AURORA: The automobile industry had been struggling well before Covid-19 struck. What is the prevailing situation today?
ALI ASGHAR JAMALI: The industry has experienced ups and downs for many years. Going back 20 years or so and up until 2000, the industry was producing only 50,000 units. Then, post 2000, the industry grew rapidly. This was when consumer financing took off in Pakistan, interest rates were low and spending increased as per capita income rose. As a result, from 50,000 units, production went up to 250,000 units by 2007 – almost by five times in a short span of time. Then in 2008, as a result of the global recession, the market collapsed. Pakistan too was going through a difficult period politically due to the assassination of Prime Minister Benazir Bhutto and a subsequent shift of power to a democratic setup. The market started to recover in 2013 and peaked at 340,000 units in 2017-18. In July 2019, it collapsed again by about 60% and we were down to 140,000 units a year.
A: What were the reasons for this?
AAJ: There were several. Firstly, substantial new taxes were imposed on the industry by the government; for example Federal Excise Duty rose from 2.5% up to 7.5% and Additional Customs Duty by seven percent. There was also lot of uncertainty and fear among customers as the tax authorities were increasing pressure on non tax filers, who either deferred their purchases or bought used vehicles. Furthermore, in the 2016 Automobile Development Policy, the government announced reduced duties and taxes for new investors. As a result, many new players such as Changan, Hyundai, Isuzu and Kia entered the market, and more are in the pipeline. So a lot of players are now entering our small market, which is always good. We believe competition is good, provided there is a level playing field, which it is not, as the duty and tax incentives are only applicable to new entrants and will remain in place until 2026. Secondly, the rupee depreciation resulted in huge increases in the cost of imports/inputs, both for CKD and raw materials, and all the automobile companies found themselves in a cost cutting situation. To add to the industry’s difficulties, as a result of the pandemic, a complete shutdown ensued from March to June 2020, further aggravating the situation. Luckily, at IMC, we were able to avoid layoffs. For many years we have been working on a double shift basis, and although between June and August we had to slow down production and move to one shift only to ensure the safety of our workforce, we were able to maintain much of our two shift workforce.
A: What was the situation when the lockdown eased?
AAJ: We restarted production in June, which was not easy because by that time our manpower, due to natural attrition, was not enough to start double shift operations. Furthermore, even when we restarted with SOPs in place, in Karachi the infection rate was still high and we had to stop production for a few days. Luckily, because of our spare shift capacity we were able to run on single shifts. In September, as demand increased, we started to rehire and ramp up production and since October we are back to double shift operations and although we need to be careful about what comes next, in the current situation, I see a 20 to 25% recovery in the market, so that we could close at 200,000 units, up from the last fiscal year’s 140,000.
A: What gives you this cause for optimism?
AAJ: Three reasons. Firstly, interest rates are down and consumer financing is going up. Secondly, we have a head-start compared to the rest of the world, because we were able to restart our economy faster. Although the output of the four main cash crops has been lower this year, their value is higher and there is a lot more cash in the market. Furthermore, every month two billion dollars enter the market in the form of remittances, due to the depreciation of the rupee since last year from 155 to 165, an additional 100 billion rupees are coming into the market. Some CPEC projects may also come online in coming years. The stock market has improved and cement as well as other industries are picking up. So I am optimistic. With a population of 220 million and so many young people coming of age, who will became the main influencers, I believe the automobile market will hit half a million units by 2026/2027.
A: From where would these sales come from?
AAJ: The per capita income will keep increasing. Even with a three or four percent growth in GDP, per capita income increases. We have cash crops and we are mainly an agricultural economy. Domestic tourism is also set to increase. All this creates demand and it will come from the middle class.
A: The sense is that at the moment most consumers are wary of spending.
AAJ: Our advantage is that a lot of our customers are from the upper middle class and I don’t think they will be much affected by this situation.
A: But the half million units you envisage will have to come from across the board?
AAJ: The industry is divided into different segments starting from A. We only play in segment B and above. Our competitors have been hit hard, but we are more flexible in terms of the product range we offer. Long term, I am optimistic. Firstly, new players are coming in and when this happens there are two advantages. The market size grows because more people are selling and more choices are being offered and the market size automatically increases. Secondly, from Toyota’s standpoint we have been following best practices from the very start. People often like to compare manufacturers, but the question is, compared to what? Previously, they had no points of comparison regarding our products and services; now with new entrants this will change. Customers will be able to compare the quality, resale value, parts and service availability provided by Toyota with that of our competition, and decide for themselves. We have a skilled young team, and if there are some learnings from the competition, we will quickly adapt to them. All this brings a lot of excitement to the market. I am optimistic that normal growth will continue. We touched 350,000 units three years ago and then it dropped to 140,000. I believe we can recover this loss fairly quickly, after which there should be growth. In the past I have seen markets fall and then recover by 40 to 50%. Some people predict we will touch half a million units by 2030, but with so many new entrants coming in, I think this will happen in 2026 or 2027. Of course, everything depends on per capita income and how the middle class grows as well as on several other variables, such as stability in the country and no unforeseen events. Right now we don’t even know what will happen next month; the Covid-19 situation may force another lockdown.
A: One of the main complaints from consumers is that the three main players (Honda, IMC and Suzuki) have been slow to introduce features that are common to most cars elsewhere and the fact that safety features, such as airbags, are missing. Can one assume that with new entrants coming in, these concerns will be addressed?
AAJ: All of our cars and SUVs have dual air bags, the best anti-lock braking systems and retractable seat belts – in short, all of the basic safety features. Other countries have government regulations and if the government imposes regulations that require enhanced safety features, we will follow them. It is important to know that although we are making Toyota in Pakistan, our motto is not ‘made in Pakistan’ but ‘made in Toyota’ – this applies to every country that makes Toyota vehicles. As for the features you mention, we need to look at the market and the capacity of the consumer to pay. All our cars have a synch-in audio system where you can synch your mobile and use Google Maps. We have reverse sensors and a sonar system in high-end cars. The issue is that for every feature that is added, the price increases accordingly.
Some customers only want the basic safety features. So what do we do? Take them out? The point is we have to provide customers with what they want, but they always have a choice if they want to upgrade.
A: Are you satisfied with the extent and pace of localisation?
AAJ: Many people say that there is no localisation; that nothing is made in Pakistan and everything is imported. Yes, the raw material is imported. If you need to make a sheet metal part at the required global quality, you need to import steel sheets because we don’t have locally made steel sheets of the required quality in Pakistan. Similarly, for a plastic part, you need to import resin because we don’t produce it at the required quality. It is economical to make parts in Pakistan. It creates jobs, saves foreign exchange and contributes to the economy. If a car sells for Rs 100, 40% goes to the government in the shape of duty and taxes, 60 to 65% of the remaining value is local value addition. IMC alone buys almost Rs 250 million worth of local parts every working day. Localisation also varies from model to model. In the case of Fortuner, localisation may not be so high because the volume is limited; volume plays an important role in ascertaining which parts to localise because the investments are huge. For example, for a full model change, the investment is Rs 10 to 12 billion and some investments cannot be justified by the volume because the amortisation goes up. Corolla and Yaris start from scratch from a metal sheet. The entire body is made in Pakistan; everything you touch and see in both cars is made in Pakistan. In Fortuner, we cannot do this because the volumes are lower. I would say that 80% of the vehicles IMC sells have over 60 to 65% localisation.
A: Do you think it is fair that existing players pay 40% in taxes and duties to the government, whereas new entrants are exempted?
AAJ: It is unfair, but the government took the decision to support the cause of ‘made in Pakistan’ and we support this as well. Pakistan needs jobs and more industries and it also needs to save foreign exchange because we have always had a balance of payments problem. We need to create more jobs for a population of 220 million, of which 60% are in the working age bracket. This is how we can contribute to society, by allowing more industrialisation in the country.
A: The government has announced its intention to introduce Euro 5 emissions standards for all cars next year. Do you think this is feasible?
AAJ: If they want to introduce Euro 5 emissions standards, the fuel should be available. I don’t think the oil refineries are ready for Euro 5.
A: Why not?
AAJ: I believe there is an import versus local mixing issue, but I am no expert on this subject. I understand Euro 5 fuel will be available in some pumps. All Honda vehicles are Euro 4 as are Yaris and Fortuner. The fuel and the emission should match and because the fuel availability is lacking, our options are lesser. The world has moved to Euro 6 standards and no global company will only make engines for you and we have to move with the world. If the fuel is available and the emissions standards change, we will change too. It is not a big issue; in fact it gives us more options. We just need a little lead time to convert. Once the fuel is available, it takes about 12 to 18 months to convert.
A: Kia and Hyundai have introduced their SUVs at prices comparable to your sedans. Do you think this will affect your market share in both these categories?
AAJ: First of all, these vehicles are different. Fortuner is a D segment vehicle. Sportage (KIA) and Tucson (Hyundai) are C segment SUVs, so they are not comparable. Even without the tax advantage, a Toyota product will always be more expensive than a Korean product because the quality, durability and safety will always have a price tag to it. Tucson and Sportage are in the six million rupees plus price range, whereas a top of the line Fortuner will cost nine million rupees. It is like comparing a C segment car with a B Segment hatchback. Similarly, one cannot compare a sedan with an SUV as the vehicle type is very different and going forward, it will depend on how consumer choice shapes up, whether they prefer an SUV/cross over shape or a sedan.
Ali Asghar Jamali was in conversation with Mariam Ali Baig. For feedback: firstname.lastname@example.org