Cover Story
By FARAZ
SIDDIQUI
Jun 05 - Jun 11, 2000
Investing for a strong, self-sufficient Pakistan
Pakistan auto industry has started to come out of shadow with
the introduction of new producers beginning this year. Since its inception Suzuki has been
enjoying the position as market leader in small car segment. While Honda and Toyota
compete for the high price segment of the market. Suzuki commenced production in 1983
eyeing the small and LCV car segment, 800cc- 1000cc. The industry continued to be
regulated until early 1990's, after deregularization, major Japanese manufacturer entered
the Pakistani market to produce locally.
So far, Pak Suzuki, Honda Atlas and Indus Motor have been dominating
the market, emergence of competition this year was experienced by the entrance of Dewan
Farooque, Daihatsu and Hyundai Motors in the market with a number of new product line.
This intense competition has totally changed the paradigm of Auto Industry in Pakistan.
Pak Suzuki has been a sole market leader in assembling 800cc and 1000cc small passenger
cars as well as 1000cc jeeps, Potohar. In 1993, Toyota started its operation and in the
proceeding year 1994 Honda Atlas has commenced its operation in Pakistan as the main
competitors in 1300-2000cc segment but the Suzuki has an edge over the market with 1300cc
(Margalla) Baleno.
Automobile market has become more competitive in recent months as new
players are going to introduce their products in the market like Daihatsu has launched its
850cc Daihatsu Coure, Dewan Farooque has launched its Kia classic 1300cc and Hyundai
Santro Plus 1000cc car. There are a number of new products like Kia Shuma 1500-1800cc car
by Dewan Farooque Motors.
The sudden competition in small car segment is expected to pose
challenge for Pak Suzuki, the former lone player in the market and other leading name in
the market. In near future, Dewan Farooque will offer the widest range of products in the
domestic automobile market. The trend of localization is experienced at large in the
industry. Toyota is also following the trend of localization with 3o per cent on its all
models of 1300-2000 cc Corolla. Toyota has also achieved an 18 percent deletion on its 24
cc Hilux trucks, the deletion status in 1500 cc and 1600 cc models of its Civic cars is
about 30 per cent and 28 per cent on its 1300 City cars.
Increased deletion level and entrance of local manufacturers in Auto
industry are the healthy sign for the future progress of auto industry in Pakistan. It has
been attracting investments and has the potential to attract future investment. It is
imperative to completely utilize the production capacity in order to get the lucrative
benefits for the country as well as organization.
The most striking issue in today's auto industry is the emergence of
new competitors in the market which is definitely a major cause to change the auto
industry scenario in Pakistan.
Major
Producers:
SUZUKI MOTORS: Suzuki is the leading name
in small commercial vehicles and passenger cars. Suzuki commenced its operation by
assembling small 800 cc cars. Suzuki has so far a sole leader in 800cc and 1000cc
passenger cars as well as 1000cc jeep Potohar. But the emergence of so many competitors in
the market will definitely trigger a very hard time to Pak Suzuki. Suzuki has launched
Mehran 800cc, Cultus 1000cc, Baleno 1.3 & 1.6 Eli and Gxi, Bolan van & Ravi pickup
800cc and Potohar jeep. The total production capacity of Suzuki Motors is about 50000
units and the total actual production in 1999 is 32,805. The sales volume of Suzuki is
highest among the competitors with 31,296 cars as per June 30, 2000. According to Pakistan
Association of Automotive Parts and Accessories Manufacturers (PAAPAM) , Suzuki has
achieved the 60 per cent deletion status in 800cc Mehran car. Localization in other
products like 1000cc Khyber 42 per cent, 1300cc Margalla/Baleno 32 per cent, 800cc pickup
50 per cent 10 passenger pickup 47 per cent and 1000cc Potohar jeep 40 percent.
Honda:
Honda started its operation in Pakistan in 1994. Honda is
enjoying its key position in the segment of 1300 cc and above. Honda has launched many
models like Civic 1.5 cc, City 1.3 cc to 1.5 cc etc. VTI brand continued to be popular
among customers. The company has been consistently following the Industry Specific
Deletion programme setup by the Government. It has already achieved the proposed
localization target of 42 per cent until June, 1999 which saved about Rs. 120 million in
financial year. To achieve the deletion target company is continuously assisting the local
vendors in cost, quality and inventory management. The actual plant capacity at Honda
Motors is about 5000 units in 1999 and the actual production during the same year is 4070
units. There are 348 employees working in Honda.
Toyota:
The company was incorporated in Pakistan as a public
limited company in December 1989 and started commercial production in May 1993. So far ,
it has launched models like Corolla XE 1.3cc, GL 1.3cc, Hilux 4X2 S/C and 4x4 S/C. The
total installed capacity of Toyota Motors is 20000 units and actual production in 1999 was
1069 units. Corolla has also fast pace towards localization of 30 per cent on all its
models which range 1300 to 2000 cc. The company is trying to get high deletion level in
all its product line.
Dewan Farooque Motors:
It is the major competitor which has commenced its operation with a
wide range of products in domestic automobile market. Dewan Motors is basically a
collaboration with Hyundai and Kia, two Korean auto manufacturers. The initial response to
Dewan's offering in the market with record company booking of its Santro Plus. It has
launched its Kia classic 1300 cc car with sophisticated features. In future wide range of
models like Kia Shuma 1500-1800cc car, Kia Sportage 2000 cc sports utility are expected to
launch in the market. Dewan has also launched its 1.5 tons Shehzore, the assembly of
Hyundai light commercial vehicle has already started at the Sindh Engineering Plant in
Karachi under contractual agreement.
Dewan's presence in the market will give the major move to the auto
industry in Pakistan. The intense competition will give the benefit to the potential buyer
in the market.
Daihatsu:
Daihatsu, another new player in the market with its Cuore 850 cc,
increased the competition in the market . Daihatsu and Indus Motor signed an agreement to
launch the Coure in market. The project worth Rs 750 million was developed at Port Qasim
between Daihatsu and Indus Motor to produce Coure. Daihatsu also heated up the competition
in small car segments.
Suzuki for the first time faces competition in small car business. It
is for the first time that Daihatsu will produce its car in Toyota Plant in Karachi. The
assembly plant of Daihatsu has the capacity to produce 10,000 Cuore cars in the year. But
the expected level of output in future will be some about 5000 cars in the starting year
of its operation.
VENDING INDUSTRY:
With the process of localization, vending industry is also contributing
its share in the revenue and creating employment. Although the vending industry in
Pakistan is also in transition and need to be further modify to meet the challenges of
competition but the importance of automobile component industry can not be denied. Indus
Motor have 61 vendors with 13 technical collaboration, Pak Suzuki has 180 vendors with 15
technical collaborations, Honda Atlas cars have 59 vendors with 17 technical
collaborations(see table B). The auto part industry comprises number of different
size vendors industries which are providing jobs to some about more than 13500. The total
contribution of this industry to the GDP is about Rs 23 billion. The total Federal levies
of Rs 5 billion are received by the Government from this industry.
The Association of Pakistan Automotive Parts and Accessories
Manufacturers (PAAPAM) was established in 1988. The main purpose of this association is to
safeguard the vendors industry and provide financial and technical assistance to its
members. The vending industry has the potential to increase its contribution to the Auto
Industry as well as the economy of the country but it is imperative that Government should
encourage the investment in this sector and should protect vendors. Another important
thing is that assemblers should not be allowed to have more than two vendors for a
component or part to help abolish the rampant practice.
REVENUE AND GDP:
Auto Industry is contributing big proportions of revenue and GDP to
the Government. Last year the industry has contributed a revenue of Rs 7 billion and if
the vendors are also included the amount will be over Rs 10 billion. Contribution of auto
industry to the GDP is Rs 38 billion and savings in foreign exchange by import
substitution would amount to $ 500 million.
The revenue contribution of Indus Motor company in the year 1998-99 is Rs 2.5 billion,
Pak Suzuki has the largest contribution in this regard with Rs 3.2 billion and Honda Atlas
Cars has contributed with Rs 900 million. So the contribution of auto Industry in revenue
and GDP is great which is expected to be increased in future.
Table
A |
FINANCIAL
PERFORMANCE 1998 - 99 |
| |
Indus Motor |
Pak Suzuki |
Honda |
| Revenue and GDP |
2.5b |
3.2b |
900m |
| Investment |
2b |
2.7b |
1b |
| Employment |
625 |
619 |
348 |
| Production capacity |
20000 |
50000 |
5000 |
| Production volume |
10,169 |
32805(u) |
3926 |
| Sales volume |
11,249 |
31296 |
- |
| Net sales |
Rs 6.9b |
Rs 8.9 b |
Rs 2.56 |
| Operating profit |
Rs 508m |
Rs 410m |
Rs 231 m |
| Pre tax profit |
Rs 501m |
Rs 339 m |
Rs 239m |
| After tax profit |
Rs 251m |
Rs 263m |
Rs 207m |
| (Source:
Annual reports and industry) |
Auto Industry is a
sector with lucrative investment opportunities. It has been attracting the investment
since its inception and has strong potential to attract investors in future. The total
investment by Toyota, Suzuki, Honda, Nissan and Hyundai is over eight billion and with the
introduction of Fiat will amount to Rs 10 billion approx. Dewan Farooque and other big
names in future will extend the investment size. Indus Motor Company has the investment of
Rs 2000 million, Pak Suzuki has its share with Rs 2700 million and Honda group has
invested Rs 1000 million in the sector. The investment level is expected to increase in
future.
The Auto Industry is providing number of employment opportunities in
country and in future industry has capacity to generate more employment . The total
employments including OEMs & vendors is 125000 persons including technicians,
engineers and management staff. The Indus Motor Company provided jobs to some about 625
persons till 1998-99, Pak Suzuki with 619 persons and Honda Atlas Cars with 348 persons in
1998-99. Total numbers of jobs in vending industry is about 135,000. If the Auto Industry
is supported by Government then it can generate more employment in the country.
LOCALIZATION:
Although the volume of Auto Industry in Pakistan is not big enough to
create economies of scale. So far the level of localization of parts is majority confined
to small parts and the localization of high tech and major engineering parts is not so
much developed. Inspite of low volumes the industry's local content in the small car is
over 60 per cent and 40 per cent in larger vehicles has been achieved. The industry is
paying huge amount to the local vendors for manufacturing of parts. The contribution of
vending industry in this regard is worthwhile. So far Indus Motors is producing about 740
parts locally with deletion level of 42.10 per cent, Pak Suzuki is producing approximately
1794 parts with highest deletion level of 66 per cent and Honda Atlas Cars has localized
about 699 parts with 42.40 percent of deletion level(SEE TABLE). Product wise
deletion level is already discussed with organization.
The pace of higher deletion in the country should be increased in order
to reduce the prices of vehicles by manufacturing them locally in order to boost up the
auto industry in Pakistan and provide consumer with reasonable prices.
Although the
production volume of Pakistan is very small but the prices of locally manufactured cars
are competitive and in some cases even lower than India. The revenue contributed to the
Government of Pakistan comprises of 25% to 35 per cent of the car price.
Inconsistent
government policies and uncertain decisions not only discourage the foreign investment but
also create insecurity among local manufacturers. The uncertain policies also affect the
development of local industry in many ways. In last 10 years the auto industry has
experienced 26 policy changes and duty tariff have taken place. The industry got due
support due to the establishment of Engineering Development Board but the volume of
production is still very low due to the political and economic reasons.
Recommendations:
Here some proposed suggestions are given to progress the auto industry
in Pakistan by taking some important measures .
*
A consistent policy
should be declared by the Government for at least 7-10 years in order to make the local
manufacturer more focused and more certain.
* The current deletion policy and form "S" be maintained and
officially announced to lesson uncertainty created by WTO agreement.
* The custom duty on CKD and CBU vehicles be maintained.
* The duty on parts be increased from 35 per centto 45 per cent to
create a gap between CKD which is also 35 per cent.
* The current used car policy which discourages trading should be
maintained.
* The duty on 10 seater and above 10 Seater van, which was reduced to
60 to 25 per cent should be increased to 60 per cent.
* deletion level should be increased specially of high tech and major
engineering parts.
* Market expansion measures should be taken which will definitely
benefit the industry, government and general public in terms of employment and price.
* Volume of production should be increased in order to achieve the
economies of scale. Localization should be increased and investments should be made to
increase localization.
CONCLUSION:
Auto industry in Pakistan has the great potential to generate
investment and opportunities, and can expand its operation to contribute the development
of the economy of the country.
In future there will be intense competition in the market due to the
entrance of new companies in the market with many new products. As the new assemblers Kia
and Hyundai has started its local production, Dewan Farooque and Daihatsu Coure has really
potential to change the auto scenario in Pakistan . But the imperative is the development
and progress of Auto industry in order to provide consumer with high quality, low priced
locally manufactured products.
Table B
COMPANY WISE VENDOR INFORMATION |
Approx |
Name of
the Industry |
Total
vendors |
Total
technical
collaborations |
Deletion
status |
No. of
parts localized |
Indus Motor Co |
61 |
13 |
42.10% |
740 |
Pak Suzuki |
180 |
15 |
66.00% |
1,794 |
Honda Atlas
Cars |
59 |
17 |
42 40% |
699 |
GENERAL VENDOR INFORMATION
(INCL. AUTOS, TRUCKS, MOTORCYCLES & TRACTORS.) |
Total Federal Levies to the
Government: |
Over Rs 5 billion |
Total Contribution to the
GDP: |
Over Rs 23 billion |
Total number of Jobs in the
Industry: |
Over 135,000 |
