Many challenges to the local car producers
By SYED M. ASLAM
Sep 10 - 16, 2001
The traffic on Pakistani roads offers an interesting mix of old and new, functional and sleek. It also shows the increasing number of latest model passenger cars produced locally by world renowned names which are increasingly replacing the older generation of cars. In short, the car production in Pakistan shows signs of coming to age with more range of models and variations suitable for all types of personal budgets.
Pak Suzuki Motor, the producers of Suzuki vehicles, started commercial production in January 1984. By early 1990s two other Japanese car producers, Toyota and Honda, set up auto production plants to cater to the big car segment of the market. Today there are four active car producers — Suzuki, Indus Motor (the producer of range of Toyota cars and 4-by-4 trucks as well as Daihatsu Cuore cars), Honda and Dewan Farooque, the producer of Korean Kia cars.
These four car producers are competing against each other in both the small and big car segment of the market. For instance, Suzuki which entirely dominated the small car segment for over 14 years today is facing competition not only from Daihatsu's compact Cuore 850 cc car (commercial production started March 2000) but also from Dewan Farooque Motors' Kia. On the other hand Suzuki's 1300 cc Baleno and Dewan Farooque's Hyundai Santro Plus are competing for the share of big car segment in which Toyota in particular and Honda in general plays the leading role.
The emerging situation at present is that all the four car producers — three of them Japanese and one Korean — are competing against each other in both the small and big car segment of the market. What has make the competition even more beneficial for the people who always wanted to own a car of their own but were unable to make the investment in full on strict cash basis is the fact that all the companies are now offering lease through their dealerships. In addition, numerous auto-specific leasing companies offer to finance new car purchase of many models to help purchase automobiles at one of many individually-tailored plans.
The vital role leasing companies are playing to pump the much needed cash flow in the local car industry is evident from the fact that over 40 per cent of all new car sales are through leasing. Without the active participation of leasing companies, both company backed and individual, the car producers would not have access to a market which remained dormant until recently.
Suzuki: For the half year ended December 31, 2000 Suzuki utilized just 31 per cent of its 50,000 annual plant capacity on double-shift basis. During the half year it produced 7,676 units compared to 10,731 units during the corresponding period the previous year. The sales declined by 22 per cent — 8,640 units were sold compared to 11,052 units in the corresponding period the previous year. Suzuki's pre- and post-tax loss increased for the half year ended December 31, 2000 over the corresponding period the previous year — the former increased from Rs 70 million to Rs 99 million while the later increased from Rs 80 to Rs 116 million. This has been way over the pre- and post-tax losses of the company for the year ended June 30 last year which stood at Rs 1.9 million and Rs 26.6 million respectively. It may be mentioned that till 1999 Suzuki managed to show an all around profitability — gross profit of Rs 663 million, operating profit of 410 million, pre-tax profit of Rs 339 million and post-tax profit of Rs 263 million.
In the half-year under discussion, Suzuki's gross profit declined by 54.5 per cent from Rs 111 m to Rs 50.5 m. Suzuki attributed its less-than-satisfactory financial performance on lower production resulting in depressed demand due primarily to 'persistent economic recession and new competition.' However, it is hopeful that the launching of new Alto 1000 cc model in September last year and a new-look Mehran 800 cc in January this year would help it arrest the troubling trend. We have to wait for the annual report for the year ended June 30 this year.
Indus Motor: Indus Motor's Toyota enjoyed a healthy share of 53 % in the Toyota range of vehicles and 47 per cent in the Hilux commercial category in the year 1999-2000. Since the inception of its commercial production in May 1993, Indus has sold over 50,000 vehicles till June 31 last year. In the half year ended Dec. 31, 2000 Indus registered a healthy increase in sales which increased to Rs 4.1 billion compared to Rs 3.4 billion in the corresponding period the previous year; gross profit increased to Rs 255 million from Rs 215 million; and operating profit to Rs 143 million from Rs 111 million. The pre-tax profit increased to Rs 120 million from Rs 103 million while net profit increased to Rs 74 million from Rs 63.4 million.
Despite the overall profitability Indus Motor expressed concerns that "while the overall profitability improved over the corresponding period last year, it was however, lower than projected due to the weakening of the Pakistani Rupee against the Japanese Yen leading to higher input costs which could be only partially off set by increasing the selling prices." It also attributed the performance on the "sales turnover improved with the addition of the Daihatsu Cuore to the company's product line-up and the overall unit sales totalled over 6,000 units in the six months period."
Last week Indus Motor announced to reduce the prices of CL and Cx models of Cuore by Rs 40, 000 — CL is now priced at Rs 349,000 and Cx for Rs 399,000. In addition, a special financing offer on the two models is available at an affordable down payment of just 15 per cent in addition to 3 per cent insurance.
Honda Atlas Cars (Pakistan): production increased by 18 per cent from 14,891 units to 17,555 units. The company also reported increase in its production by 68 per cent and attributed it on better quality, appropriate model line up at competitive prices. It reported increase in sales revenue from 1.3 billion to Rs 2 billion; gross profit from Rs 164 m to Rs 217 million; operating profit from Rs 107 million to Rs 140 million, pre-tax profit from Rs 112 million to Rs 152 million and after-tax profit increased from Rs 74 million to over Rs 99 million. Honda Atlas attributed the overall profitability to the improving of economic situation due in part to good wheat and cotton crops.
Putting the passenger car production in the country at 17,555 units during the half year ended December 31 last year, Honda said that translated in to an 18 per cent increase over the corresponding period the previous year. It claimed that 17,555 units were produced compared to 14,891 units in the corresponding period the previous year.
Dewan Farooque Motors sold 3,268 units. The pre-tax profit totalled Rs 39.5 million and after-tax profit was Rs 32.5 million. The turnover was Rs 1,364 million, no comparative figure is given in the un-audited half-year financial statement. Dewan Motors' second plant started commercial production in January this year and Kia Spectra was launched a month later. The company attributed the reduction in its gross profit margin from 9.78 per cent for the year ended June 30 and half year December 31 last year on the depreciation of Pakistani Rupee against the Dollar.
The changing face of car and light commercial market is all too evident with the heating up of the competition in both the small and big- car segment of the market. Today the local producers of Suzuki, Toyota & Cuore, Honda and Kia & Hyundai cars are all vying the same market. Suzuki which commenced commercial production seventeen years ago and till recently faced no competition in 800-1000 cc market, Toyota which commenced commercial operations in May 1993 and started producing Daihatsu's compact Cuore in March 2000, Honda Atlas which followed it in July 1994, and Dewan Farooque Motors, the producer of Kia and Hyundai cars and light commercial vehicles, are all competing with each other.
Daihatsu: The competition in the small car segment hot up with the entrance of 850 cc Daihatsu Cuore car in 1999. Daihatsu has developed a Rs 750 million project in the premises of Indus Motor at Port Qasim. Daihatsu Cuore has an agreement with Indus Motor to market the Cuore cars in Pakistan.
Toyota Japan controls the majority shares of Daihatsu Japan, the oldest Japanese manufacturer specialising in small car segment for over 92 years. Karachi enjoys a distinction — it houses the Toyota plant which is producing the Daihatsu car for the first time anywhere in the world. The plant has the capacity to produce 26,000 vehicles, including 10,000 Cuore cars, annually. This capacity is based on double-shift basis but the company is operating on single shift basis due to market demand.
Like the car industry, the automobile component industry is also in the process of transition in Pakistan to meet the challenges, the emerging competition and demand for improved quality and value. The auto parts vending industry comprises some 750 various sized industries; large, medium and small. It provides jobs to half a million people and Rs 20 billion investment.
Both the car producers and the vendors blame the absence of consistent and long term policies by the successive governments as the main reason for discouraging the investment and growth of the auto industry.
Perhaps, vending industry in Pakistan is the most deprived industry running strictly on self-financing basis. Auto vendors are deprived of the credit facilities from the banks as they are not seen as priority. Needless to say, neglecting the auto vending industry is taking a heavy toll on the economy as oft-announced deletion targets have never been achieved due in part to the inability of the vendors to induct latest technology which needs heavy financing.
Though there is a great demand for replacement parts in the country, and though it differs from part to part, precision engineered parts have to be imported from outside. That explains why local manufacturers of oil and air filter are in a much better position than for instance, the vendors producing a sheet metal part which offers a limited after-sales market.
While Pakistani auto spare parts and components have found a welcome niche in such developed markets as Germany, Italy, UK, USA and Turkey — both as replacement parts as well as original components in vehicles produced there, they are unable to fully capitalize on the local market. The export of auto components and parts is earning over $ 1.5 million for the country, though small in terms of value, shows the potential that the local vending industry has provided it is given the importance it deserves.
Over the years, the smuggling of vehicles, components and replacement parts has become a part of the underground economy of the country. Vehicles plying on the roads across the country without number plates have become the norm. The previous, as well as the present, governments attempted to tackle the problem by giving a deadline to register the vehicles or face fine or confiscation of the vehicle.
Vehicles, components and replacement parts worth billions find their way in to the country thus depriving the government of substantial revenues on the one hand and the undermining the very base of local production. Not only the components and parts are smuggled in to the country the they also find in to the country under the legal cover of "used parts."*
It is also depriving the local car producers to market their genuine parts, both imported and locally manufactured as per the specifications of Original Equipment Manufacturers (OEMs), in the replacement part market. In addition, it is discouraging the development of the vending industry, comprise mainly of small and medium size entrepreneurships, which can not survive on captive demand for the components from the auto producers alone. Without access to the local market, denied to it by the smuggled items, is depriving the vending industry to develop and grow on sound footing.
Easy access of the smuggled components and spare parts on shop floors across the country is undermining the local vending as such fast moving auto accessories such as plugs, points, lighting assemblies, air filters, oil filters, air conditioners, compressors, fan belts, mud guards, etc., are routinely finding their way into the country.
The heavy domination of the market by smuggled parts is making it impossible for the buyers to even think of buying components and parts produced locally, more so as national psyche prefers all things foreign and the trade offers lucrative profits for the retailers.
The local vending industry which comprises of some 750 manufacturers of all sizes and produces a variety of items including precision engineering parts, sheet metal, radiators, body parts, plastic parts, plugs, air and oil filters, employs some 500,000 persons directly or indirectly. The limited assembly market in addition to loss of the major portion of the replacement parts market is denying the local auto vending industry the push imperative for its growth and to encourage investment. In fact, it is eroding the very foundation of an industry still in the development phase.
Under-Utilisation of Production Capacity
Indus Motors bettered its production by 1,074 units last year but managed to improve its sales by 695 units. It showed an overall profitability but the profit margins were narrowed — operating profit declined by over 43 per cent; pre-tax profit by 44 per cent; and net profit by 31 per cent.
On the other hand, Suzuki managed to produce just 20,404 units in 2000. Its sales also dipped to Rs 6.8 billion from almost Rs 9 billion during the same period. Suzuki earn Rs 75 million profit last year.
Suzuki's half-yearly report for the period ended December 31, 2000 shows: Net sales declined by 8 per cent and gross profit by 55 per cent. Operating loss has also increased.
The under-utilisation of production capacity is also an indicator of the problems the car producers are reeling from. Suzki utilized just a little over 40 per cent of its 50,000 double-shift plant capacity last year. Indus, which expanded its production capacity from 20,000 units to 26,000 units on two shift basis, managed to use 43 per cent capacity last year.
The emergence of competition in the small car segment in particular, and big car segment in general, now offers wider choices to potential auto buyers in price as well as models. The auto market in Pakistan is in the process of transformation for the benefit of both the producers and buyers, a mutually beneficial relation indeed. However, the annual reports of the major car producers pose many challenges to the local car producers the not so easy answers of which have to be find for not only the development and growth but also the very survival of the auto and vending industry.
Financial Results for The Year Ended June 30, 2000
50,000 (same) (Double Shift Basis)
26,000 (20,000) (Double Shift Basis)
20,404 units (32,805)
11,243 units (10,169)
19,816 units (31,296)
11,944 units (11,249)
Rs 6.9 B (8.9 B)
Rs 8.2 B (Rs 6.9 B)
Rs 75 m (Rs 410 m)
Rs 293 m (Rs 508 m)
Rs 1.9 m (Rs 339 m)
Rs 280 m (Rs 501 m)
Rs 27 m loss (Rs 263 m profit)
Rs 172 m (Rs251 m profit)
Source: Annual Reports