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A Suzuki plant in Karachi.
A Suzuki plant in Karachi.

HELPED by a large demand for small cars and vans created by the Shahbaz Sharif government, and a sharp drop in the cost of car financing, Pak Suzuki Motor Company’s earnings for 2015 are expected to spike to a record high.

Suzuki’s share in the car and light commercial vehicle (LCV) market has surged to 58pc during the first three quarters of 2015 to September with its pre-tax profits almost tripling to Rs6.33bn from Rs2.18bn a year ago.

The after-tax profits also jumped to Rs4.24bn from Rs1.60bn in spite of increased taxation on higher profits. The tax nearly quadrupled to over Rs2bn from a year earlier.

The company’s unaudited accounts for the period show that its sales rose by 64pc to 97,128 units from 59,295 units compared with the 54pc growth in the market for cars and LCVs.

Double taxation is a major hurdle in the way of the automobiles industry to grow to its potential

The directors’ report acknowledges the fact that the “major factor for improved sales volume is due to sales of Suzuki Bolan and Suzuki Ravi to the Bank of Punjab under ‘Apna Rozgar Scheme’ of (the) government of Punjab.”

The Punjab government had ordered 50,000 cars and vans in the middle of 2014 to be supplied from December that to February this year.

During the first nine months of 2015, the company had supplied 32,041 units — almost a third of total cars and vans sold during that period — under this scheme.

The order is expected to be complete by the end of this month, according to the report.

Thanks to the demand for smaller cars and LCVs the company remains a market leader even if the Punjab government’s order is ignored.

However, its sales dipped by a fifth in 2013 after the provincial government discontinued its yellow cab scheme after two years. The yellow cab scheme had pushed Suzuki sales to 96,170 units in 2012 and over 92,700 units in 2011.

The joint venture between Pakistan Automobile Corporation (PACO) and Japan’s Suzuki Motor Corporation (SMC) — the holding company owning 73pc of the firm — is engaged in the assembling, progressive manufacturing and marketing of Suzuki cars, pickups, vans, 4x4s and motorcycles and related spare parts.

Motorcycles form only fraction of the company’s overall revenues, contributing little to its profits and earnings.

The report points out that a weaker Japanese Yen and stable rupee had significantly contributed to the company’s improved gross profit margin to 13.8pc in the period under review from 8.1pc.

The carmaker’s earnings have risen in spite of the fact that it’s distribution expense increased from Rs590m to Rs1.500m mainly due to transportation charges of vehicles on account of uniform selling prices of vehicles announced by it from January 2015 for the entire country.

This factor alone was responsible for an increase in transportation charges of Rs880m. Administration expenses rose slightly by 8pc from Rs814m to Rs879m mainly due to the impact of inflation.

Some of the impact of increase in expense was offset by rise in ‘other operating income’ from Rs439m to Rs740m and income from bank deposits as higher sales and reduced stock in trade balances created greater surplus funds.

The company considers outlook for the automobile industry as positive. “All time low discount rate coupled with availability of consumer financing at competitive rates will boost industry sales,” the directors said in their report for the first nine months of 2015.

Suzuki supports trade with India and taking automobiles sector out of the negative list. It argues that the import of auto parts from Pakistan’s eastern neighbour will be cheaper owing to lower prices and freight advantage.

With the boost in the overall industry sales and its own capacity utilisation reaching 86pc from slightly above 53pc in 2014, Suzuki plans to invest $480m in setting up a spare parts plant at a cost of $370m and introduce two new variants of 660cc and 1600cc segments at a cost of $110m, according to media reports.

The company management firmly believes that Pakistan’s car market holds a significant growth potential with motorisation of eight person per 1,000 persons compared with 12 in India, 21 in Indonesia and 30 in Egypt.

The execution of China Pakistan Economic Corridor (CPEC) is expected to create yet another opportunity for the automobiles assemblers to increase their sales over the years.

But it has linked its investment plans to certain policy incentives, similar to the ones the government is contemplating to offer to attract European car producers into Pakistan, for the new variants in the new auto industry policy: restrictions on import of used cars and reduction in duties in import of new technology.

The new policy is under preparation since the previous ended in 2012.

“ It is expected that the ‘auto industry policy’ will address the issues being faced by the automobile sector and contribute positively for the growth of automobile sector,” the carmaker said in its unaudited report for Jan-Sept 2015.

Like other carmakers, Suzuki also feels that inconsistent auto policies that allow liberal import of used cars into the country and double taxation are a major hurdle in the way of the automobiles industry to grow to its potential and achieve economies of scale at 500,000 units.

“Consistent government policies (like restrictions on imports of used cars) with a vision to strengthen auto industry are essential for the growth of auto industry... the government announced 10pc tax on undistributed reserves. It is double taxation as it is levied on reserves, which were accumulated from after tax profits.

“As per sound business practice, companies should be managed to make profit and major part of such profit, after income tax and dividends payment, should be reinvested for expansion of business.”

Suzuki is a notable example that achieved the expansion in plant capacity and development of new models through own resources.

Published in Dawn, Business & Finance weekly, February 15th, 2016