The Industry Bounced Back At A Faster Than Anticipated Rate In Second Half Of 2020 After Lockdown Was Lifted And Interest Rates Were Slashed.
Ever since Karl Benz invented the world’s first motor car in 1886 – the Benz Patent-Motorwagen – the automotive industry has come a long way. From hi-tech Hondas and Chryslers to electric Teslas and Nios, the global industry contributes roughly three percent to all GDP output. Due to the pandemic, however, worldwide car sales have taken a hit and are expected to fall from $74.9 million in 2019 to under $62 million in 2020, according to Statista.
Industry Overview
In Pakistan, the automotive industry, which contributes 2.8% to the country’s GDP (source: Invest Pakistan), has faced a cycle of booms and busts since the 2000s. In fact, the auto industry was on a downward trend before Covid-19 struck, primarily due to rising taxes (Federal Excise Duty increased from 2.5% to 7.5% and Additional Customs Duty by seven percent) and the rupee’s depreciation against the dollar. As a result, according to the Pakistan Automotive Manufacturers Association (PAMA), total passenger car sales (for Honda, Suzuki and Toyota) declined by four percent from 216,786 in FY 2017-2018 to 207,630 in FY 2018-2019.
After Covid-19 struck, auto manufactures had to close operations for three months and sales further dropped to 96,455 (a decrease of 53.5%) in FY 2019-2020 (Toyota Corollas had the most sales, followed by Honda Citys/Civics and Suzuki Swifts), with April 2020 showing no sales. At the same time, the import of cars and spare parts declined to 12% compared to 15% and 27% in 2019 and 2018, respectively.
Yet, despite this, The Industry Bounced Back At A Faster Than Anticipated Rate In The Second Half Of 2020 After The Lockdown Was Lifted And Interest Rates Were Slashed to seven percent by the State Bank of Pakistan. As a result, sales of 1300cc and above passenger cars rose from 9,953 units in the first quarter of 2020 to 16,736 units in January 2021 (as per PAMA). Overall sales of Honda, Hyundai, Suzuki and Toyota surged by 48% in the second half of 2020 (between July and November) and the overall industry picked up with a 13.6% increase year-on-year. According to the Pakistan Bureau of Statistics, the worth of imported cars increased to $77 million between July and November 2020 compared to $26.13 million during the same period in 2019.As interest rates went down, consumers showed renewed interest in auto finance.
According to Auto Financing Gets a Boost, consumer financing reportedly experienced an increase of Rs 39.6 billion in the last quarter of 2020, with a major contribution coming from the auto financing sector. However, according to Nasir Jamal, Chief Reporter, Dawn Lahore, this increase in auto financing is more likely to have come from the corporate sector rather than individuals. Corporates generally constitute a major chunk of the auto market and 70 to 80% of leases come from that segment. Auto financing, in Jamal’s opinion, is financially tough for the average man. “Until an individual’s monthly income touches at least Rs 300,000, buying or leasing a car is difficult.
People also do not have economic sense and think ‘If I can buy Car X for two million rupees, why should I pay Rs 2.5 million with leasing?’ Most people will also not have enough money for the upfront payment.” He also points out that although car sales and bookings have increased this year, there is a major shortfall in the supply of locally assembled cars, which has led to black marketing, with dealers charging premiums or ‘on-money’ for immediate delivery. Companies such as Indus Motors have been trying to stop this trend by adding more shifts to their factories, while other players have long suggested the government impose taxes on the resale of new vehicles for a given time period to discourage these premiums. Parallel to all these issues, the industry faces a number of other hurdles.
Unaffordability
Considering that the industry’s big three players (Honda, Suzuki and Toyota) have had decades to cater to Pakistan’s middle-class, cars are still unaffordable for much of the population. To address this issue and to improve localisation, the government’s Automotive Development Policy (ADP 2016-2021), granted Greenfield status to international car manufacturers to encourage them to set up assembly plants, along with a series of tax incentives. As a result, Hyundai Nishat Motors, Kia Lucky Motors, Regal Motors (DFSK Motor Company/RP Group), and recently, Master Changan Motors and MG Motors Pakistan entered the market.
Kia is said to have received an impressive response from the market for their Picanto hatchback and Sportage SUV. According to PAMA, “Kia’s sales figure for the first quarter of 2020-21 was Rs 20.5 billion, markedly up from Rs 3.84 billion a year ago. Their operating profit in the same period was Rs 1.54 billion compared to a loss of Rs 332 million in the preceding fiscal year.”
Anwar Iqbal, CEO, Regal Motors, says Honda Civic sales are declining because of the new SUVs that are available, including Kia’s Sportage: “The Civic costs approximately four million rupees and today for Rs 3.5 million one can look at other options in the SUV segment. Competition from new players will also negatively affect sales of Toyota’s Fortuner (which currently costs Rs 10 million) as new entrants are offering similar cars for Rs 5-5.5 million, including Regal’s own DFSK Glory 580 (Rs 3.7-4.5 million).”
MG Motors are also planning to launch their SUV MG Zs for Rs 4.1 million (making it the cheapest SUV ever launched in Pakistan) and Hyundai will soon be launching two more passenger cars: Elantra and Sonata. (Elantra is in the same class as Toyota Corolla and Honda Civic, and Sonata is a luxury sedan in the same category as Toyota Camry and Honda Accord).
Iqbal does emphasise that although a gradual consumer shift is taking place, Honda, Suzuki and Toyota will not be affected so easily and quickly, and that while players from China, Korea and Malaysia have entered Pakistan’s Japanese-only auto market in the last five years, strong competition is yet to be seen, especially in the passenger car segment. So far, the competition has mainly been seen in the SUV segment (1800cc and above), where prices are already out of the range of the average consumer.
As Jamal says, “Yes, there are more choices in the SUV segment, but the middle-class still does not have the affordability required for that segment.” In his opinion, market expansion will only happen with an increase in the production of small, affordable cars and the industry will not be fully viable until it crosses half a million units. “Until more 1300cc cars enter the equation, the market size will not expand in the next five to 10 years.”
Regal Motor’s latest product, their 800cc Prince Pearl sedan, does target the middle-class, but since it was launched just before the lockdown, sales were impacted and deliveries were affected due to supply bottlenecks in China. “We could not uphold our promises to our customers. Now that the situation has eased, it will take two more months to completely normalise,” Iqbal says. The Prince Pearl was the cheapest sedan (Rs 1.15 million) in Pakistan, until United Motors recently reduced their 800cc Bravo’s price by 8.33% to Rs 1.1 million.
However, the most sold car in this segment is still Suzuki’s 660cc Alto (Rs 1.43 million), which can be attributed to two factors. Bravo’s new price point and the Prince Pearl have not been in the market long enough and consumers are hesitant to invest in new brands, especially Chinese ones. Changan’s Alsvin, on the other hand, potentially competes with the Honda City, Suzuki Swift and Toyota Yaris and is said to have received a good response in terms of pre-bookings; it has halted further bookings until June 2021.
Slow Localisation
To help reduce prices, auto players have long been urged by the government to increase local production of parts. According to a recent article in Dawn, “Despite claims of localisation of 60 to 65% in cars, consumers witness multiple price increases for four-wheelers every year. For instance, the Suzuki Mehran ruled the roads for 30 years with multiple price hikes every year with 70% local part contents [and no changes in the model]… Honda has kept the 2009 Honda City model unchanged for almost 12 years.”
The article also highlights that ever since their establishment, Honda, Suzuki and Toyota have not supported the development of the local parts manufacturing industry or “let parts makers enter their global supply chains. Thus, the entire industry is dependent on unregulated imports, resulting in higher car prices.”
Auto players meanwhile argue that as a consequence of surging raw material costs, the rupee-dollar exchange rate, a lack of economies of scale and skilled HR, localisation is limited to belts, buckles, bumpers, seats and tyres. Maqsood-ur-Rehman Rehmani, VP, Honda Atlas Cars, says that “volumes are important when considering localisation; high-tech parts (mainly the engine) become economically viable when a market reaches the size of one million units per year.”
In his view, these limitations result in the import of high-tech parts, limitations which he believes can be addressed by tariff incentives and cheap loans to vendors given the huge investment that is required to set up or upgrade plants for high-tech parts production. “Under the prevailing tariff structure, the share of duty and taxes accounts for about 40% of the cost of a car and these should be reviewed.” In the opinion of Danial Malik, CEO, Master Changan Motors, in order to support localisation, the principal needs to be on board and technical agreements should be signed between Pakistani assemblers and their foreign counterparts.
“Our vendor company, Procon, make some parts and other vendor companies make others. We are trying to enter into technical agreements with the companies producing the same parts in China, as in this way they will share their technology and skills with our local vendors, who will then be able to produce the same quality for Alsvin parts and supply them to us. We are working on transferring the technology to vendors and then buying those parts and installing them in our vehicles.” In Malik’s view, a policy for auto parts makers needs to be drawn up by the government to encourage them to invest in the required machinery and then look towards export markets.
At the moment, he says, they are totally dependent on the local Original Equipment Manufacturers (OEMs). Picking up on this thread, Iqbal believes a government level institution should be set up aimed at focusing on advancements in the automotive industry. “Compared to 10 years ago, there is major high-tech involvement in the manufacture of vehicles. HR in the auto industry needs to be given a major boost in terms of training. For example, our new SUV has 27 voice commands; our HR should at least know how to maintain and upgrade these technologies.”
Industry Outlook
Given the recent bounce back, a stable economy (Moody’s Investors Service has projected a stable economic outlook for Pakistan with a modest growth of 1.5% in the current fiscal year, which will accelerate to 4.4% in the next fiscal year) and a stable dollar rate, auto players have a positive outlook. In Aurora’s November-December 2020 edition, Ali Asghar Jamali, CEO, Indus Motor Company, founded his optimism for the industry on the back of increased cash flow in the market, foreign remittances, CPEC projects, an improving stock market and Millennials entering the workforce, among other factors. “I believe the automobile market will hit half a million units by 2026-2027 and per capita income will keep increasing.”
Iqbal, for his part, believes the industry will produce more than half a million units by 2026. “As soon as the lockdown ended, our sales vastly improved, and they will keep on improving as per capita income increases. He adds that the sector’s market size is greater than reported, because of Pakistan’s massive undocumented economy.
“According to our dealers, their customers mostly pay cash.” On the subject of the real market size of the industry, Malik adds that “people are buying and selling cars all the time, which is why companies like CarFirst and VavaCars have entered the market. They are trading in a market that is much bigger than the new car market and we hope that some of that market will shift to new cars as more options become available.”
Rehmani, however, sounds a note of caution. “This seems to be a short-term spike; it is difficult to foresee what the market will be like in the long run due to uncertainties such as inflation exchange rate and interest rate fluctuations. The next Auto Policy will have an important role in determining how the government will incentivise new entrants and new technology.”
To summarise, although the industry outlook is mainly positive, established players need to increase production volumes and up their ante by offering more options. The government needs to work with industry players to develop incentives to encourage investment in localisation. Most of all, the government needs to stick to the announced policy and ensure a level playing field for all players.
This news was originally published at Aurora Dawn.