Reduction in sales volume and higher cost of goods sold seem to be the major reasons for the losses

Nov 20 - 26, 2000

Pak Suzuki Motor Company paying 22.5 per cent dividend to its shareholders for the previous year, has posted loss after tax amounting to Rs 26.6 million for the year ending June 30, 2000. The reduction in sales seems to be a major reason responsible for this loss. Profitability of the Company is expected to remain under pressure in the following years due to tough competition offered by the new entrants in small cars market previously an exclusive domain of the Company.

Net sales of the Company came down from Rs 8.9 billion for the year 1999 to Rs 6.9 billion for the year under review. However, the real issue appeared to be the higher cost of sales amounting to Rs 6.58 million reducing the gross profit margin to around 4.5 per cent of sales. The situation was also not comfortable as the gross margin was 7.5 per cent for the previous year. The management efforts to contain expenditure are apparent from reduction in selling and administrative expenses and financial charges. However, these efforts remained fruitless due to depressed sales volume.

Some analysts strongly believe that despite highest protection, which include a ban on import of CBUs and second hand cars, profitability of local assemblers remains under pressure. This is mainly due to low capacity utilization estimated around 55 per cent only. At present almost all the leading Japanese brands are being assembled locally. These include, Toyota, Honda, Suzuki, Nissan and Dihatsu and engine power range from 900cc to 1600cc.

Suzuki has the longest history of operation in Pakistan and assembles a wide range of products. It had also achieved higher level of deletion. However, with the introduction of newer models, in last couple of years, the percentage of imported components has increased once again. Suzuki was obliged to come up with new and better models to retain its share in the local market.

With the persistent increase in fuel price the customer preference is gradually shifting from higher to lower engine capacity models and diesel driven cars. Another factor fueling competition against Suzuki, in particular, is the customer preference for Toyota, Honda and Nissan over Baleno and Cultus. In 1000cc range the Company faces tough competition from Kia and Diahatsu mainly due to attractive financing facility available.

According to a report during 1999-2000, all the assemblers put together, produced 32,461 cars and sold 31,759 units. The two brands which claimed the bigger share were Toyota (8,705) and Honda (4,871). During July-October period of current financial year, 4,351 cars were produced out of which 3,724 units were sold.

Despite financing facility available, customers still find acquiring a car an expensive proposal mainly due to the higher mark-up rates. The economy of the country still suffers from slow down and rate of inflation is high, affecting purchasing power of those who were considered to be slightly better off yesterday. The erosion in power and inability to keep a car has also lowered prices of second hand models. Another factor which encourages people to opt for used cars is high carjacking incidents.

The outlook for car assemblers in the above mentioned scenario does not seem to be promising. Some sector analysts say that it would be more prudent to put some kind of embargo on introduction of new models. In their view a revised model should not be introduced for two years after introduction of a model. This will help in containing cost of imported components and strengthening the local component manufacturers. These analysts also demand that the GoP must also ensure deletion programme in the industry. Achieving higher sales volume, in their view, is the only way to contain persistent hike in car prices.

Yet another proposal is to bind the foreign equity participants, the original franchise holders, to buy back at least 20 per cent of the cars produced at their plants in Pakistan.