As economy slows, mood of new entrants in auto sector loses a little shine

Updated May 12, 2019

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Old and new players in the auto sector agree that the fate of the industry is now tied to developments in the wider 
economy. — File photo
Old and new players in the auto sector agree that the fate of the industry is now tied to developments in the wider economy. — File photo

KARACHI: As over 300,000 units of additional capacity in cars, sport utility and light commercial vehicles are coming up in the next one to two years, some new entrants believe that the government should avoid giving green signal to more new players while others say that let the market decide the fate of new entrants.

They said influx of 15 new entrants in the green field segment and two others in brown field under Auto Policy 2016-21 carrying an investment of over one billion dollars may create a difficult working environment in the short term for new entrants in getting even a slight slice of market share from the three big Japanese giants already operating in the field.

Read: What is Pakistan’s car industry good for?

Low localisation levels at the start of assembly by new entrants means opening of few new jobs at the assembling units and offices instead of big job opportunities at the vendors’ end. Accelerating localisation level in the locally assembled vehicles will take considerable time depending on the response of consumers towards new the vehicles.

Eyeing a challenging business scenario for new entrants owing to upcoming additional capacity, CEO Kia Lucky Motors, Asif Rizvi says “I think 17 new players are too much in Pakistan, if they all materialise.”

Auto Policy 2016-21 has attracted big global players and country’s installed capacity will double if all the new players were to establish and advance their plans, he said.

“I request the Government to prevent the creation of a huge over-capacity which will only result in a bloodbath among manufacturers and will not be conducive to localisation. The government should keep the ADP 2016-21 policy framework intact with no extension,” Asif said.

On price of new vehicles, he said “low price is not the cornerstone of our strategy. New entrants will give additional choices, new variety of models and better quality. This will end late delivery issue and menace of premium.”

The year 2018 ended with sales volume of 330,000 units including 70,000 imported CBU, which by all accounts is very low for a country the size of Pakistan in comparison to cars sold worldwide. Pakistan’s ratio for only 2018 stands at 1.65 units sold per 1,000 population versus global ratio of 12.8.

He said if the global ratio, albeit a hash average is applied to Pakistan, the number is 2.56m cars per year and when corrected for the per capita ratio, Pakistan should be selling close to 500,000 while the country is now actually at 320,000 units.

Seen in another way, Pakistan’s peak sales were 236,000 units in 2006 before the recession. Compounded at 6pc annually, the market should have increased to 500,000 in 2019. Hence, there is pent up demand of over 100,000 in the country given the right condition.

Asif said taxes and duties eat up 30-38pc of car value in Pakistan. He said he cannot advocate lowering of duties on CKD kits only to reduce price, as this will have detrimental effects on the viability of localized parts, but it can be advocated to reduce CKD duty and an equivalent reduction of duty on components that go into manufacture of local parts, while equivalent protection is provided to new entrants. The safest reduction of levies would be in the form of reducing sales tax and FED.

He added the pace of localisation may be a little slower but not because of the concessionary regime or a lack of desire to localise but only due to low volume at the inception and the simultaneous launch of multiple products not attempted previously. He urged the government to now link the very successful tariff based localisation regime to volume, so that high technology products having low volume can be introduced viably.

“The first year localisation of KLM is 15 per cent which will gradually increase with improving sales volumes,” he said. Located in the Bin Qasim SEZ on 100 acres, KLM has a production capacity of 50,000 units annually at an investment of $175m. Initially the company plans to roll out 15,000 vehicles per year.

He said another big challenge for the new entrants is their vulnerability towards exchange rate impact. Starting car assembly with very few locally made parts means hovering pressure of frequent price shocks to the consumers. Hence localisation is essential even with low volumes.

But Chief Operating Officer of Khalid Mushtaq Motors, Anwar Iqbal had a different take. He said the number of new entrants and the additional capacity now look higher than it did at the start of the investment cycle under the new auto policy, keeping in view the country’s political situation and economic indicators.

“Despite that, there is no need for placing any cap on arrival of more players. Let the market economy decide the fate of new entrants,” he said. Khalid Mushtaq’s plant has the capacity to produce 200 LCVs and passenger vans per month on a single shift.

CEO Master Motors Limited (MML) Danial Malik agreed. He said new entrants would not only benefit the consumers but also promote healthy competition among the OEMs to improve their offerings and introduce new features in the vehicles.

Current demand is around 300,000 units annually. If current economic situation prevails for a year or two, the demand may not see much increase but with more Pakistani youth among prospective buyers, vehicle demand will pick up gradually he said.

He sees a huge potential in the auto industry in the long run and with the right government policies in place Pakistan’s auto industry can competitive on a global level.

Danial said new entrants cannot flourish without fast and high quality localisation.

One of our objectives is to export Changan vehicles to right hand drive counties, which would not be feasible without cutting down our costs through transfer of technology and aggressive localisation.

“We are working towards achieving 30pc localisation within one year and are targeting 50pc localisation within three years.

On upcoming working environment under exchange rate parity, he said the scale of impact can vary but rupee-dollar parity affects not only new but existing OEMs, as well as raw material for even localised parts also needs to be imported. As a result, vehicle prices have been increased multiple times in recent years and new entrants may also need to do the same.

All players agreed that the fate of the industry is now tied to developments in the wider economy.

Published in Dawn, May 12th, 2019