A fast and furious competition

The year 2016 turned out to be an auspicious one for the automotive sector of Pakistan. It not only heralded the entry of several new carmakers and saw new models launched by local manufacturers, but it also witnessed a 19% increase in the overall sales. About 180,000 units were sold in FY 2015-16 compared to 151,131 units in the previous year (source: Dawn). A Khaleej Times report has predicted that these sales will go up a further 10% or more this year.

Partially responsible for this positive development is the Automotive Development Policy (ADP) 2016-21 that offered incentives to foreign entrants, including a 10% duty reduction on non-localised parts and 25% on localised parts, for five years, compared to the earlier 50%. Via the new Auto Policy, the Government aimed to woo international carmakers into the market, attract investment worth $4.09 billion (in the next five years) and offer customers better quality vehicles at cheaper rates.

Within a few months of the announcement of the ADP, many well-established global automobile companies showed interest in investing. European companies, including Renault, plan to set up plants in 2018; BMW has already introduced low-end models in the market last year and Volkswagen and Fiat are studying investment prospects. Most recently, Nishat Mills, a flagship textile group, announced plans of a joint venture with Hyundai Motor Company (HMC), worth $150-200 million, while Lucky Cement has partnered with Kia Motors Corporation to assemble cars locally with an investment worth Rs 12 billion. Audi, too, is said to have approached the Board of Investment (BoI) to start an Original Equipment Manufacturer (OEM) plant here.

Pakistan’s automotive sector contributes nearly three percent (Rs 50 billion) to the GDP and 16% to the manufacturing sector. The vehicles’ manufacturers directly employ over 192,000 people with a total investment worth over $1.5 billion (source: IBA Project Report 2016 Competitive Analysis of Auto Sector in Pakistan and China). The vehicles in Pakistan encapsulate passenger cars, light commercial vehicles (LCV), heavy commercial vehicles (HCV) and two-wheelers. The passenger cars segment is dominated by three Japanese carmakers: Pak Suzuki Motor Company Limited (PSMC), Indus Motor Company Limited (IMC) and Honda Atlas Cars (Pakistan) Limited (HACPL). Other players include Ghandhara Nissan Limited (GNL), Dewan Farooque Motors Limited (DFML) and Al-Haj Faw Motors Limited (AHFML). Of the local cars manufactured, the lion’s share (60 to 70%) is attributable to passenger cars. The ongoing developments in the sector have spurred activity within local carmakers as well; they introduced various new models with an aim to stay competitive or even ahead of the game.

Pakistan’s automotive sector contributes nearly three percent (Rs 50 billion) to the GDP and 16% to the manufacturing sector.

IMC (a joint venture between the House of Habib, Toyota Motor Company and Toyota Tsusho Corporation, and a leader in the sedan car category) introduced, at the end of 2016, Hilux Revo (an LCV worth Rs 3.7 million) with a new frame and an improved engine to offer more efficiency. It also launched the new model of Toyota Fortuner (Rs 5.2 million), which is now being assembled entirely in Pakistan.

On the other hand, PSMC (a joint venture between Pakistan Automobile Corporation Limited [PACO] and Suzuki Motor Corporation [SMC], Pakistan’s largest carmaker with a 58% market share and the leader in the small cars category) launched three cars in a span of five months. In December 2016, the company introduced the fourth generation crossover Vitara. The car, available in two variants, Vitara GLX (Rs 3.8 million) and Vitara GL+ (Rs 3.5 million), was launched in response to the rising demand for SUVs and was targeting urban ‘adventurous’ customers.

In February 2017, the company launched a luxury sedan named Ciaz with a 1.4 litre fuel-efficient, K-Series engine. Ciaz (Rs 3.8 million) is imported directly from Thailand and is targeted at customers who want an upgrade from the Liana or Swift. Lastly, in April, PSMC brought in the latest revamped model of Suzuki Cultus (priced at Rs 1.25 million for VXR and Rs 1.39 million for the VXL variant).

Responding to what prompted the companies to launch multiple models in the same year, Ali Asghar Jamali, CEO, IMC, says that like any product, vehicles too have a predetermined life cycle. When a model has run its course in the market, customers want change and variety for the next purchase. As a result, to excite customers and be in line with global model changes, IMC introduced new ‘world-acclaimed’ models. Agreeing with Jamali, Azam Mirza, GM Marketing, PSMC, says the launches were in response to the demand from the dealers and customers.

It is pertinent to mention here that last year, PSMC, along with the other two Japanese carmakers, were criticised for producing low-quality vehicles. Irked by their monopoly, the Government did not grant any incentives to the three local carmakers. PSMC was especially attacked for producing obsolete vehicles at exorbitant prices (Mehran and Cultus).

Mirza confirms that both models have been discontinued globally, but adds, “I don’t see any reason why we should discontinue producing the Mehran in Pakistan; it is a popular car and has a huge demand. It is economical and parts are easily available.” According to him, the model sells 4,000 units a month and both the Mehran and Cultus have a great resale and maintenance value. “If a car sells well and is affordable, it should go on; the 40-year-old Ambassador in India is still going strong.” Mehran, he says, sells well in rural areas (interior Sindh, Punjab and KP). It was earlier popular in cities, but urban customers have now upgraded to a Wagon-R, that sells, on average, 2,000 units a month.

“I don’t see any reason why we should discontinue producing the Mehran in Pakistan; it is a popular car and has a huge demand. It is economical and parts are easily available.”

— Azam Mirza, GM Marketing, PSMC

Coming to safety and quality, he believes the standard features are all there as per ADP and Government requirements. The new Cultus has “an immobiliser feature (an anti-theft system), anti-lock braking system (ABS) and airbags as well.”

Concerning quality, Jamali adds that before launching any vehicle, locally-built vehicles have to pass rigorous and exhaustive quality and safety tests. “I can assure you that our vehicles meet all the safety and quality criteria of our Japanese principals.”

The lowest car financing rates in 43 years by commercial banks (5.75%), along with burgeoning incomes of the top level and middle-class population have been key factors behind this increase (in sales).

After the announcement of the Auto Policy, PSMC said the company was ready to invest $460 million in Pakistan (in a greenfield project) to set up a second plant, provided the Government offered the same incentive given to new entrants. The new plant would produce 100,000 cars and introduce four new models within five years. However, according to Mirza, regardless of whether the company is given any incentives or not, “if the demand increases further, we will definitely set up the plant.”

Both companies believe that a positive government, and an improved law and order situation and overall business climate have made a huge impact on sales, and demand will definitely go up further. Furthermore, the lowest car financing rates in 43 years by commercial banks (5.75%), along with burgeoning incomes of the top level and middle-class population have been key factors behind this increase.

Planning ahead, both companies, while consolidating their product line-up and aggressively developing their dealership network, are closely observing the market dynamics. Mirza predicts that hatchbacks and small cars (with gadgets) will be the next best-sellers. This is why, although Toyota does not have a small car in the overseas market, it is also to introduce a new variant of the Daihatsu Cuore from the Daihatsu platform.

All new and upcoming launches are marketed through various media platforms including TVCs, print and OOH. The companies have been active on digital to create pull and both confirm that on-ground activation on various platforms and within malls have proven extremely effective in reaching out to customers.

Although competing with each other, the three carmakers believe the imported used cars that enter the country, under the guise of various schemes and ‘gifts’, pose the biggest challenge to the auto sector. As for the new entrants, the companies say they welcome them as their inclusion will enhance growth.