pharmaceutical firms and large publishing groups as major users. The pharmaceutical companies used direct mail to reach out to doctors, hospitals, and other medical professionals, and the publishers used direct mail to reach out to their existing subscribers of magazines and publications for repeat business. However, the inception of telemarketing and the increased usage of courier services have recently broadened the scope of direct marketing.

The concept of direct marketing is gradually gaining acceptance in the Pakistan marketplace, driven by the efforts of several multinational companies. The low cost of domestic mail and local telephone calls makes this a potentially cost-effective sales medium. The major drawbacks to direct marketing in Pakistan are the lack of readily available mailing lists with up-to-date contact information, and the paucity of reports on consumer preferences. These limitations make it difficult to target and reach the intended audience. Efficient mail and courier services are limited to major urban areas, confining the current reach of direct marketing to the cities of Karachi, Lahore, Rawalpindi/Islamabad and Peshawar.

U.S. companies considering direct marketing in Pakistan should take local customs and cultural values into consideration before launching a campaign. The use of a local advertising agency is advisable in implementing the direct marketing option. A few advertising agencies have separate direct marketing departments. A major U.S. bank also offers direct marketing service.

Joint Ventures & Licensing

The three principal routes to entering the Pakistan market are: (1) formation of a whollyowned private company; (2) formation of a public limited company (foreign firm retains majority control, but seeks public participation through stock issuance); and (3) establishment of a company in cooperation with joint venture partners who supply local expertise, management and capital. The joint venture may be either a private or a public company. Joint ventures can be an attractive option in Pakistan today because there are many local entrepreneurs who have built a substantial base in their industrial enterprises and are seeking to combine their knowledge of local markets with foreign capital and technological know-how. The foreign joint venture partner limits its initial country exposure while enjoying the support of a local partner in a new market. Prominent joint ventures have been established in the automobile, fertilizer, electronic, financial services, food and consumer product sectors.  Firms wanting to delay direct entry into the Pakistan market should consider licensing arrangements with Pakistani firms, an option that permits them to enter the market in stages if the initial response is promising.

Distribution & Sales Channels

Pakistan's retail industry has yet to take off in a big way. Most of the retail segment is fragmented and underdeveloped; the very large number of small retail outlets – estimated at 2.5 million - in the country reflects this scenario. Most of these outlets offer basic necessities of everyday life. Consequently, food, beverages and tobacco account for as much as 75 percent of retail sales. At this time there are less than a dozen shopping malls in the country and they are generally limited to the larger cities of Karachi and Lahore.

Large supermarkets or chain stores for general consumer items still do not exist in Pakistan, though the trend may catch on soon, as one large supermarket has been established in Lahore in collaboration with a British chain of supermarkets and has become a major point of attraction there. Another supermarket chain with German collaboration is also expected to soon enter the market. However, the concept of chain stores for fashion apparel has lately begun to emerge in the larger cities, where several such chains, carrying predominantly locally manufactured merchandise, are currently operating. In addition, hundreds of government-owned Utility Stores sell food and household items and serve as a mechanism for restraining inflationary price increases by following the government line on pricing.

The general perception among Pakistani consumers is that the prices in the larger and more upscale stores must be higher due to higher overhead and investment costs. Many consumer retail stores stock general merchandise for everyday use. There are also large numbers of stores that sell a single commodity, for example, tires, cooking utensils, textiles or jewelry. Such stores are generally located in bazaar areas and tend to be situated near other shops carrying similar goods. Foreign companies considering marketing their products in Pakistan may choose to use the services of local distributors or may develop their own distribution chain. Distributors in the urban areas generally deal on an exclusive basis. Some market consultants estimate that the services of 100-300 distributors would be required for nationwide coverage. One very large multinational company selling consumer products employs 500 distributors to reach a significant portion of Pakistan's small towns and villages. As a matter of policy, most companies do not provide credit to distributors, and distributors in turn generally sell on a strictly cash basis to retailers. Smaller distributors often do provide credit to retailers, but the volume of such transactions is relatively insignificant.

Pakistan's wholesale market is fairly well developed, with about 1,000 - 1,500 wholesalers constituting this segment of the distribution network. Karachi is the major distribution center for wholesale goods. Approximately one-fifth of the wholesalers in Karachi sell on a consignment basis. Less than one-third of the wholesalers allow discounts to their customers, but the granting of 30- to 90-day credit is common. Because of limited financial resources, retailers generally sell on a cash-only basis. Consumer credit in Pakistan remains an insignificant portion of the total commercial credit. Foreign companies selling industrial or capital goods often sell directly to the end-user or, if the market is fairly large, they appoint one major distributor who then sells either to sub-distributors or directly to end-users.

Selling Factors & Techniques

The traditional approach to selling in Pakistan has been to make a personal contact with a major wholesaler who serves a network of retailers throughout the country. However, this trend is changing. Advertising is now a rapidly growing industry and some of the large consumer manufacturers extensively advertise their products through both print and electronic media. Some of the banks regularly contact their potential customers through direct marketing. Nonetheless, personal relationships are very important, especially when selling non-consumer items to the government or large corporations. Since personal relationships take time to nurture, U.S. firms are advised to invest time in the market with preferably a local presence or at least very frequent trips to the area. This is not an activity that can be done long-distance. Face-to-face contact is essential. In addition to personal relationships, price generally remains the dominant buying factor. Government procurement also places heavy emphasis on selection of the low bidder, provided the bidder meets the technical specifications and has relevant industry experience.

U.S. products and services enjoy an excellent reputation in the local market, especially for their quality and durability. However, U.S. companies face tough competition from European, Chinese, Japanese and Korean companies, which generally have a larger presence in the country and are able to offer their products and services at competitive prices. Providing after-sales service is also essential and U.S. firms are advised to establish this service either through a local/agent distributor or through their own presence in the local market.

Electronic Commerce

Pakistan can still be considered a cash-based economy. The majority of transactions are conducted in cash, except for those that are very large and require a bank draft or pay order.  However, a number of government departments have started to offer services through the Internet. In the private sector, at least three airlines now offer e-ticketing and several local banks offer online banking services. This segment of the economy is expected to grow steadily as there are approximately 2.5 million Internet subscribers in Pakistan and this figure is expected double during the next five years.

Trade Promotion & Advertising

Pakistan has over a dozen major advertising agencies, some with foreign affiliation. Advertising agency commissions are usually 15 percent of the cost of the advertisement. Information concerning advertising agencies may be obtained from the Pakistan Advertising Association (PAA), 232 Hotel Metropole, Abdullah Haroon Road, Karachi, Pakistan or through the PAA website www.Pakistanadvertising.com Television and newspapers are the most widely used method of advertising. Other means of advertising include radio, billboards, periodicals and trade journals, direct response advertising, slides and commercial film shorts in movie theaters, as well as the Internet.

Pakistan has over 120 daily newspapers. The daily Jang, published in Urdu, is the single largest newspaper, with a claimed national circulation of almost 750,000 (estimated: 400,000). Combined circulation for the roughly 11 English-language newspapers is approximately 200,000. The principal English-language daily newspapers are Dawn (published in Karachi, Lahore and Islamabad), The News (Islamabad, Lahore and Karachi), The Nation (Lahore and Islamabad) and The Business Recorder (Karachi). Although the English-language press reaches only a small fraction of the population, it is influential in political, business, academic and professional circles.

The two major English-language current affairs magazines are monthlies - the Herald and Newsline. The principal English-language weekly economic magazine is the Pakistan & Gulf Economist, published in Karachi, and there is also a widely read English weekly, the Friday Times, published in Lahore. Several special interest magazines such as Spider (Internet), Computerworld (Computer and IT), and Mobile Communications are steadily gaining prominence. Almost all the newspapers in Pakistan are now available on the Internet.

Television is broadcast on state-owned Pakistan Television and several other local channels, using the PAL system. English language programs, including news, are available on several satellite channels. In 2001, the government imposed a ban on Indian channels, which were providing stiff competition to the local channels, although many are received “unofficially”.

Cable and Satellite Television: Cable television has been available in Pakistan for more than seven years, but initially none of the operators except for Shaheen Pay TV was licensed. The broadcast media is regulated by the Pakistan Electronic Media Regulatory Authority (PEMRA), which has issued more than 800 licenses to prospective operators. It is estimated that cable television reaches approximately 20 percent of households in Pakistan. Regulatory details about broadcast media are available on the PEMRA website www.pemra.gov.pk.

Satellite television broadcasts have made rapid inroads in Pakistan and it is estimated that more than 200,000 dish antennas are presently installed in the country, although, with the advent of cable TV, the popularity of direct satellite television is gradually diminishing. More than 60 channels are received via satellite. The most popular transponder received in Pakistan is “Asiasat,” which carries most of the Indian TV channels.

Radio Pakistan reaches out to audiences within the country and abroad in 36' languages (19 regional and 17 foreign) from 24 medium and short wave stations and three FM stations, transmitting 442 hours of programs. The government has allowed two private companies to operate FM broadcast service. FM-100 is Pakistan's first FM stereo music channel, available round the clock in Karachi, Islamabad and Lahore. The license granted by the government does not permit them to broadcast news and current affairs programs.

Pakistan currently allows trade-advertising material other than commercial catalogs to enter duty-free, but levies a 15.0 percent sales tax on those items. Samples may be admitted duty-free only if they are representative parts of a complete shipment or are unsuitable for sale. The duties applicable to commercial shipments apply to samples having a commercial value.

Trade Shows - The textile and apparel, along with the leather and gemstones industries hold regular trade shows. Lately, the telecommunications, information technology, and oil and gas industries have become active in this area. The U.S. Department of Commerce-sponsored catalog/product shows and seminars can be useful vehicles for generating sales leads and for locating suitable agents and distributors. Trade and seminar missions can also provide valuable first-hand insights into the Pakistani market, as well as serving to introduce U.S. equipment and technology. Trade missions can educate government and other end-users about product availability, technical characteristics, quality, and price, and can establish contacts with key organizations to promote product awareness. U.S. firms should also consider participation in regional events (focusing on either South Asia or the Middle East) in order to reach potential Pakistani purchasers, agents, and distributors.

Pricing

Product pricing is often difficult for new entrants to the Pakistan market, principally due to the country's complex tax structure. Foreign companies represented by a local agent, distributor, licensee, or other intermediary generally work closely with their local affiliates in determining prices.  Relatively high shelf prices frequently include a substantial tax component, which can add nearly 50 percent to the retailer's purchase price. High prices for imported consumer items have created a large market for goods coming into Pakistan through
the "informal channel." Expatriate Pakistanis and professional couriers bring in large quantities of goods from the Gulf region in their personal baggage. In some segments of the market, goods brought through this channel have market shares ranging from 50 to 95 percent.

As an illustration of the scale and complexity of various taxes and duties imposed on imported consumer items, marketers of products build into their final sales price the following factors: landing charges (approximately 1.0 percent of initial price); customs duty; sales tax; bank charges; insurance, and the general sales tax. Pricing of non-consumer items is based on different parameters. Most foreign
companies in this market segment are also represented by agent/distributors and give their local affiliates significant latitude in pricing decisions. Agents often opt for higher sales turnover by reducing their margins, allowing them to generate more revenue through a higher volume of sales. In other cases, local agent/distributors may add up to 30 percent to the list price as their commission, depending on the nature of the product. For duty and tariff purposes, they quote the principal's list prices only. On average, retailers mark up imported machinery and equipment 10 to 15 percent and imported general merchandise 20 to 30 percent.

Sales Support & Customer Service

In Pakistan, the end-user generally requires comprehensive and reliable after-sales support on all durable and non-consumer items, accompanied by good documentation and instructions for product installation, operation, and repair. Many purchasers choose a complete turnkey package, which often includes employee training. Foreign sellers generally require local agents/distributors to maintain a certain minimum inventory of spare parts. Most agents provide a warranty and "free” maintenance for one year, building the cost of maintenance into their overall price. It is a common practice for end-users to demand a guarantee that the supplier will respond to questions or rectify faults in the equipment within a specified period of time. The time period may vary from a few hours to several days, depending on the nature of the product and the fault in the equipment.

Protecting Your Intellectual Property

The laws in Pakistan generally provide for protection of intellectual property rights (IPR). Nevertheless, intellectual property piracy in Pakistan remains widespread. Recently, the government has undertaken the task of rewriting legislation in the areas of copyrights, patents, and trademarks. Several U.S. companies (e.g., book publishers, video film producers, and computer software companies) have complained that Pakistan's copyright law enforcement is ineffective and that penalties for violation are extremely weak.

The U.S. Pakistan Treaty of Friendship, Commerce and Navigation guarantees national treatment for patent, trademark and industrial property rights. Also, the GOP recently enacted the Trade Mark Ordinance that provides for registration and better protection of trademarks and further prevents the use of fraudulent marks. Pakistan is a member of the World Intellectual Property Organization (WIPO), the Universal Copyright Convention, and the Bern Copyright Union, but not of the Paris Convention for the Protection of Industrial Property. The United States and Pakistan have held a series of official discussions on intellectual property protection aimed at strengthening the rights of U.S. companies and individuals, and to ensure that Pakistan complies with its TRIPS commitments.

Due Diligence

U.S. companies seeking to do business in Pakistan are strongly advised to conduct a background check on the local company. It is always advisable to check the ownership of the company and its business track record. It is recommended that U.S. companies carry out their due diligence on prospective partners or opportunities using the U.S. Commercial Service International Company profile (ICP) service. Please contact the U.S. Commercial Service, Islamabad, Pakistan for more information on this service.