A clear road ahead?

As 2017 draws to a close, Pakistan’s automobile industry is under an uneasy spotlight. After decades of stagnancy and the same old faces selling the same old automobiles, tweaked here or there, things appear to be finally looking up with new transnational investments, new jobs and innovations in automobile technology.

All the companies that make up Pakistan’s automobile industry have prospered, their balance sheets are in good shape and their shareholders’ returns are satisfactory, to say the least. Share prices recorded astronomical increase in values, from two-digit prices at the Pakistan Stock Exchange (PSX) to four-digit in a space of two years. The locally-assembled passenger car industry closed the last fiscal year at 189,000 units, well past the most optimistic of industry assessments.

The results have aroused interest on the international front. When the government opened calls for bids in June 2017, as many as nine companies applied to set up manufacturing plants, and Hyundai, Kia and an unnamed Chinese manufacturer are now on-board. These three companies will bring in foreign investment worth $372 million; $190 million by Kia-Lucky, followed by $164 million by the Nishat Group and $18.1 million by United Motors. Interest from Renault and Volkswagen has not waned, but they are likely to keep a keen eye on developments before jumping in.

Hardcore numbers

Pakistan, despite being the sixth most populous country in the world, has only 13 cars per 1,000 people. This is now changing rapidly, as the economy picks up pace with a rising middle-class, spurred by bank financing rates of under six percent; the lowest in nearly 43 years. Given the significant demand in clear sight, the view from the investor continues to be the most attractive. Although in 2016-17, sales nearly hit 190,000 passenger cars, industry analysts are predicting a demand-supply gap of a 90,000-100,000 units in a projected annual market size of 280,000 units – more than attractive to induce new entrants to narrow the gap. A number of factors have pitched in to stimulate this growth and these include government incentives such as special allowances on taxes and import duties, taxi incentive schemes, low fuel prices and a slash in interest rates. Moreover, recently, the government slashed the withholding tax on the registration of new vehicles by Rs 2,500-5,000 (20 to 25%) for all car categories from 850cc to 1300cc, provided that the end user was a tax filer. These incentives and market dynamics are forecast to sustain in the longer term.

Pakistani customers have had it with the three Japanese car brands in Pakistan – Honda, Suzuki and Toyota. The three players have been persistently berated for ‘dumping’ obsolete technology, poor quality finish and inside trim at exorbitant price tags, and looking the other way as far as passenger safety is concerned. Another drain has been the extended waiting time for delivery, exacerbated by the possibility of paying a higher price for the booked vehicle, should prices increase in the transit time.

The Automotive Policy

If there is one trigger in elevating Pakistan’s attractive image internationally, it is the Automotive Policy 2016-21. A major highlight of the policy was the incentive package offered to new entrants, which includes a one-time, duty-free import of a plant and the machinery required to set up a manufacturing facility. It allows the import of 100 vehicles of the proposed model variant in the form of completely built units (CBUs) at 50% of the prevailing duty. Substantial tax incentives have also been offered. New entrants will only pay 10% customs duty for five years on the import of non-localised parts and 25% for localised ones. Current players will continue to be charged at the rate of 32.5% for local (which will be reduced to 30% from 2016-17) and 50% for imported parts. These reductions have come into play in order to attract new or even dormant players and increase competitiveness, thereby enhancing buyer choice with safe, modern and cost-effective vehicles. Furthermore, to cut down on the red tape, a one-window facility has been established at the Engineering Development Board (EDB) where business plans and documentation can be presented for fast-track assessment by investors. According to analysts, these incentives are likely to result in foreign direct investment in excess of five billion dollars within the next five years.

The CPEC effect

Given the scale and the nature of the projects envisaged, the automobile industry is excellently placed to take a definitive position here. The expansive new road network with round-the-clock traffic will need heavy commercial vehicles. Transport companies like the National Logistics Cell (NLC) are already drawing up plans which include setting up a plant with a leading German manufacturer to produce 700-1,000 of prime mover trucks annually. Other leading heavy-duty truck manufacturers are likely to follow suit. The appeal of CPEC is also likely to stimulate other countries to meet the increasing demand for small cars. There is interest from European car makers to set up plants around the corridor to feed an expanding middle-class. Romania’s Dacia has already shown interest, with Chinese companies like JAC also considering introducing small cars for local consumers. Long hauls on the road will require elevated standards of fuel efficiency and ruggedness – which will mean that latest engine and structural technology will be introduced, upping both performance and environmental standards for the industry.

An aware customer

Frankly put, Pakistani customers have had it with the three Japanese car brands in Pakistan – Honda, Suzuki and Toyota – and they have been very vocal about this. The three players have been persistently berated for ‘dumping’ obsolete technology, poor quality finish and inside trim at exorbitant price tags, and looking the other way as far as passenger safety is concerned, at times even forcing them into accepting defective deliveries. Another drain has been the extended waiting time for delivery, exacerbated by the possibility of paying a higher price for the booked vehicle, should prices increase in the transit time. Customers are now keeping abreast of technological developments and are constantly demanding more value for money, forcing local assemblers to add more trickle-ins. Even so, these are seen to be cosmetic and diversionary. In a recent survey on the industry, customers were aware of how engines used in locally assembled models use Euro-2 technology, while the world standard has moved to Euro-6.

Finally for all these elements to coalesce, the government must guarantee the provision of essential infrastructure like power, water, gas and waste management, critical to economic development. It must also ensure skill training for the local industry. Hand-in-hand with this are the key performance measures – maximising value for money for the customer and the support industry, fair competition for current players, and ensuring that foreign investors are happy with their profits, as well as the transparent manner with which Pakistan conducts its business with them. No small trade!

Mazhar M. Chinoy has led the marketing services function for a leading multinational automobile company and is currently a Director at LUMS. mazharmchinoy@yahoo.com