Barely a year into it and the new Auto Industry Development Policy (AIDP) seems to have begun to yield the intended results: new non-Japanese car brands are coming to the Pakistani market, and the existing ones are forced to invest in new variants and models as well as improve the quality and passenger safety features of their vehicles in line with global standards.
At least three new carmakers plan to enter Pakistan’s market whose size, some analysts believe, will almost double to half a million units by 2025.
French Renault was the first carmaker to announce its plan to invest $100m in the Ghandhara Nissan plant to bring its brand into the country’s market.
South Korean companies — Hyundai and Kia — followed the French carmaker, announcing their intentions to stage a comeback in collaboration with reputable local industry giants — Nishat Group and Younus Brothers — with deep pockets.
Now the German Audi is also said to have approached the Board of Investment through its local authorised dealer with a proposal to start an OEM (original equipment manufacturer) plant here.
Pakistan being the 6th largest populated country, with half of its population below 30 years and car penetration as low as 13 vehicles per 1,000 persons, offers a huge potential for growth to global carmakers.
At least three new carmakers plan to enter Pakistan’s market whose size, some analysts believe, will almost double to half a million units by 2025
“The development of infrastructure under the $57bn China-Pakistan Economic Corridor (CPEC), a large young population, increasing buying capacity, rapid urbanisation and a growing economy offers an enormous opportunity to carmakers to come and invest here,” says Rao Khalique, a Lahore-based banker who didn’t want to give his bank’s name.
He claimed that car leasing has been growing rapidly for the last two years to peak at Rs127bn by the end of 2016. “The size of financing shows the quick growth in car demand over the last couple of years.”
While the new car brands have expressed their intention of setting up assembly plants in the country in order to reap the benefits of a growing demand, it remains unclear as to how much they and their local partners plan to invest and what plant capacities and engine sizes they are targeting.
“We are working on the project. It will take some time to finalise all the details,” Mohammad Ali Tabba, Chief Executive Officer of Lucky Cement, which is partnering with the Kia Motor Company to produce its cars in Pakistan, told Dawn. But, he added, “We plan to produce cars as well as commercial vehicles.”
Ali Asghar Poonawal, an analyst at AKD Securities, is of the view that local partners of foreign carmakers are tight-lipped about their plans owing to their non-disclosure agreements with the principals.
He points out that the establishment of new assembly plants and development of a dealer network usually takes two years.
“I think both Lucky and Nishat will start by importing different variants of Kia and Hyundai cars to first ascertain demand in the Pakistani market before launching actual assembly plants,” he adds.
“They will likely venture into a small car segment where the demand is growing more rapidly,” he says.
Renault, on the other hand, is expected to enter in the 1,200cc and above segment.
Watching these developments closely, the existing OEMs appear to be losing hope of a change in the AIDP that favours new investments in the auto industry and seem to have decided to brace for the upcoming competition.
Pak Suzuki, which had earlier threatened to withdraw a planned investment of $450m in a new plant, unless the government extended same incentives for new investment by the incumbents that the AIDP offered to the new entrants, is now said to be moving ahead with it — albeit not as aggressively as it intended to.
Besides, it is also replacing old models and bringing in new ones to prepare for competition.
Indus Motors, the producer of Toyota cars, is tweaking its plant and de-bottling its facility to raise its production capacity to above 65,000 units on a double shift basis, as well as bringing in operational and cost efficiencies.
Constrained by its production capacity, Honda too is changing its variants and models in order to maintain its clientele in the country’s high prices car market.
“The existing players are conscious of the likely competition going forward. Therefore, the old models are being scrapped and new ones, with features that they had never thought of offering in Pakistani market before, are being rolled out,” says Ali Asghar Poonawal.
There’s a consensus among industry analysts that the new competition in the country’s car market would help dismantle the ‘cartel’ of the existing Japanese carmakers. “The car companies have enjoyed government patronage and protection from competition for far too long a time. Now it is time for them to learn to compete, improve their quality and give their customers value for their money,” a Lahore-based car dealer contends.
“While new players in the car industry pose a challenge to the existing OEMs and will depress their margins, we do not anticipate any immediate arrival. This will give the incumbents in the industry enough time to tweak their plants to bring cost efficiencies, as well as to improve the quality of their cars. If they don’t prepare for the coming competition, their brands will suffer once their new competitors start eating into their market share,” an analyst who didn’t want to give his name remarks.
Published in Dawn, Business & Finance weekly, February 13th, 2017