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.
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, 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.
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.
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.
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.
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.
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.
COMPANY WISE VENDOR INFORMATION
Name of the Industry
No. of parts localized
Indus Motor Co
Honda Atlas Cars
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: